-----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, EY5oSP8Cm/am6zYxiCOI9SFN8LGKKYJyzvG96ftyCYGrzXNnry42SdUWSikn9pqQ MEZ+M/a6i7zn6x9lOmjBwA== 0000950168-97-003447.txt : 19971121 0000950168-97-003447.hdr.sgml : 19971121 ACCESSION NUMBER: 0000950168-97-003447 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19971120 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HLM DESIGN INC CENTRAL INDEX KEY: 0001049129 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 562018819 STATE OF INCORPORATION: DE FISCAL YEAR END: 0425 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-40617 FILM NUMBER: 97724789 BUSINESS ADDRESS: STREET 1: 121 WEST TRADE STREET STREET 2: SUITE 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 S-1 1 HLM DESIGN, INC.--FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ HLM DESIGN, INC. (Exact name of registrant as specified in its charter) DELAWARE 8712 56-2018819 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
121 WEST TRADE STREET, SUITE 2950 CHARLOTTE, NORTH CAROLINA 28202 TELEPHONE (704) 358-0779 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ MR. JOSEPH M. HARRIS PRESIDENT AND CHAIRMAN OF THE BOARD HLM DESIGN, INC. 121 WEST TRADE STREET, SUITE 2950 CHARLOTTE, NORTH CAROLINA 28202 TELEPHONE (704) 358-0779 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: GARY C. IVEY, ESQ. MICHAEL K. DENNEY, ESQ. PARKER, POE, ADAMS & BERNSTEIN L.L.P. BRADLEY & RILEY, P.C. 2500 CHARLOTTE PLAZA 100 FIRST STREET, S.W. CHARLOTTE, NORTH CAROLINA 28244 CEDAR RAPIDS, IOWA 52404 TELEPHONE (704) 372-9000 TELEPHONE (319) 363-0101
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE [CAPTION] TITLE OF CLASS PROPOSED MAXIMUM AMOUNT OF OF SECURITIES TO AGGREGATE OFFERING REGISTRATION BE REGISTERED PRICE (1)(2) FEE Common Stock par value $.01 per share.................................................. $7,000,000 $2,121.22
(1) Includes shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED , 1997 PROSPECTUS SHARES HLM DESIGN, INC. COMMON STOCK ------------------------ All of the shares (the "Shares") of common stock, par value $.01 per share (the "Common Stock"), are offered hereby (the "Offering") by HLM Design, Inc. ("HLM Design"). Prior to the Offering, there has been no public market for the Common Stock. It is currently anticipated that the public offering price will be between $ and $ per share. See "Underwriting" for information relating to factors to be considered in determining the initial public offering price. HLM Design intends to apply for listing of the Common Stock on the American Stock Exchange under the symbol "HLM." SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ [CAPTION] PRICE TO UNDERWRITING PROCEEDS TO THE PUBLIC DISCOUNT (1) COMPANY(2) Per Share........................................... $ $ $ Total (3)........................................... $ $ $
(1) HLM Design has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, payable by HLM Design, estimated at $ . (3) HLM Design has granted to the Underwriters an option, exercisable within 45 days of the date hereof, to purchase up to an aggregate of additional shares of Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to HLM Design will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The Shares are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Shares will be made in New York, New York on or about , 1998. BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. WESTPORT RESOURCES INVESTMENT SERVICES, INC. The date of this Prospectus is , 1997. [Photographs of various projects completed by the Company] ------------------------ HLM Design intends to furnish its stockholders with annual reports containing financial statements audited by its independent auditors and will make available copies of its quarterly results for the first three quarters of each year. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." ------------------------ 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (A) GIVES RETROACTIVE EFFECT TO A TO 1 STOCK SPLIT (EFFECTED IN THE FORM OF A STOCK DIVIDEND) OF HLM DESIGN'S COMMON STOCK TO BE CONSUMMATED PRIOR TO THE CONSUMMATION OF THE OFFERING (THE "STOCK SPLIT") AND (B) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "UNDERWRITING." UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES HEREIN TO THE "COMPANY" MEAN HLM DESIGN, INC AND THE ARCHITECTURAL, ENGINEERING AND PLANNING FIRMS ("AEP FIRMS") IT MANAGES CONSIDERED AS ONE ENTERPRISE, REFERENCES TO A "MANAGEMENT AND SERVICES AGREEMENT" MEAN A LONG-TERM AGREEMENT BETWEEN HLM DESIGN AND AN AEP FIRM AS DESCRIBED HEREIN IN "BUSINESS -- HLM DESIGN OPERATIONS -- MANAGEMENT AND SERVICES AGREEMENTS", AND REFERENCES TO THE "MANAGED FIRMS" MEAN (I) WITH RESPECT TO THE PERIOD PRIOR TO THE DATE OF THIS PROSPECTUS, HLMI, HLMNC AND HLMO (EACH AS DEFINED BELOW) WHICH ARE THE AEP FIRMS CURRENTLY OPERATING UNDER MANAGEMENT AND SERVICES AGREEMENTS WITH HLM DESIGN, AND (II) WITH RESPECT TO THE PERIOD FROM AND AFTER THE DATE OF THIS PROSPECTUS, HLMI, HLMNC AND HLMO AND SUCH OTHER AEP FIRMS WITH WHICH HLM DESIGN SHALL, FROM TIME TO TIME, ENTER INTO MANAGEMENT AND SERVICES AGREEMENTS. "HLM" IS A REGISTERED TRADEMARK OF HLM DESIGN. THE COMPANY HLM Design, Inc. ("HLM Design") is a management company that enters into management and services relationships with full service AEP Firms. HLM Design was formed in March 1997 to pursue a strategy of consolidating non-professional operations and providing management expertise to individual AEP Firms. HLM Design believes it is the first company to pursue such a consolidation strategy to take advantage of operating efficiencies and provide geographic and service diversification for clients. Prior to March 1997, the current management team of HLM Design operated Hansen Lind Meyer Inc., an Iowa corporation ("HLMI"), HLM of North Carolina, P.C. ("HLMNC") and HLM of Oregon, Architecture and Planning, P.C. ("HLMO"). HLMI has been in operation for over thirty years. HLMNC and HLMO were organized in 1996 but have had no operations to date. These three AEP Firms have each entered into a Management and Services Agreement with HLM Design. The Managed Firms operate offices in Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando, Florida, Bethesda, Maryland, Denver, Colorado, Sacramento, California, Philadelphia, Pennsylvania, Portland, Oregon and Charlotte, North Carolina. A full-service AEP Firm provides a spectrum of services in various specialties to customers through a broad range of professionals, including architects, mechanical, electrical, structural and civil engineers, landscape architects, interior designers and construction administration personnel. HLM Design has chosen to focus its effort on the management of full-service AEP Firms because it believes these firms offer a competitive advantage -- the ability to provide a full line of high-quality, cost effective services -- over firms that provide a more narrow range of services. HLM Design believes that its consolidation strategy will assist in attracting new AEP Firms as a result of two major trends: (1) the increasing complexity, cost and competitiveness of the design practice requiring operating and cost efficiencies, and (2) the need for access to a wider pool of geographically dispersed professionals in order to provide solutions for the evolving needs of their clients. HLM Design's strategy is to expand revenues through (1) the development of new long-term Management and Services Agreements with full-service AEP Firms throughout the United States and (2) the expansion of services to existing clients. HLM Design's principal executive office is located at 121 West Trade Street, Suite 2950, Charlotte, North Carolina and its telephone number is (704) 358-0779. OPERATING STRATEGY The Company provides, primarily through HLMI, a complement of architectural, engineering and planning services to a variety of clients in several industries. These services include, in addition to the provision of architectural and engineering services, all phases of a project starting with assistance in the funding process, development of a master plan at the inception of a project, and oversight of all phases of the construction project. The services also may involve the redesign of a workplace to make it efficient, reliable and easy to maintain. The Company has developed a strength and is recognized as a national leader in the following markets: (Bullet) Healthcare -- In the last five years, HLMI has designed and constructed more than 15 million square feet of healthcare facilities. Clients have ranged from 20-bed hospitals in the rural mid-west to America's most prestigious academic medical centers. Healthcare clients include Duke University Medical Center, University of Chicago Hospitals, University of Iowa Hospitals and Clinics, Rush-Presbyterian-St. Lukes Medical Center, Thomas Jefferson University Hospital and Georgetown University Medical Center. 3 (Bullet) Justice -- HLMI has designed over 10 million square feet of justice facilities in the last ten years. It has designed jail and prison projects valued at over $500 million and has designed emerging court facility projects valued at over $555 million. (Bullet) High-tech Research Facilities -- HLMI has designed research facilities valued at over $500 million. The Company's clients in this market include some of the most prestigious in the country including Johns Hopkins University, the National Institutes of Health, the Mayo Foundation, and Georgetown University. Planning for high-tech research facilities is intended to optimize space utilization and provide flexibility to adapt to changing technology and funding constraints. GROWTH STRATEGY HLM Design intends to implement an aggressive, yet disciplined, expansion program by pursuing Management and Services Agreements with (i) large "regional" AEP Firms with established operating histories located in large metropolitan and high-growth suburban geographic markets that the Company does not currently serve and (ii) small firms that provide operational diversity in geographic areas that will complement the services that are either currently provided by the Company in such geographic areas or that are intended to be provided in the future. HLM Design believes its approach will be attractive to these large and small AEP Firms because it will provide these firms with economies of scale and the synergies that result from increased purchasing power, a greater breadth of services, an increased pool of professionals, and geographical diversity. Furthermore, this strategy will give these regional and local AEP Firms, as a part of the Company, the ability to provide services to existing and future clients with national operations that might otherwise have turned to "non-local" firms to service their needs. The goal is for the Company to be the single source provider for large national clients that have geographically diverse operations. HLM Design generally expects that AEP Firms that sign Management and Services Agreements will retain existing high-quality professional employees and continue to operate in an effective and efficient manner with architects, engineers and planning professionals who understand the local market. HLM Design's management team will provide all management and administrative services to the AEP Firms. Additionally, management believes they are positioned to pursue larger, well established AEP Firms as a result of the depth of HLM Design's management team, HLM Design's capital structure and the reputation of the management team in the design industry. Management also believes these goals can be achieved at less cost than that which would be incurred by AEP firms operating on a stand alone basis. RISK FACTORS The Common Stock offered hereby involves a high degree of risk. See "Risk Factors" beginning on page 6 for a discussion of factors that should be considered by prospective purchasers of the Common Stock offered hereby. THE OFFERING Common Stock offered by HLM Design.................... shares (1) Common Stock to be outstanding after the Offering..... shares (1)(2)(3) Total............................................ shares Use of proceeds....................................... The net proceeds of the Offering will be used to repay certain indebtedness of HLM Design, for working capital and for general corporate purposes, including the funding of HLM Design's rights to cash flows under future Management and Services Agreements. See "Use of Proceeds." Trading............................................... The Company intends to apply for listing of the Common Stock on the American Stock Exchange (the "AMEX"), under the symbol "HLM."
- --------------- (1) Does not include up to an aggregate of shares that may be sold by HLM Design upon exercise of the over-allotment option granted to the Underwriters. See "Underwriting." (2) Excludes (i) shares of Common Stock reserved for future issuance under HLM Design's Stock Option Plan (as defined herein), including an option to purchase shares of Common Stock that will be granted immediately before the completion of the Offering with an exercise price equal to the initial public offering price, (ii) shares of Common Stock reserved for future issuance under HLM Design's ESPP (as defined herein) and (iii) shares of Common Stock reserved for future issuance upon exercise of the Warrants (as defined herein). (3) Gives effect to the Stock Split. 4 SUMMARY HISTORICAL FINANCIAL DATA The following summary historical and financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of HLM Design and Affiliates and the Predecessor Company as defined below and the related notes thereto included elsewhere in this Prospectus. The following summary historical financial data for the Predecessor Company for each of the three fiscal years ended April 25, 1997 are derived from audited financial statements, which are included elsewhere in this Prospectus. The summary financial data (Predecessor Company) for the one month ended May 30, 1997, and the six months ended October 25, 1996 are derived from the unaudited financial statements of HLMI, which are included elsewhere in this Prospectus. The selected financial data for the five months ended October 31, 1997 are derived from the unaudited combined financial statements of HLM Design, HLMI, HLMNC and HLMO, which are included elsewhere in this Prospectus. In the opinion of management, these unaudited financial statements reflect all adjustments necessary for a fair presentation of its results of operations and financial condition. The results of operations for an interim period are not necessarily indicative of results of operations for a full fiscal year or any other interim period. All of the data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes included elsewhere in this Prospectus.
PREDECESSOR COMPANY ----------------------------------------------------------------------- SIX FOR THE YEAR ENDED (1) MONTHS ONE MONTH ----------------------------------------- ENDED ENDED APRIL 30, APRIL 26, APRIL 25, OCTOBER 25, MAY 30, 1995 1997 1997 1996 1997 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA: Revenue....................................... $29,122,557 $28,554,424 $26,754,710 $13,503,623 $2,233,036 ----------- ----------- ----------- ----------- ----------- Costs and Expenses: Direct cost of revenue........................ 15,685,671 14,261,952 13,376,251 7,534,491 898,979 Operating costs............................... 14,098,729 13,104,278 12,414,739 6,074,195 1,163,141 ESOP expenses................................. 573,837 584,202 408,765 271,652 Amortization on intangible assets............. 5,952 99,145 107,670 54,702 9,571 ----------- ----------- ----------- ----------- ----------- Total costs and expenses...................... 30,364,189 28,049,577 26,307,425 13,935,040 2,071,691 ----------- ----------- ----------- ----------- ----------- Income (Loss) from Operations................. (1,241,632) 504,847 447,285 (431,417 ) 161,345 ----------- ----------- ----------- ----------- ----------- Other Income (Expense): Net Interest.................................. (156,680) (394,068) (402,509) (192,794 ) (36,951 ) Non-Operating income.......................... 442,411 860,789 292,137 ----------- ----------- ----------- ----------- ----------- Total Other Income (Expense).............. 285,731 466,721 (110,372) (192,794 ) (36,951 ) ----------- ----------- ----------- ----------- ----------- Income (Loss) Before Income Taxes............. (955,901) 971,568 336,913 (624,211 ) 124,394 Income tax expense (benefit).................. (360,080) 435,459 219,799 (192,346 ) 43,000 ----------- ----------- ----------- ----------- ----------- Net Income (Loss) (4)......................... $ (595,821) $ 536,109 $ 117,114 $ (431,865 ) $ 81,394 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Working capital(deficiency)................... $(1,705,986) $(1,619,720) $(1,902,363) $(1,717,490) $(2,238,531) Total assets.................................. 9,419,189 12,577,992 12,874,503 12,376,973 17,639,673 Long-term debt................................ 840,302 564,577 103,792 453,870 2,476,008 Total liabilities............................. 8,713,076 11,819,796 11,670,962 11,639,830 16,354,738 Warrants outstanding.......................... Stockholders' equity (3)...................... 706,113 758,196 1,203,541 737,143 1,284,935 (HLM DESIGN) COMBINED SIX MONTHS ENDED OCTOBER 31, 1997 (2) ------------ INCOME STATEMENT DATA: Revenue....................................... $13,186,803 ------------ Costs and Expenses: Direct cost of revenue........................ 5,944,762 Operating costs............................... 5,920,332 ESOP expenses................................. Amortization on intangible assets............. 71,496 ------------ Total costs and expenses...................... 11,936,590 ------------ Income (Loss) from Operations................. 1,250,213 ------------ Other Income (Expense): Net Interest.................................. (496,973 ) Non-Operating income.......................... ------------ Total Other Income (Expense).............. (496,973 ) ------------ Income (Loss) Before Income Taxes............. 753,240 Income tax expense (benefit).................. 374,125 ------------ Net Income (Loss) (4)......................... $ 379,115 ------------ ------------ BALANCE SHEET DATA: Working capital(deficiency)................... $ 613,024 Total assets.................................. 17,426,156 Long-term debt................................ 4,474,234 Total liabilities............................. 16,768,230 Warrants outstanding.......................... 250,078 Stockholders' equity (3)...................... 407,848
- --------------- (1) The Predecessor Company is HLMI. (2) Financial information for HLM Design includes the amounts for the Managed Firms, HLMI, HLMNC and HLMO for the five months from May 31, 1997 to October 31, 1997 on a combined basis. (3) The Company has paid no cash dividends from May 1, 1994 to October 31, 1997. (4) Historical net income per share is not presented, as the historical capital structure of the Company prior to the Offering is not comparable with the capital structure that will exist after the Offering. 5 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE PRINCIPAL RISK FACTORS SET FORTH BELOW. INNOVATIVE STRATEGY HLM Design's operating and growth strategies are predicated upon its ability to achieve significant consolidation of AEP Firm operations and to generate profits from those firms. The process of identifying suitable candidates for entering into Management and Services Agreements and proposing, negotiating and implementing economically feasible affiliations with AEP Firms is lengthy and complex. Such strategies require intense management direction in a dynamic marketplace that is increasingly subject to cost containment and other competitive pressures. There can be no assurance that these strategies will be successful or that modifications to the Company's strategies will not be required. POTENTIAL CONFLICTS OF INTEREST Joseph Harris and Vernon Brannon, the President and the Chief Financial Officer, respectively, of HLM Design, are also principal stockholders in each of HLMI, HLMNC and HLMO and have entered into stockholders' agreements with respect to those firms that, among other things, permit the management by HLM Design of each of HLMI, HLMNC and HLMO. Potential conflicts of interest could arise between HLM Design and Messrs. Harris and Brannon in connection with the operation and enforcement of the provisions of these stockholders' agreements and the Management and Services Agreements. See "Certain Transactions." The interests of HLM Design could be materially adversely affected if circumstances arose in which it would be in the interest of Joseph Harris and Vernon Brannon to interfere with the performance by HLMI, HLMNC or HLMO of the Management and Services Agreements. Upon the execution of new Management and Services Agreements with AEP Firms, similar conflicts of interest could arise between HLM Design and stockholders of such firms. LIMITED NUMBER OF FIRMS HLM Design's revenues are currently derived from Management and Services Agreements with three firms, only one (HLMI) of which had active operations at October 31, 1997. There can be no assurance that HLM Design will be able to successfully enter into Management and Services Agreements with additional firms. ADDITIONAL FINANCINGS HLM Design's operating and growth strategies require substantial capital resources. These requirements will result in HLM Design incurring long- and short-term indebtedness and may result in the public or private issuance, from time to time, of additional debt or equity securities, including the issuance of such securities in connection with the execution of Management and Services Agreements. There can be no assurance that any such financing will be obtainable on terms acceptable to HLM Design. Additionally, issuing securities in connection with the execution of Management and Services Agreements will dilute the percentage of Common Stock owned by stockholders prior to such issuance. There is also no assurance that such financings will not cause dilution in the book value per share of the Common Stock. EFFECT OF BANKRUPTCY AEP Firms that have entered into Management and Services Agreements with HLM Design have the right to terminate such agreements upon the filing by HLM Design of a petition in voluntary bankruptcy, an assignment for the benefit of creditors, or upon other action taken voluntarily or involuntarily under any federal or state law for the benefit of debtors. Because the substantial majority of the assets of the Company are owned by the Managed Firms, if such agreements are terminated, HLM Design would proceed through bankruptcy without any meaningful assets. In such circumstances, it is likely that no significant assets would be available for distribution to stockholders upon a liquidation. GOVERNMENT REGULATION The architectural and engineering industries are regulated at the state level. The Company believes its operations are in material compliance with applicable law. Nevertheless, because of the unique structure of the relationships between HLM Design and its Managed Firms, many aspects of these relationships have not been the subject of prior regulatory interpretation. 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 would likely require structural and organizational modifications of HLM Design's form of relationships with its Managed Firms. Although the Company believes its operations are in material compliance with existing applicable law, there can be no assurance that the Company's existing Management and Services Agreements will not be successfully challenged as, for example, constituting the unlicensed practice of architecture, or that the enforceability of the provisions thereof, including non-competition agreements, will not be limited. 6 DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT AND PERSONNEL RESOURCES The Company's success depends to a significant degree upon the continued contributions of its management team (particularly its senior management) and professional personnel. The loss of the services of one or more of these key employees could have a material adverse effect on the Company. The Company has employment and/or noncompetition agreements with Joseph M. Harris and Vernon B. Brannon as well as with several members of its senior professional staff, but does not have such agreements with all of its most important personnel. There can be no assurance that a court would enforce the noncompetition agreements as currently in effect. A court might, for example, narrow the geographical or client restrictions contained in such agreement, lessen the length of the agreement or, in some cases, refuse to enforce any provision of the agreement. If courts refuse to enforce noncompetition agreements of HLM Design or the Managed Firms, such decisions could have a material adverse effect on HLM Design. In addition, as the Company expands it may need to hire additional personnel and will likely be dependent on the senior professional staff of any firm with which HLM Design enters into a Management and Services Agreement. The market for qualified employees in the industry and in the regions in which the Company operates is competitive and may subject the Company to increased labor costs in periods of low unemployment. The loss of the services of key employees or the inability to attract additional qualified professional staff could have a material adverse effect on the Company. In addition, the lack of qualified professional staff or employees of the Company's potential candidates for Management and Services Agreements may limit the Company's ability to consummate future agreements. See "Business -- Growth Strategy," "Business -- Competition" and "Management." RISKS INHERENT IN PROVISION OF SERVICES The Managed Firms and certain employees of the Managed Firms are involved in the delivery of services to the public and, therefore, are exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in substantial damage awards to the claimants that may exceed the limits of any applicable insurance coverage. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. Although HLM Design is indemnified under its Management and Services Agreements for claims against the Managed Firms and their employees, HLM Design maintains liability insurance for itself and negotiates liability insurance for its Managed Firms the professionals employed by its Managed Firms. Successful malpractice claims asserted against the Managed Firms, their employees or HLM Design could have an adverse effect on the Company's profitability. DEPENDENCE ON MANAGED FIRMS HLM Design's revenues depend on fees and revenues generated by various AEP Firms managed by HLM Design. Any material loss of revenue by such firms, whether as a result of the loss of professionals or otherwise, could have a material adverse effect on HLM Design. HLM Design does not control (i) the practice of architecture, engineering or planning by professionals or (ii) the compliance with certain regulatory requirements directly applicable to the Managed Firms. COMPETITION The business of providing architectural, engineering and planning related services is highly competitive. The Company's competition includes many other firms, including large national firms as well as regional or small local firms. Several companies that have established operating histories and significantly greater resources than the Company provide some of the services provided by the Managed Firms. In addition, there are other companies with substantial resources that may in the future decide to engage in activities similar to those in which the Company engages. See "Business -- Competition." CONCENTRATION OF VOTING POWER AND ANTI-TAKEOVER PROVISIONS HLM Design's Certificate of Incorporation authorizes the Board of Directors of HLM Design to issue 1,000,000 shares of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely effect the voting power or other rights of the holders of HLM Design's Common Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company has no present intention to issue any shares of preferred stock, there can be no assurance that the Company will not do so in the future. The application of any such provisions or the issuance of preferred stock could prevent stockholders from realizing a premium upon the sale of their shares of Common Stock upon an acquisition of the Company. See "Description of Capital Stock." Certain provisions of the Company's Certificate of Incorporation and Bylaws make it more difficult for stockholders of the Company to effect certain corporate actions. See "Description of Capital Stock -- Delaware Law and Certain Charter and Bylaw Provisions." Under the Company's Stock Option Plan, options outstanding thereunder become immediately exercisable upon a change in control of the Company. See "Management -- Stock Option Plan." Additionally, HLM Design's 7 Bylaws provide: (i) for a Board of Directors divided into three classes serving staggered terms, (ii) that special meetings of stockholders may be called only by the President or by the Company's Secretary or Assistant Secretary at the request in writing of the majority of the Board of Directors and (iii) that any stockholder seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must provide timely notice thereof in writing. These provisions will impair the stockholders' ability to influence or control the Company or to effect a change in control of the Company, and may prevent stockholders from realizing a premium on the sale of their shares of Common Stock upon an acquisition of the Company. See "Description of Capital Stock." NO PRIOR PUBLIC MARKET FOR COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock. HLM Design intends to apply for listing of its Common Stock on the American Stock Exchange. The initial public offering price of the Common Stock will be determined by negotiations among the Company and representatives of the Underwriters. See "Underwriting." There can be no assurance that the market price of the Common Stock prevailing at any time after this Offering will equal or exceed the initial public offering price. Quarterly and annual operating results of the Company, variations between such results and the results expected by investors and analysts, changes in local or general economic conditions or developments affecting the architecture or engineering industries, the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. As a result of these factors, as well as other factors common to initial public offerings, the market price could fluctuate substantially from the initial offering price. In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations, which could adversely effect the market price for the Common Stock without regard to the financial performance of the Company. LACK OF INDEPENDENT DIRECTORS Upon completion of the Offering, the majority of the members of HLM Design's Board of Directors will be employees or representatives of holders of Warrants (as defined herein). Although HLM Design intends to maintain at least two independent directors on its Board following completion of the Offering, such directors will not constitute a majority of the Board, and HLM Design's Board may not have a majority of independent directors at any time in the future. In the absence of a majority of independent directors, HLM Design's executive officers, who also are principal stockholders and directors, could establish policies and enter into transactions without independent review and approval thereof, subject to certain restrictions under HLM Design's Certificate of Incorporation. In addition, although HLM Design intends to establish audit and compensation committees which will consist entirely of outside directors, until those committees are established, transactions and compensation policies could be approved without independent review. These and other transactions could present the potential for a conflict of interest between HLM Design and its stockholders generally and the controlling officers, stockholders or directors. See "Management." DILUTION Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in the amount of $ per share in net tangible book value per share from the initial offering price. See "Dilution." POTENTIAL ADVERSE MARKET PRICE EFFECT OF ADDITIONAL SHARES ELIGIBLE FOR FUTURE SALE The shares of Common Stock owned beneficially by existing stockholders of HLM Design, the shares of Common Stock subject to options to be granted under the Stock Option Plan on or before the consummation of the Offering and the shares of Common Stock underlying the Warrants (as defined herein) are "restricted securities" as defined in Rule 144 under the Securities Act, and may in the future be resold in compliance with Rule 144. See "Management -- Stock Option Plan" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." No prediction can be made as to the effect that resale of shares of Common Stock, or the availability of shares of Common Stock for resale, will have on the market price of the Common Stock prevailing from time to time. The resale of substantial amounts of Common Stock, or the perception that such resales may occur, could adversely affect prevailing market prices for the Common Stock and the ability of HLM Design to raise equity capital in the future. HLM Design has agreed, subject to certain exceptions, not to issue, and all executive officers of HLM Design and the Managed Firms have agreed not to resell, any shares of Common Stock or other equity securities of HLM Design for 365 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. See "Shares Eligible for Future Sale" and "Underwriting." 8 USE OF PROCEEDS The net proceeds to HLM Design from the sale of the shares of Common Stock offered hereby are estimated to be approximately $ million ($ if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $ per share (the midpoint of the range of the initial public offering price set forth on the cover page of the Prospectus) and after deducting the underwriting discount and estimated expenses of the Offering. HLM Design intends to use approximately $ million of the net proceeds to repay certain indebtedness consisting of (i) the $1.98 million due under the Pacific/Equitas Loan (as defined herein), (ii) a $0.8 million term loan from Berthel Leasing (as defined herein), an affiliate of one of the Underwriters, and (iii) notes payable in an aggregate principal amount of $182,308 to employee stockholders. Such indebtedness currently has an effective weighted interest cost at an annual rate equal to 25%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." HLM Design intends to use the remaining expected net proceeds of the Offering for working capital and other general corporate purposes, including payments made by HLM Design, for the rights to future cashflows, in connection with the execution of new Management and Services Agreements. Until utilized, the Company will invest the net proceeds in short-term, interest bearing, investment grade instruments. DIVIDEND POLICY HLM Design has never declared or paid a dividend on its Common Stock. HLM Design intends to retain all of its earnings to finance the growth and development of its business, including the execution of new Management and Services Agreements, and does not anticipate paying any cash dividends on its Common Stock for the foreseeable future. Any future change in HLM Design's dividend policy will be made at the discretion of the Board of Directors of HLM Design and will depend upon HLM Design's operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Capital Stock." CAPITALIZATION The following table sets forth, as of October 31, 1997, the combined capitalization of HLM Design and Affiliates (a) on an actual basis, and (b) on a pro forma basis, as adjusted to reflect the Offering and the application of the estimated net proceeds thereof to be received by the Company. See "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the unaudited pro forma financial statements of HLM Design and Affiliates and the related notes thereto included elsewhere in this Prospectus.
OCTOBER 31, 1997 ------------------------ PRO FORMA FOR THE OFFERING ACTUAL (1) ---------- ---------- Short-term debt: Notes payable................................................................................... $2,250,000 $1,500,000 Current maturities of long-term debt............................................................ 728,011 728,011 ---------- ---------- Total short-term debt........................................................................ $2,978,011 $2,228,011 ---------- ---------- ---------- ---------- Long-term debt, excluding current maturities...................................................... $4,474,233 $2,311,925 ---------- ---------- Warrants outstanding.............................................................................. 250,078 250,078 ---------- ---------- Stockholders' equity: Preferred Stock of HLM Design, $.10 par value, 1,000,000 shares authorized; no shares issued and outstanding.................................................................................. 0 Common Stock of HLM Design, $.01 par value, 9,000,000 shares authorized; 50,640 shares issued and outstanding, actual; shares issued and outstanding, as adjusted (2)................... 506 Common Stock of HLMI, $.01 par value; Class A, voting authorized 2,000,000 shares; issued 200; Class B, nonvoting, authorized 1,000,000 shares, no shares outstanding....................... 2 Common Stock of HLMNC $.01 par value, 10,000 shares authorized; 300 shares issued and outstanding.................................................................................. 3 Common Stock of HLMO $.01 par value, 10,000 shares authorized; 300 shares issued and outstanding.................................................................................. 3 Additional Paid-in capital...................................................................... 34,781 Retained earnings............................................................................... 379,115 Stock Subscription Receivable -- HLM Design, HLMNC, HLMO (3).................................... (6,562) ---------- ---------- Total stockholders' equity................................................................... 407,848 ---------- ---------- Total capitalization....................................................................... $5,132,159 $ ---------- ---------- ---------- ----------
9 - --------------- (1) Adjusted to give effect to the Offering and the application of the net proceeds thereof. See "Use of Proceeds" and "Certain Transactions." (2) shares if the Underwriters' over-allotment option is exercised in full. See "Underwriting" and "Principal Stockholders." Excludes (i) shares of Common Stock reserved for future issuance under HLM Design's Stock Option Plan (including up to shares of Common Stock reserved for issuance upon exercise of options to be granted on or before the consummation of the Offering pursuant to the Stock Option Plan), (ii) shares of Common Stock reserved for issuance under HLM Design's ESPP, and (iii) shares of Common Stock reserved for issuance under the Warrants (as defined herein). See "Management's Discussion of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Management -- Stock Option Plan" and "Management -- Employee Stock Purchase Plan". (3) Common stock had not been funded as of October 31, 1997. DILUTION The net tangible book value (deficit) of the Company (defined as the combined net tangible book value (deficit) of HLM Design, HLMI, HLMNC, and HLMO) as of October 31, 1997 was $ , or $ per share of Common Stock. Net tangible book value (deficit) per share is determined by dividing the tangible net worth of the Company by the total number of outstanding shares of Common Stock. After giving effect to the sale of the shares of Common Stock offered hereby and the receipt of an assumed $ million of net proceeds from the Offering (based on an assumed initial public offering price of $ per share and net of underwriting discounts and estimated offering expenses), net tangible book value of the Company at October 31, 1997 would have been $ per share. This represents an immediate increase in the net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing Common Stock in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share................................................................... $ Net tangible book value per share before giving effect to the Offering.......................................... Increase in net tangible book value per share attributable to the Offering...................................... Pro forma net tangible book value per share after giving effect to the Offering................................... Dilution per share to new investors(1)............................................................................ $
- --------------- (1) Dilution is determined by subtracting the net tangible book value per share of Common Stock after the Offering from the public offering price per share. 10 SELECTED FINANCIAL DATA The following selected financial data for the Predecessor Company for each of the three fiscal years ended April 25, 1997 are derived from audited financial statements, which are included elsewhere in this Prospectus. The following selected financial data for the Predecessor Company for each of the two fiscal years ended April 30, 1994 are derived from unaudited financial statements, which are not included in this Prospectus. The selected financial data (Predecessor Company) for the one month ended May 30, 1997, and the six months ended October 25, 1996 are derived from the unaudited financial statements of HLMI, which are included elsewhere in this Prospectus. The selected financial data for the five months ended October 31, 1997 are derived from the unaudited combined financial statements of HLM Design, HLMI, HLMNC and HLMO, which are included elsewhere in this Prospectus. In the opinion of management, these unaudited financial statements reflect all adjustments necessary for a fair presentation of its results of operations and financial condition. The results of operations for an interim period are not necessarily indicative of results of operations for a full fiscal year or any other interim period. All of the data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes included elsewhere in this Prospectus.
(PREDECESSOR COMPANY) ---------------------------------------------------------------------------------- SIX FOR THE YEAR ENDED (1) MONTHS ------------------------------------------------------------------- ENDED APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 25, OCTOBER 25, 1993 1994 1995 1996 1997 1996 ----------- ----------- ----------- ----------- ----------- ------------ Revenue........................... $33,464,656 $27,841,902 $29,122,557 $28,554,424 $26,754,710 $13,503,623 ----------- ----------- ----------- ----------- ----------- ------------ Costs and Expenses: Direct cost of revenue............ 18,371,876 15,925,434 15,685,671 14,261,952 13,376,251 7,534,491 Operating costs................... 15,376,045 13,516,392 14,098,729 13,104,278 12,414,739 6,074,195 ESOP expenses..................... 474,403 564,918 573,837 584,202 408,765 271,652 Amortization on intangible assets.......................... 4,464 5,952 5,952 99,145 107,670 54,702 ----------- ----------- ----------- ----------- ----------- ------------ Total costs and expenses.......... 34,226,788 30,012,696 30,364,189 28,049,577 26,307,425 13,935,040 ----------- ----------- ----------- ----------- ----------- ------------ Income (Loss) from Operations..... (762,132 ) (2,170,794 ) (1,241,632) 504,847 447,285 (431,417 ) ----------- ----------- ----------- ----------- ----------- ------------ Other Income (Expense): Net Interest...................... (55,510 ) (57,600 ) (156,680) (394,068) (402,509) (192,794 ) Non-Operating income.............. 37,072 14,542 442,411 860,789 292,137 ----------- ----------- ----------- ----------- ----------- ------------ Total Other Income (Expense).................... (18,438 ) (43,058 ) 285,731 466,721 (110,372) (192,794 ) ----------- ----------- ----------- ----------- ----------- ------------ Income (Loss) Before Income Taxes........................... (780,570 ) (2,213,852 ) (955,901) 971,568 336,913 (624,211 ) Income tax expense (benefit)...... (260,000 ) (779,000 ) (360,080) 435,459 219,799 (192,346 ) ----------- ----------- ----------- ----------- ----------- ------------ Net Income (Loss) (4)............. $ (520,570 ) $(1,434,852) $ (595,821) $ 536,109 $ 117,114 $ (431,865 ) ----------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- ------------ BALANCE SHEET DATA: Working capital(deficiency)....... $2,059,840 $1,229,211 $(1,705,986) $(1,619,720) $(1,902,363) (1,717,490 ) Total assets...................... 11,586,309 10,147,420 9,419,189 12,577,992 12,874,503 12,376,973 Long-term debt.................... 1,598,727 1,050,330 840,302 564,577 103,792 453,870 Total liabilities................. 10,020,182 9,316,193 8,713,076 11,819,796 11,670,962 11,639,830 Warrants outstanding.............. Stockholders' equity (3).......... 1,566,127 831,227 706,113 758,196 1,203,541 737,143 HLM DESIGN (COMBINED) SIX ONE MONTH MONTHS ENDED ENDED MAY 30, OCTOBER 31, 1997 1997 (2) ------------ ----------- Revenue........................... $ 2,233,036 $13,186,803 ------------ ----------- Costs and Expenses: Direct cost of revenue............ 898,979 5,944,762 Operating costs................... 1,163,141 5,920,332 ESOP expenses..................... Amortization on intangible assets.......................... 9,571 71,496 ------------ ----------- Total costs and expenses.......... 2,071,691 11,936,590 ------------ ----------- Income (Loss) from Operations..... 161,345 1,250,213 ------------ ----------- Other Income (Expense): Net Interest...................... (36,951 ) (496,973 ) Non-Operating income.............. ------------ ----------- Total Other Income (Expense).................... (36,951 ) (496,973 ) ------------ ----------- Income (Loss) Before Income Taxes........................... 124,394 753,240 Income tax expense (benefit)...... 43,000 374,125 ------------ ----------- Net Income (Loss) (4)............. $ 81,394 $ 379,115 ------------ ----------- ------------ ----------- BALANCE SHEET DATA: Working capital(deficiency)....... (2,238,531 ) 613,024 Total assets...................... 17,639,673 17,426,156 Long-term debt.................... 2,476,008 4,474,234 Total liabilities................. 16,354,738 16,768,230 Warrants outstanding.............. 250,078 Stockholders' equity (3).......... 1,284,935 407,848
- --------------- (1) The Predecessor Company is HLMI. (2) Financial information for HLM Design includes the amounts for the Managed Firms, HLMI, HLMNC and HLMO for the five months from May 31, 1997 to October 31, 1997 on a combined basis. (3) The Company has paid no cash dividends from May 1, 1992 to October 31, 1997. (4) Historical net income per share is not presented, as the historical capital structure of the Company prior to the Offering is not comparable with the capital structure that will exist after the Offering. 11 HLM DESIGN, INC. AND AFFILIATES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS The following unaudited pro forma combined financial information includes HLM Design, HLMI, HLMNC and HLMO to reflect their results assuming the acquisition of HLMI through the merger of BBH Corp., a non-operating entity controlled by the controlling Stockholders of HLM Design, into HLMI had occurred at the beginning of the respective periods and the Management and Services Agreements and related stockholder agreements had been effective as of the beginning of the respective periods. The Company believes that the assumptions used in the following statements provide a reasonable basis on which to present the pro forma financial data. The unaudited proforma combined financial data is provided for informational purposes only and should not be construed to be indicative of the Company's financial condition or results of operations had the transactions and events described above been consummated on the dates assumed, and are not intended to project the Company's financial condition on any future date or its results of operation for any future period.
(COMBINED) (PREDECESSOR HLM DESIGN PRO FORMA COMPANY) (COMBINED) FOR THE SIX ONE MONTH SIX MONTHS PRO FORMA MONTHS ENDED ENDED ENDED (1) ADJUSTMENTS PRO FORMA MAY 30, OCTOBER 31, PRO FORMA FOR THE OCTOBER 31, 1997 1997 ADJUSTMENTS OFFERING 1997 ----------- ----------- ------------- ------------- ------------ Revenue................................... $ 2,233,036 $13,186,803 $15,419,839 Costs and Expenses: Direct cost of revenue.................... 898,979 5,944,762 6,843,741 Operating costs........................... 1,163,141 5,920,332 $ (3,800)(7) 7,051,673 (28,000)(3) Amortization of intangible assets......... 9,571 71,496 4,800(2) 85,867 ----------- ----------- ------------- ------------- ------------ Total costs and expenses.................. 2,071,691 11,936,590 (27,000) 13,981,281 ----------- ----------- ------------- ------------- ------------ Income from Operations.................... 161,345 1,250,213 27,000 1,438,558 Other Income (Expense) Interest expense.......................... (36,951) (496,973) 26,000(4) $ (270,000)(6) (864,924 ) (35,000)(4) 200,000(6) (48,000)(5) (204,000)(12) ----------- ----------- ------------- ------------- ------------ Total Other Expense..................... (36,951) (496,973) (57,000) (274,000) (864,924 ) ----------- ----------- ------------- ------------- ------------ Income Before Income Taxes................ 124,394 753,240 (30,000) (274,000) 573,634 Income tax expense (benefit).............. 43,000 374,125 (9,639)(9) (104,805)(8) 302,681 ----------- ----------- ------------- ------------- ------------ Net Income................................ $ 81,394 $ 379,115 $ (20,361) $ (169,195) $ 270,953 ----------- ----------- ------------- ------------- ------------ ----------- ----------- ------------- ------------- ------------ Pro forma net income per share (11)....... $ ------------ Weighted average shares outstanding (000s).................................. ------------ ------------
(FOOTNOTES ON FOLLOWING PAGE) 12 HLM DESIGN, INC. AND AFFILIATES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
PRO FORMA FOR THE TWELVE FOR THE TWELVE (1) ADJUSTMENTS MONTHS ENDED MONTHS ENDED PRO FORMA FOR THE PRO FORMA APRIL 25, 1997 ADJUSTMENTS OFFERING APRIL 25, 1997 -------------- ----------- ----------- -------------- Revenue.................................................. $ 26,754,710 $ 26,754,710 Costs and Expenses: Direct cost of revenue................................... 13,376,251 13,376,251 Operating costs.......................................... 12,414,739 $(338,000)(3) 12,031,739 (45,000)(7) ESOP expenses............................................ 408,765 (408,765)(10) Amortization of intangible assets........................ 107,670 60,330(2) 168,000 -------------- ----------- ----------- -------------- Total costs and expenses................................. 26,307,425 (731,435) 25,575,990 -------------- ----------- ----------- -------------- Income from Operations................................... 447,285 731,435 1,178,720 -------------- ----------- ----------- -------------- Other Income (Expense) Interest expense......................................... (402,509) 311,000(4) $(240,000)(6) (1,118,509) (425,000)(4) 400,000(6) (580,000)(5) (182,000)(12) Non-Operating income..................................... 292,137 292,137 -------------- ----------- ----------- -------------- Total Other Expense.................................... (110,372) (694,000) (22,000) (826,372) -------------- ----------- ----------- -------------- Income Before Income Taxes............................... 336,913 37,435 (22,000) 352,348 Income tax expense (benefit)............................. 219,799 78,579(9) (8,415)(8) 289,963 -------------- ----------- ----------- -------------- Net Income (loss)........................................ $ 117,114 $ (41,144) $ (13,585) $ 62,385 -------------- ----------- ----------- -------------- -------------- ----------- ----------- -------------- Pro forma net income per share (11)...................... $ -------------- Weighted average shares outstanding (000s)............... -------------- --------------
- --------------- (1) On May 23, 1997 BBH Corp., affiliated with HLM Design through a majority of stockholders in common, acquired HLMI in a transaction accounted for under the purchase method of accounting. In connection with this transaction, BBH Corp. was merged into HLMI with HLMI being the surviving entity. As a part of the foregoing, the stockholders of HLMI, including the HLMI Employee Stock Ownership Plan (the "ESOP") redeemed their shares in HLMI. As a result of the foregoing, the change in voting control was 90%. The assets and liabilities of HLMI were restated to fair value as of May 31, 1997, the date purchase accounting was reflected for the acquisition. The excess of the purchase cost over the fair value of tangible net assets was recorded as goodwill and will be amortized over fifteen years. (2) Reflects the adjustment necessary for the amortization of goodwill arising from the acquisition of HLMI by BBH Corp. through the merger of BBH Corp. into HLMI. (3) Reflects the adjustment necessary to record the net decrease in depreciation expense due to the extended lives of depreciable assets. (4) Reflects the increase in interest expense resulting from the financing arrangement, which was in the form of a sale-leaseback agreement which is reduced by the interest costs associated with bank loans that were repaid. (5) Reflects the adjustment to record interest expense for the debt incurred to effect the acquisition of HLMI by BBH Corp. through the merger of BBH Corp. into HLMI. (6) Reflects the decrease in interest expense resulting from the repayment of certain indebtedness which is offset by an increase in deferred fee expense associated with the pay off of such indebtedness. See "Use of Proceeds". (7) Reflects the adjustment necessary to record decreased depreciation expense due to the reduction to fair value of certain leasehold improvements. (8) Reflects the change in provision for income taxes resulting from adjustment (5) above. (9) Reflects the change in provision for income taxes resulting from adjustments above. (10) Reflects the elimination of ESOP expenses as a result of the acquisition of HLMI by BBH Corp. through the merger of BBH Corp. into HLMI. (11) Pro forma net income per share is based upon the assumption that _______ shares of Common Stock are outstanding after the offering. This amount represents _______ shares of Common Stock to be issued in the offering and _______ shares of Common Stock owned by the Company's stockholders prior to the offering. (12) Reflects the increase in interest expense resulting from warrants attached to certain indebtedness which was repaid with proceeds of the offering. See "Use of Proceeds". 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with HLM Design and Affiliate's financial statements and Predecessor's financial statements and the related notes thereto included elsewhere in this Prospectus. OVERVIEW HLM Design is a management company which enters into management and services relationships with full-service architectural, engineering and planning firms. Currently, HLM Design has entered into Management and Services Agreements with HLMI, HLMNC and HLMO. These three firms operate in ten offices in Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando, Florida, Bethesda, Maryland, Denver, Colorado, Sacramento, California, Philadelphia, Pennsylvania, Portland, Oregon, and Charlotte, North Carolina. A full service AEP Firm provides a spectrum of services in various specialties to customers through a broad range of professionals, including architectural, mechanical, electrical, structural and civil engineers, landscape architects, interior designers and construction administration personnel. In May 1997, BBH Corp., a corporation controlled by Joseph Harris and Vernon Brannon, controlling shareholders of HLM Design, merged into HLMI with HLMI being the surviving corporation. Funding of the acquisition through the merger and "cash-out" of HLMI's existing stockholders, including the redemption of the ESOP, was provided by loans of $3.2 million from HLM Design to BBH Corp. See "Certain Transactions -- Merger Transaction." Immediately following the merger, the Managed Firms, HLMI, HLMNC and HLMO, entered into Management and Services Agreements with HLM Design. HLM Design, under the terms of such agreements, is the sole and exclusive manager and administrator of all of the Managed Firms' day-to-day business functions, including financial planning, facilities, equipment and supplies, management and administrative services, and receives as compensation all but 1% of each firm's positive cash flow following the payment by each firm of all such firm's expenses. PRO FORMA RESULTS OF OPERATIONS (EXCLUDING THE EFFECT OF THE OFFERING) As a result of the acquisition of HLMI through the merger of BBH Corp. into HLMI and the consummation of the Management and Services Agreements and Stockholders' Agreements, the discussion and analysis of results of operations for the six months ended October 31, 1997 compared to six months ended October 25, 1996 is presented on a pro forma basis that reflects the acquisition of the assets of HLMI through the merger of BBH Corp. into HLMI and the consummation of the Management and Services Agreements and Stockholders' Agreements as though they occurred at the beginning of the respective periods. SIX MONTHS ENDED OCTOBER 31, 1997 COMPARED WITH SIX MONTHS ENDED OCTOBER 31, 1996 -- PRO FORMA This pro forma financial data does not reflect the results of the effect of the Offering.
COMBINED COMBINED PRO FORMA PRO FORMA OCTOBER 25, OCTOBER 31, 1996 1997 ----------- ----------- Revenue........................................................................................ $13,503,623 $15,419,839 Costs and expenses: Direct cost of revenue......................................................................... 7,534,491 6,843,741 Operating costs................................................................................ 5,909,546 7,051,673 Amortization of intangible assets.............................................................. 84,000 85,867 ----------- ----------- Total costs and expenses....................................................................... 13,528,037 13,981,281 ----------- ----------- Income (loss) from operations.................................................................. (24,414) 1,438,558 Other income (expense) Interest expense............................................................................... (549,794) (590,924) ----------- ----------- Total other expense.......................................................................... (549,794) (590,924) ----------- ----------- Income (loss) before income taxes.............................................................. (574,208) 847,634 Income tax expense (benefit)................................................................... (147,344) 407,486 ----------- ----------- Net Income (loss).............................................................................. $ (426,864) $ 440,148 ----------- ----------- ----------- -----------
Revenues were $15.4 million for the six months ended October 31, 1997 compared to $13.5 million for the six months ended October 25, 1996, which is an increase of 14.2%. The increase in revenues is attributable to management's stronger focus on marketing efforts during the six months ended October 31, 1997. 14 Direct costs primarily include, direct labor, subconsultant costs, and reimbursable expenses. Direct costs were $6.8 million, or 44.4% of revenues, for the six months ended October 31, 1997, as compared to $7.5 million, or 55.8% of revenues for the six months ended October 25, 1996. This decrease as a percent of revenue is principally due to a decrease in direct labor incurred as a percentage of revenues due to improved productivity as a result of management's closer monitoring of each project, as well as, a decrease in subconsultant costs. Operating expenses were $7.0 million, or 45.7% of revenues, for the six months ended October 31, 1997 as compared to $5.8 million, or 43.8% of revenues, for the six months ended October 25, 1996. This increase is principally due to an increase in indirect labor and related costs as a result of aggressive marketing efforts to increase revenues and an increase in rent expense associated with rental of certain computer and software equipment. Amortization of intangible assets were $0.1 million for both the six months ended October 31, 1997 and October 25, 1996. The amortization expense relates to the goodwill arising from the acquisition of HLMI by BBH Corp. through the merger of BBH Corp. into HLMI. See Note 2 to the Notes to Combined Financial Statements. Interest expense was $0.6 million for the six months ended October 31, 1997 as compared to $0.5 million for the six months ended October 25, 1996. Income tax expense for the six months ended October 31, 1997 was $0.4 million as compared to an income tax benefit of $0.1 million for the six months ended October 25, 1996. The effective income tax rate was 48.1% for the six months ended October 31, 1997 as compared to 24.6% for the six months ended October 25, 1996. The effective income tax rate was higher due to non-deductible goodwill amortization and the ratio of non-deductible penalties and meals and entertainment expense to pre-tax income or loss. PREDECESSOR RESULTS OF OPERATIONS The following discussion of analysis and results of operations for the fiscal years ended 1997, 1996 and 1995 relate to the predecessor company HLMI. HLM Design was incorporated on March 6, 1997 had no significant activity as of April 25, 1997. FISCAL 1997 COMPARED WITH FISCAL 1996 Revenues were $26.8 million in fiscal 1997 compared to $28.6 million in fiscal 1996, which was a decline of 6.3%. The decline in revenues was primarily attributable to HLMI's decentralization of architectural personnel from one location to multiple locations, shift in HLMI's mix from large academic education facilities to smaller healthcare and criminal justice projects, and HLMI's efforts to focus on the estimating process and selecting contracts with profitability as the major goal, which resulted in some potential contracts not being pursued. During fiscal 1997 and fiscal 1996, approximately 70% of HLMI's revenues are related to health care projects and approximately 30% are from criminal justice and other projects. Direct costs include, among other things, direct labor, subconsultant costs, and reimbursable expenses. Direct costs were $13.4 million, or 50.0% of revenues, in fiscal 1997 as compared to $14.3 million, or 49.9% of revenues, in fiscal 1996. This increase as a percent of revenue is principally from an increase in the use of subconsultants to meet the requirements of the projects (18.2% and 16.7% of revenue in fiscal 1997 and fiscal 1996, respectively) and an increase in reimbursable expenses incurred (4.4% and 3.3% of revenue in fiscal 1997 and fiscal 1996, respectively). This increase is offset by a decrease in direct labor incurred due to improved productivity as a result of HLMI's focus on cost containment of each project (24.7% and 26.7% of revenue in fiscal 1997 and fiscal 1996, respectively). As a result of these fluctuations and decreased sales, gross profit from revenue (revenue less direct cost of revenue) decreased to $13.4 million in fiscal 1997 from $14.3 million in fiscal 1996. Operating expenses decreased 6.4% to $12.4 million, or 46.4% of revenues, in fiscal 1997 from $13.1 million, or 45.9% of revenues, in fiscal 1996. The decrease of 5.3% is principally due to a reduction in personnel costs resulting from HLMI's efforts to increase utilization of labor. ESOP expenses were $0.4 million in fiscal 1997 as compared to $0.6 million in fiscal 1996. These expenses represent principal and interest payments on the ESOP debt. Amortization of intangible assets was $0.1 million for both the six months ended October 31, 1997 and October 25, 1996. The amortization relates to the goodwill arising from the acquisition of MBP Architects, Inc. in April 1995. See Note 2 to HLMI Financial Statements. Interest expense was $0.4 million for both fiscal 1997 and fiscal 1996. 15 Non-operating income was $0.3 million in fiscal 1997 compared to $0.9 million in fiscal 1996. Non-operating income is principally due to the gain, on a lease termination, as a result of the cumulative excess of lease expense over the lease payments made as of the termination dates. In fiscal 1997 and fiscal 1996, HLMI terminated facility leases resulting in a gain of $0.3 million and $0.8 million, respectively. Income tax expense was $0.2 million in fiscal 1997 compared to $0.4 million in fiscal 1996. The effective income tax rate in fiscal 1997 was 65.3% compared to 44.8% in fiscal 1996. The effective tax rate was higher for fiscal 1997 as compared to fiscal 1996 due principally to nondeductible penalties (17.42% in 1997) and meals and entertainment expenses (9.3% in 1997). The increase in penalty expense is due to HLMI's inability to timely fund payroll taxes. FISCAL 1996 COMPARED WITH FISCAL 1995 Revenues were $28.6 million in fiscal 1996 compared to $29.1 million in fiscal 1995, a decline of 2.0%. The decline in revenues was primarily attributable to HLMI's decentralization of architectural services from one location to multiple locations and its efforts to focus on the estimating process and selecting contracts with profitability as the major goal, which resulted in some potential contracts not being pursued. During fiscal 1996, approximately 70% of HLMI's revenues were related to health care projects and approximately 30% were from criminal justice and other projects as compared to during fiscal 1995, approximately 73% of HLMI's revenues were related to health care projects and approximately 27% were from criminal justice and other projects. Direct costs include, among other things, direct labor, subconsultants costs, and reimbursable expenses. Direct costs were $14.3 million, or 49.9% of revenues, in fiscal 1996 as compared to $15.7 million, or 53.9% of revenues, in fiscal 1995. This decrease as a percent of revenues is principally from a decrease in the use of subconsultants to meet the requirements of the projects (16.7% and 18.2% of revenue in fiscal 1996 and fiscal 1995, respectively), a decrease in direct labor incurred as a result of HLMI's focus on cost containment of each project (26.7% and 27.3% of revenue in fiscal 1996 and fiscal 1995, respectively) and a decrease in reimbursable expenses incurred (3.3% and 5.3% of revenue in fiscal 1996 and fiscal 1995, respectively). As a result of these reductions, gross profit from revenue (revenue less direct cost of revenue) increased to $14.3 million in fiscal 1996 from $13.4 million in fiscal 1995. Operating expenses decreased 7.1% to $13.1 million, or 45.9% of revenues, in fiscal 1996 from $14.1 million, or 48.4% of revenues, in fiscal 1995. The decrease is principally due to a decrease in rent and occupancy costs resulting from management's renegotiation of certain office leases and, to a lesser extent, a decrease in the costs incurred for contingencies related to various disputes and legal actions related to contract operations due to HLMI's focus on prevention and resolution of such matters on an on going basis. This is partially offset by an increase in salary and related costs and reproduction costs. ESOP expenses were $0.6 million for both fiscal 1996 and 1995. The expenses represent principal and interest payments on the ESOP debt. Amortization of intangible assets were $0.1 million in fiscal 1996 and $5,952 in fiscal 1995. This increase relates to the goodwill arising from the acquisition of MBP Architects, Inc. in April 1995. See Note 2 to Notes to HLMI Financial Statements. Interest expense was $0.4 million for fiscal 1996 and $0.2 million for fiscal 1995. This increase is primarily due to increased borrowing for working capital needs in fiscal 1996. Non-operating income was $0.9 million in fiscal 1996 compared to $0.4 million in fiscal 1995. In fiscal 1996, the Company terminated facility leases resulting in a gain of $0.8 million. In fiscal 1995, HLMI sold its airplane which generated a gain on sale of assets of $0.4 million. See Note 4 to Notes to HLMI Financial Statements. Income tax expense was $0.4 million in fiscal 1996 compared to an income tax benefit of $0.4 million in fiscal 1995. The effective income tax rate in fiscal 1996 was 44.8% compared to 37.7% in fiscal 1995. The effective tax rate was higher for fiscal 1996 as compared to fiscal 1995 due to the ratio of non-deductible meals and entertainment expense to pre-tax income or loss. LIQUIDITY AND CAPITAL RESOURCES At April 25, 1997, HLMI's current liabilities of $11.6 million exceeded current assets of $9.7 million, resulting in a working capital deficit of $1.9 million. During fiscal 1997, HLMI generated $0.5 million in cash from operating activities. HLMI used $0.7 million in investing activities, primarily the purchase of equipment. HLMI received proceeds from new debt 16 of $0.5 million and repaid borrowings on notes payable of $0.4 million. These transactions resulted in a net decrease in cash of $8,809 for the fiscal year. At October 31, 1997, the Company's current assets of $11.7 million exceeded current liabilities of $12.4 million resulting in a working capital of $0.7 million. During the six months ended October 31, 1997, the Company used $48,600 in cash from operating activities. The Company used $0.4 million for investing activities, primarily the purchase of equipment. The Company generated $0.5 million for financing activities, primarily from long-term borrowings reduced by the payment of the ESOP buyback. The Company received proceeds, in June 1997, from financing, in the form of a capital lease of $2.8 million (the "Lease Financing") from Berthel Fisher & Company Leasing, Inc. ("Berthel Leasing"). The proceeds were used to repay a line of credit and a note payable due to Firstar Bank of Iowa, N.A. In connection with the Lease Financing, HLMI granted a security interest in all of its personal property to Berthel Leasing and Joseph Harris, Vernon Brannon and William Blalock, a former director of HLM Design, partially guaranteed the amount due to Berthel Leasing. HLM Design also entered into a term loan, in September 1997, of $0.8 million with Berthel Leasing for working capital purposes. In consideration for this borrowing, HLM Design sold warrants to purchase 2,515 shares of Common Stock, subject to adjustment in certain circumstances, to Berthel Leasing (the "Berthel Warrants"). See "Certain Transactions -- Berthel Leasing Lease Financing" and "Description of Capital Stock -- Warrants." In connection with the merger agreement with BBH Corp. and the payment of the merger consideration to holders of HLMI common stock, the Company (i) issued indebtedness in the aggregate principal amount of $2 million to Pacific Capital, L.P. ("Pacific") and Equitas, L.P. ("Equitas") (the "Pacific/Equitas Loan"), and (ii) obtained financing from First Charter National Bank in the form of a revolving line of credit in an aggregate principal amount of $1 million (the "First Charter Loan"). The Pacific/Equitas Loan is secured by, among other things, a collateral assignment of HLM Design's interest in its Management and Services Agreements and a security interest in HLM Design's personal property and fixtures. Additionally, HLMI, as well as Joseph Harris and Vernon Brannon has, under certain circumstances, guaranteed the Pacific/Equitas Loan. HLM Design also sold warrants to purchase 14,372 shares of Common Stock, subject to adjustment in certain circumstances, to Pacific and Equitas and Shannon LeRoy, a representative of Equitas and a member of the Board of HLM Design and Clay R. Caroland, a representative of Pacific and a member of the Board of HLM Design (the "Pacific/Equitas Warrants" and, together with the Berthel Warrants, the "Warrants"). See "Certain Transactions -- Merger Transaction," "Description of Capital Stock -- Warrants" and Note 4 to the Combined Financial Statements. The First Charter Loan is secured by an unconditional guaranty from HLMI, which is secured by a security interest in all of HLMI's accounts receivable. Joseph Harris, Vernon Brannon and William Blalock, a former director of HLM Design, have also guaranteed the First Charter Loan. The Company's growth and operating strategy will require substantial capital and may result in the Company incurring additional debt, issuing equity securities or obtaining additional bank financing. The Company has received an oral commitment from First Charter Bank for a new revolving line of credit, contingent upon the Offering and other customary terms and conditions. The Company believes that the net proceeds from the Offering, the new revolving line of credit from First Charter Bank and anticipated funds from future operations will be sufficient to meet its working capital needs for at least the next twelve months. The Company's operations are professional services and as such are not capital intensive. However, in order to enhance productivity, the Company has increased its purchase of computer hardware and software. The Company currently has no material commitments for purchases of additional equipment. Capital expenditures during fiscal year 1997 were $0.7 million. The Company expects fiscal 1998 capital expenditures to be comparable to expenditures in fiscal 1997. Subsequent to the Offering, the Company expects to fund AEP affiliations with proceeds from the Offering and future offerings. SEASONALITY The Company's operations are not seasonal in nature. EFFECTS OF INFLATION Due to the relatively low levels of inflation in fiscal years 1995, 1996 and 1997, inflation did not have a significant effect on the Company's results of operations for those periods. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Standards No. 128, "Earnings Per Share." This Statement specifies the computation, presentation and disclosure requirements for earnings per share. 17 The Company believes that the adoption of such Statement would not result in earnings per share materially different than pro forma earnings per share presented in the accompanying pro forma statements of income. It will be effective for periods ending after December 15, 1997. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement will be effective for HLMI's fiscal year ending April 24, 1998, and the Company does not intend to adopt this statement prior to the effective date. 18 BUSINESS OVERVIEW HLMI was founded in Iowa City, Iowa in 1962 to provide architectural, engineering and planning services. HLMI enjoyed steady growth, expanding geographically and establishing a national presence and is now recognized as a leader in the healthcare arena. In 1987, the original founders of HLMI sold their ownership in the company to the ESOP and a board of directors, consisting of senior principals, took control of HLMI. In 1994, as a result of the poor financial performance of HLMI, Joseph M. Harris was hired as Chief Executive Officer and Vernon B. Brannon was hired as Chief Financial Officer. Messrs. Harris and Brannon instituted significant changes, cutting costs and personnel, with a focus on returning HLMI to profitability. In 1996, HLMO and HLMNC were formed and the headquarters of HLMI was moved from Iowa City, Iowa to Charlotte, North Carolina. HLMI, HLMO and HLMNC currently operate offices in Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando, Florida, Bethesda Maryland, Denver, Colorado, Sacramento, California, Philadelphia Pennsylvania, Portland, Oregon and Charlotte, North Carolina. On May 23, 1997, BBH Corp. merged into HLMI. See "Certain Transactions -- Merger Transaction." Following the merger of BBH Corp. into HLMI, Messrs. Harris and Brannon owned all of the outstanding common stock in HLMI. In March 1997, HLM Design was formed with the intent of managing the nonprofessional operations of AEP Firms through Management and Services Agreements. HLM Design believes it is the first company in the architectural, engineering and planning industry to actively pursue the strategy of consolidating non-professional operations and providing management expertise to AEP Firms. HLM Design believes its strategy will take advantage of operating efficiencies for AEP Firms and provide diversification, including services and geography, for the AEP Firm's clients. The process of developing and entering into management and services relationships is complex and usually requires several months to complete. In May 1997, HLM Design entered into forty-year Management and Services Agreements with HLMI, HLMNC and HLMO. All three of these firms are related through common principal stockholders and these stockholders have entered into Stockholders' Agreements. See "Certain Transactions." OPERATING STRATEGY The creation of a management relationship between HLM Design and an AEP Firm involves, among other things, the signing of a Management and Services Agreement between HLM Design and the AEP Firm. Under the terms of the Management and Services Agreement, HLM Design is the sole and exclusive manager and administrator of all of the Managed Firm's day-to-day business functions. These functions include financial planning, facilities, equipment and supplies, and management and administrative services. Management and administrative services include bookkeeping and accounts, general administration services, contract negotiation and administration for all non-architectural and non-engineering aspects of all agreements pertaining to the provision of architectural and engineering services by Managed Firms to third parties, personnel, security and maintenance, architectural and engineering recruiting and training, insurance, issuance of debt and additional capital stock, billing and collections. For these services, HLM Design receives all but 1% of the firm's positive cash flow (as determined in accordance with generally accepted accounting principles applied on a consistent basis) following the payment by the AEP Firm of all such firm's expenses. See " -- HLM Design Operations -- Management and Services Agreements." In addition to the Management and Services Agreement, HLM Design will require stockholders of Managed Firms to enter into stockholders' agreements (the "Stockholders' Agreements") which will provide the stockholders of those entities with nominee stockholder status. Generally, the Stockholders' Agreements will provide for the following: (i) the repurchase by the Managed Firm of the stockholder's stock upon such stockholder's death, (ii) restrictions on transferability of the stock, (iii) a "call-right" on the stock by the AEP Firm and (iv) a voting agreement among the stockholders and Managed Firm. See " -- HLM Design Operations -- Stockholders' Agreements." The architects, engineers and planners employed by the Managed Firms offer a broad range of specialty and ancillary services. The Managed Firms offer services in master planning, architectural design, mechanical, electrical, structural and civil engineering, interior design, environmental graphics, landscape architecture, construction services and facility management. Each office varies in the number and types of specialties offered. The Managed Firms provide excellence in design and over the years have designed over a billion square feet of buildings and completed hundreds of planning and feasibility studies. Clients of the firms range from small companies to America's most prestigious corporations. The professionals at the Managed Firms specialize in the design of hospitals, criminal justice buildings and high-tech research facilities. Design experience of professionals employed by the Managed Firms includes corporate headquarters, physician office buildings, investment office buildings, multi-use office complexes and related facilities. The Managed Firms' professionals maintain full control over their architectural and engineering practices, determine which projects to pursue and set their own standards of practice in order to promote high-quality provision of services and retain ownership of all contracts with clients. HLM Design is not engaged in the practice of architecture, engineering or planning. 19 The following more fully describes the services provided by the Managed Firms: FOCUS ON HEALTHCARE. The Managed Firms design healthcare facilities that help their clients improve patient care and reduce operating costs. During the last 33 years, HLMI has designed over one billion square feet of healthcare facilities. Its experience includes more than 325 healthcare clients and over 825 major healthcare engagements including: (Bullet) 201 health facility master plans (Bullet) 118 ambulatory care centers (Bullet) 77 ambulatory surgery centers (Bullet) 119 academic medical centers and teaching facilities (Bullet) 64 cancer centers (Bullet) 69 women's facilities (Bullet) 13 replacement hospitals (Bullet) 44 medical office buildings FOCUS ON JUSTICE. The Managed Firms design justice facilities that help their clients build efficient and effective public facilities in times where financing of construction and operation of these public facilities is continually being scrutinized. Its experience includes: (Bullet) 25 federal and state projects (Bullet) 1.8 million square feet for the federal government (Bullet) 3 million square feet of courthouse renovation By integrating design and planning, the Company's professionals meet project objectives by improving staff efficiency, accelerating the project schedule or even addressing sensitive urban design issues. Teams explore options to optimize the return on construction dollars, for example, by creatively combining renovation and new construction. The Company helps bridge the gap between need and public acceptance through public information campaigns and cost control. The results are buildings -- courts, police, detention or corrections facilities -- that meet stringent cost requirements yet still achieve a high quality of design. FOCUS ON RESEARCH FACILITIES. The Managed Firms design laboratories for clients that focus on optimizing space utilization and provide flexibility to adapt to changing technology or funding constraints. Systems are designed to control operating costs while protecting the demands of the research function and making safety and security the highest priority. Often, the goal is to produce environments that stimulate creativity, promote interaction, enhance the client's ability to recruit the best and brightest and attract funding. The Managed Firms have completed 30 projects totalling over 3 million square feet valued at $540 million in construction. GROWTH STRATEGY HLM Design intends to implement an aggressive, yet disciplined, expansion program by pursuing Management and Services Agreements with (i) large "regional" AEP Firms with established operating histories located in large metropolitan and high-growth suburban geographic markets that the Company does not currently serve and (ii) small firms that provide operational diversity in geographic areas that will complement the services that are either currently provided by the Company in such geographic areas or that are intended to be provided in the future. HLM Design believes its approach will be attractive to these large and small AEP Firms because it will provide these firms with economies of scale and the synergies that result from increased purchasing power, a greater breadth of services, an increased pool of professionals, and geographical diversity. Furthermore, this strategy will give these regional and local AEP Firms, as a part of the Company, the ability to provide services to existing and future clients with national operations that might otherwise have turned to "non-local" firms to service their needs. The goal is for the Company to be the single source provider for large national clients with geographically diverse operations. HLM Design generally expects that AEP Firms that sign Management and Services Agreements will retain existing high-quality professional staff and continue to operate in an effective and efficient manner with personnel who understand the local market. Additionally, management believes they are positioned to pursue larger, well established AEP Firms as a result of the depth of HLM Design's management team, its capital structure and the reputation of the management team in the design industry. Management also believes these goals can be achieved at less cost than that which would be incurred by AEP firms operating on a stand alone basis. 20 HLM DESIGN OPERATIONS Pursuant to its Management and Services Agreements, HLM Design manages all aspects of the Managed Firm other than the provision of professional architectural, engineering and planning services. The provision of these services is controlled by the Managed Firms themselves. HLM Design enhances firm growth by assisting in the recruitment of new professionals and by expanding and adding ancillary services. One of HLM Design's goals is to negotiate national arrangements and provide cost savings to Managed Firms through economies of scale in areas such as malpractice insurance, supplies, equipment and business functions. MANAGEMENT AND SERVICES AGREEMENTS The Management and Services Agreements with the Managed Firms are for a period of forty years. These agreements cannot be terminated by HLM Design or the Managed Firm without a material default or bankruptcy. Under these agreements, HLM Design is appointed as the sole and exclusive manager and administrator of all of the Managed Firms' day-to-day business functions, including financial planning, facilities, equipment and supplies, and management and administrative services (including bookkeeping and accounts, general administration services, contract negotiation and administration for all non-architectural and non-engineering aspects of all agreements pertaining to the provision of architectural and engineering services by Managed Firms to third parties), personnel, security and maintenance, architectural and engineering recruiting and training, insurance, and billing and collections. HLM Design has no authority, directly or indirectly, to perform any function of the Managed Firm's operations pertaining to services which are required to be performed by duly licensed architects and engineers pursuant to any and all applicable laws, rules or regulations adopted by any authority regulating the licensing of architects or engineers. The Managed Firms will retain ownership of all contracts with clients. Additionally, HLM Design has the authority to approve or deny, on behalf of the Managed Firm, any and all proposals by stockholders of such firm to encumber, sell, pledge, give or otherwise transfer the capital stock of the Managed Firm, as well as the authority to approve issuance of common stock or incurrence of indebtedness. As compensation for the provision of its services under the Management and Services Agreement, HLM Design receives all but 1% of each Managed Firm's positive cash flow (as determined in accordance with generally accepted accounting principles applied on a consistent basis) following the payment by the Managed Firm of all such firm's expenses. STOCKHOLDERS' AGREEMENTS Stockholders of Managed Firms will enter into a Stockholders' Agreement which will generally restrict the ability of these stockholders to exercise certain rights commonly associated with ownership of common stock and will effectively provide stockholders of such entities with nominee stockholder status. Generally, such Stockholders' Agreements will provide that: (i) upon the death of a stockholder, the Managed Firm will purchase and the personal representative of such stockholder's estate will sell to the Managed Firm all the stock owned by such deceased stockholder; provided, however, in certain circumstances the sale of such stockholder's stock may be made to one or more third parties, subject to the approval of the Managed Firm; (ii) stockholders may not sell, pledge, give or otherwise transfer any or all of their stock to any third party, either voluntarily or involuntarily, without first obtaining the AEP Firm's written approval of such transfer; (iii) the Managed Firm has the right at any time to purchase all, but not less than all, of the stock then owned by any or all of the stockholders; and (iv) the stockholders agree that with respect to all matters which are submitted to stockholder vote (and, to the extent that all or any of the stockholders serve as a director of the Managed Firm, then also with respect to all matters which are submitted to a vote of the board of directors), the stockholders will, if not in unanimous agreement, follow specified procedures to achieve unity in voting among all stockholders. In addition, the Stockholders' Agreements will contain an acknowledgment on the part of each stockholder that it is in the parties' best interest that certain of the Managed Firm's administrative and managerial functions be performed pursuant to a Management and Services Agreement with HLM Design and that in order to ensure consistency and continuity in the management of the firm's business and affairs, that with respect to all matters pertaining to the initiation of stock "calls" and the approval or denial of proposed stock transfers, the Managed Firm will in all cases act in accordance with the written recommendation of HLM Design. The Stockholders' Agreement will provide that they may be terminated upon the occurrence of any of the following events: 21 (i) cessation of the Managed Firm's business, (ii) bankruptcy, receivership or dissolution of the Managed Firm, or (iii) the voluntary agreement of all parties bound by the terms of such Stockholders' Agreement. Each of the stockholders of HLMI, HLMNC, and HLMO have entered into Stockholders' Agreements which provide each stockholder with nominee stockholder status. It is anticipated that stockholders' agreements among stockholders of the AEP Firm with whom HLM Design enters into Management and Services Agreements in the future will have similar terms. PROPERTIES HLM Design's principal executive offices are located at 121 West Trade Street, Suite 2950, Charlotte, North Carolina and its telephone number is (704) 358-0779, where the Company leases 7,254 square feet. The lease is for a term of 5 years and expires in 2000. The Company believes the office facility is adequate for its current uses and anticipated growth. In addition to HLM Design's principal executive offices, the Company leases office space in Sacramento, California, Denver, Colorado, Orlando, Florida, Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Bethesda, Maryland, Portland, Oregon and Philadelphia, Pennsylvania. COMPETITION The business of providing architectural, engineering and planning services is highly competitive. HLM Design, however, is not aware of any other company actively pursuing a strategy of consolidating firms' administrative and management functions. The Company believes, however, that additional companies with similar objectives will be organized in the future. Potential sources of competition include larger, nationally known, multi-specialty professional groups or professional firms and others, a number of which may have significantly greater resources than those of the Company. The Managed Firms are in competition with many other AEP firms, including large, national firms as well as many small, local firms. The Managed Firms compete with these firms on the basis of technical capabilities, qualifications and availability of personnel, experience, reputation, quality performance and, to a lesser extent, price of services. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS Each state has enacted legislation governing the registration of architects and engineers, and, in some cases, landscape architects, fire protection engineers and interior designers. These state laws impose licensing requirements upon individual design professionals and architectural-engineering firms and are implemented by a more detailed set of administrative rules and regulations overseen by a registration board. In general, the state laws define the practice of architecture and engineering, restrict the use of the titles ARCHITECT and ENGINEER to licensed individuals, establish rules for entry into the profession, explain how professionals licensed in other states may become reciprocally registered to practice in the jurisdiction and define and enforce standards of professional conduct and misconduct. The state laws, or the regulations established by a registration board, may also establish requirements for the practice of architecture or engineering by a corporation or partnership. A few states do not permit the practice of architecture or engineering in a corporate form. Some states require design professionals who want to incorporate to do so as a professional corporation authorized and certified by the secretary of state. Most states permit practice through either a professional corporation or a general business corporation. Even if a state permits practice in a corporate form, the state may require that a certain number of principals in the corporation must be registered architects or engineers. Some states specify that a certain percentage of the principals, directors or shareholders of a corporate entity must be registered architects or engineers in order to practice in the state. A corporation seeking to practice in a state other than that in which it is incorporated must register as a foreign corporation in the other state and satisfy all of the registration requirements. There can be no assurance that the regulatory environment in which the Company operates will not change significantly in the future. Federal, state and local environmental laws and regulations have not historically had a material impact on the operations of the Company; however, the Company cannot predict the effect on its operations of possible future environmental legislation or regulations. 22 EMPLOYEES At October 31, 1997, all employees used by HLM Design to carry out its obligations under the Management and Services Agreements were employed by HLMI. In January 1998, substantially all of such employees will be transferred to and will be employed by HLM Design. At October 31, 1997, HLMI employed approximately 246 persons of which approximately 123 were registered professionals (engineers, architects and others), approximately 71 were degreed professionals and approximately 52 were administrative personnel. None of HLM Design's employees or the Managed Firm's employees is represented by a labor union. HLM Design considers its relations with its employees and the employees of the Managed Firms to be satisfactory. The registered professional architects and engineers generally have degrees from accredited architecture or engineering schools, several years of work experience and have passed licensing examinations. Both registered and degreed architects have either a five year architectural degree or a four year degree and a two year advanced architectural degree. The Company's degreed professionals who are not registered have not yet passed the required licensing examinations. LEGAL PROCEEDINGS From time to time HLM Design or one or more of the Managed Firms are named in claims involving contractual disputes or other matters arising in the ordinary course of business. Currently, no legal proceedings are pending against or involve HLM Design or the Managed Firms that, in the opinion of management, when considering insurance coverage, could reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of HLM Design. MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS; KEY PERSONNEL The executive officers, directors and key personnel of the Company, and their ages as of the date of this Prospectus, are as follows:
NAME AGE POSITION(S) WITH THE COMPANY - ------------------------- --- ------------------------------------------------------------------- Joseph M. Harris 53 President, Chairman of the Board and Director* Vernon B. Brannon 54 Senior Vice President, Chief Financial Officer, Treasurer, Assistant Secretary and Director* Clay R. Caroland III 43 Director D. Shannon LeRoy 41 Director Thomas G. Pinkerton, Sr. 53 Senior Vice President Bradley A. Earl 50 Vice President Viktor A. Lituczy 44 Vice President Frank E. Talbert 41 Vice President Robert P. Ludden 42 Vice President
- --------------- * Executive Officer JOSEPH M. HARRIS, AIA, RIBA, has been President, Chairman of the Board, and a Director of HLM Design since its organization in 1997. He has been President and Chief Executive Officer of HLMI for the past three years. Prior to joining HLMI in 1994, he served as President of Heery Architects and Engineers, Inc. and an Executive Vice President and Director of Technical Services of Heery International, Inc., one of the country's largest full-service multi-disciplinary professional service firms. Prior to that, Mr. Harris was one of the founders and served as President of Clark, Tribble, Harris and Li, Architects, P.A. a multi-service architectural firm. Mr. Harris has over 30 years of professional experience and is an architect licensed in 32 states and in the United Kingdom. VERNON B. BRANNON has been Senior Vice President, Chief Financial Officer, and a Director of HLM Design since its organization in 1997. Along with Mr. Harris, he is a stockholder of HLMI which he joined in 1994 as Chief Financial Officer and was appointed Senior Vice President soon after joining the firm. Prior to joining HLMI, from 1988 to 1994 Mr. Brannon was Chief Operating Officer of UAV Corporation, a video distribution firm, with responsibility for manufacturing, finance, accounting, and all other functions except sales. 23 CLAY R. CAROLAND III has been a partner since 1987 in Health Investors, LP and its affiliates. From 1996 to 1997 he also served as President of the General Partner of Pacific Capital, L.P. Health Investors and Pacific are investment firms. In 1989, he, along with Health Investors, organized and capitalized ClinTrials, Inc., which grew to become a leading CRO. In 1981, he co-founded Liberty Street Capital, NY, a Wall Street investment boutique and was Managing Director there until 1987. Mr. Caroland has served on the boards of directors of a number of companies including EquiVision and ClinTrials. D. SHANNON LEROY currently serves as President of Tennessee Business Investments, Inc., the general partner of Equitas, L.P., a licensed Small Business Investment Company. From 1988 until 1994, Mr. LeRoy served as a Senior Vice President of First Union National Bank of Tennessee, where he managed commercial banking. Mr. LeRoy is a Director of Power Designs, Inc., a manufacturer of power supply and power line conditional products, and Laure Beverage Company, a consumer beverage company. BRADLEY A. EARL is a Vice President managing the Philadelphia office of HLMI. He joined HLMI in 1996. Prior to that he served in various leadership positions in architectural firms and as an independent architect. He was Director of Architecture at The Klett Organization from 1994 to 1996 and Executive Architect to Children's Hospital of Philadelphia from 1992 to 1994. He is a registered architect with 21 years of experience. VIKTOR A. LITUZAY rejoined HLMI in 1996 as Vice President managing the firm's Portland, Oregon office. Prior to leaving HLMI in 1989. Mr. Lituczy was Corporate Vice President for the Chicago office as well as director of high-tech laboratory projects firmwide. From 1992 until 1996 he had his own architectural practice in Portland and consulted with a number of healthcare clients and architects on projects. From 1989 until 1992 he was an Associate Principal for KMD Architects & Planners in Portland. He is a registered architect with 20 years of experience. ROBERT P. LUDDEN is a Vice President managing the Orlando office of HLMI. He joined HLMI in 1993. Prior to that, from 1986 to 1993, he was a Vice President at Cannon, a large architectural firm that focuses on healthcare architecture. Mr. Ludden's career has focused on the leadership and direction of significant architectural and engineering projects. His work spans a number of markets including justice, healthcare, research and commercial. He is a registered architect. THOMAS G. PINKERTON is a Senior Vice President of the Company. He joined the firm in 1994 as National Director of Justice Architecture. Prior to joining HLMI he was an associate with Hellmuth, Obata & Kassabaum, Inc., one of the largest architectural firms in the country. A registered architect with 33 years of experience, he has devoted his practice exclusively to the design of justice facilities. FRANK E. TALBERT is a registered architect with 17 years experience. He joined HLMI in 1994 and is Vice President managing the Chicago office of the firm. Prior to joining HLMI he was President of FibreCem Corporation from 1992 to 1994 where he led the successful turnaround of that company. His success was achieved with a combination of an intensive, hands-on sales effort, and a reorganization of operations. From 1990 to 1992 he managed the Carolinas office of Kajima International Inc., the world's largest turnkey developer/builder where he established a program for financial enhancements on free standing not leased retail projects. Mr. Talbert is a registered architect. As soon as practicable after the Offering, HLM Design intends to name two individuals not employed by or affiliated with HLM Design to HLM Design's Board of Directors. The Board of Directors of the Company is divided into three classes, each of which, after a transitional period, will serve for three years, with one class being elected each year. The executive officers are elected annually by, and serve at the discretion of, HLM Design's Board of Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Since HLM Design's organization in March 1997, all matters concerning executive officer compensation have been addressed by the entire Board of Directors. Since HLM Design's organization, Vernon Brannon and Joseph Harris have been executive officers of HLM Design and, together with Clay R. Caroland III and Shannon LeRoy, who each represent creditors of HLM Design, have constituted the majority of the Board of Directors. As soon as practicable after the Offering, HLM Design intends to name two independent directors who will thereafter comprise its Compensation Committee. LIMITATIONS OF DIRECTORS' LIABILITY HLM Design's Certificate of Incorporation includes a provision that effectively eliminates the liability of directors to HLM Design or to HLM Design's stockholders for monetary damages for breach of the fiduciary duties of a director, except for breaches of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing 24 violation of law, certain actions with respect to unlawful dividends, stock repurchases or redemptions and any transaction from which the director derived an improper personal benefit. This provision does not prevent stockholders from seeking nonmonetary remedies covering any such action, nor does it affect liabilities under the federal securities laws. HLM Design's Bylaws further provide that HLM Design shall indemnify each of its directors and officers, to the fullest extent authorized by Delaware law, with respect to any threatened, pending or completed action, suit or proceeding to which such person may be a party by reason of serving as a director or officer. Delaware law currently authorizes a corporation to indemnify its directors and officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by a third party if such officers or directors acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. Indemnification is permitted in more limited circumstances with respect to derivative actions. HLM Design believes that these provisions of its Certificate of Incorporation and Bylaws are necessary to attract and retain qualified persons to serve as directors and officers. COMMITTEES OF THE BOARD The Board of Directors of HLM Design intends to establish a Compensation Committee and an Audit Committee consisting of independent directors upon the election of at least two independent directors. The Compensation Committee will review and approve compensation for the executive officers, and administer, and determine awards under, the Stock Option Plan and any other incentive compensation plan for employees of the Company. See " -- Stock Option Plan" and " -- Employee Stock Purchase Plan." The Audit Committee will recommend the selection of auditors for the Company and will review the results of the audit and other reports and services provided by the Company's independent auditors. HLM Design has not previously had either of these committees. DIRECTOR COMPENSATION Members of the Board of Directors who are not employees of the Company will be compensated for their services in amounts to be determined. The Company will also reimburse all directors for their expenses incurred in connection with their activities as directors of the Company. Directors who are also employees of the Company receive no compensation for serving on the Board of Directors. 25 EXECUTIVE COMPENSATION Set forth below is information for the years ended April 1997, 1996 and 1995 with respect to compensation for services to the Managed Firms: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS -------------------------------------- NUMBER OF OTHER SHARES NAME AND ANNUAL UNDERLYING ALL OTHER PRINCIPAL POSITION(S) YEAR SALARY(1) BONUS(2) COMPENSATION OPTIONS(3) COMPENSATION(4) --------------------- ---- --------- -------- ------------- ------------- ---------------- Joseph M. Harris 1997 $ 230,878 $ 50,000 -0- -0- -0- Chairman, President 1996 192,307 0 and Director 1995 188,784 60,000 Vernon B. Brannon 1997 178,847 50,000 Senior Vice President 1996 144,281 0 Chief Financial Officer 1995 117,614 30,000 and Director
- --------------- (1) Does not include the dollar value of perquisites and other personal benefits. (2) The amounts shown are cash bonuses earned in the specified year and paid in the first quarter of the following year. (3) The Company's Stock Option Plan was adopted in , 1997. No options were granted to any of the Company's executive officers in the years ended April 1997, 1996 or 1995. (4) The aggregate amount of perquisites and other personal benefits received did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for such executive officer. EMPLOYMENT AGREEMENTS Prior to the consummation of the Offering, the Company intends to enter into new employment agreements with Messrs. Harris and Brannon (the "Employment Agreements"), effective upon consummation of the Offering, which will provide for an annual base salary and certain other benefits. The executives will also receive such additional increases as may be determined by the Compensation Committee. The Employment Agreements will provide for the payment of annual performance-based bonuses equal to a percentage of the executive's base salary, upon achievement by the Company of certain performance objectives, based on the Company's pre-tax income, to be established by the Compensation Committee. STOCK OPTION PLAN On , 1997, the Board of Directors and stockholders of HLM Design adopted the HLM Design, Inc. 1997 Stock Option Plan (the "Stock Option Plan") in order to attract and retain key personnel. The following discussion of the material features of the Stock Option Plan is qualified by reference to the text of such plan filed as an exhibit to the Registration Statement of which this Prospectus is a part. Under the Stock Option Plan, options to purchase up to an aggregate of shares of Common Stock may be granted to key employees of HLM Design and its Managed Firms and to officers, directors, consultants and other individuals providing services to the Company. Unless designated as "incentive stock options" ("ISOs")intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), options granted under the Stock Option Plan are intended to be "nonstatutory stock options" ("NSOs"). The Compensation Committee of the Board of Directors of HLM Design will administer the Stock Option Plan and will determine, among other things, the persons who are to receive options, the number of shares to be subject to each option, and the vesting schedule of options; provided, that the Board of Directors of HLM Design will make such determinations with respect to the initial grants made under the Stock Option Plan. Members of the Board of Directors who serve on the Compensation Committee must qualify as "non-employee directors," as that term is defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. The Board of Directors of HLM Design will determine the terms and conditions upon which HLM Design may make loans to enable an optionee to pay the exercise price of an option. In selecting individuals for options and determining the terms thereof, the Compensation Committee may consider any factors it considers relevant, including present and potential contributions to the success of the Company. Options granted under the Stock Option Plan must be exercised within a period fixed by the Compensation Committee, which period may not exceed ten years 26 from the date of the grant of the option or, in the case of ISOs granted to any holder on the date of the grant of more than ten percent of the total combined voting power of all classes of stock of HLM Design and its affiliated firms, five years from the date of grant of the option. Options may be made exercisable in whole or in installments, as determined by the Compensation Committee. Options generally may not be transferred other than by will or the laws of descent and distribution and during the lifetime of an optionee may be exercised only by the optionee. Notwithstanding the foregoing, the Compensation Committee, in its absolute discretion, may grant transferable options if such options are not ISOs. The exercise price of options that are not ISOs will be determined at the discretion of the Compensation Committee. The exercise price of ISOs may not be less than the market value of the Common Stock on the date of the grant of the option. In the case of ISOs granted to any holder on the date of grant of more than ten percent of the total combined voting power of all classes of stock of HLM Design and its affiliated firms, the exercise price may not be less than 110% of the market value of the Common Stock on the date of the grant of the ISOs. The exercise price may be paid in cash, in shares of Common Stock owned by the optionee, in options granted under the Stock Option Plan (except that the exercise price of an ISO may not be paid in NSOs) or in any combination of cash, shares and NSOs. Options granted under the Stock Option Plan may include the right to acquire a "reload" option. In such case, if an optionee pays all or part of the exercise price of an option with shares of Common Stock held by the optionee for at least six months, then, upon exercise of the option, the optionee is granted a second option to purchase, at the fair market value as of the date of exercise of the original option, the number of whole shares used by the optionee in payment of the exercise price of the original option. A reload option is not exercisable until one year after the grant date of such reload option or the expiration date of the original option. If the exercise price of a reload option is paid for with shares of Common Stock that have been held by the Optionee for more than six (6) months, then another reload option will be issued. Shares of Common Stock covered by a reload option will not reduce the number of shares of Common Stock available under the Stock Option Plan. The Stock Option Plan provides that, in the event of changes in the corporate structure of the Company or certain events affecting the Common Stock, adjustments will automatically be made in the number and kind of shares available for issuance and in the number and kind of shares covered by outstanding options. It further provides that, in connection with any merger or consolidation in which HLM Design is not the surviving corporation and which results in the holders of the Common Stock owning less than a majority of the surviving corporation or any sale or transfer by HLM Design of all or substantially all its assets or any tender offer or exchange offer for or the acquisition, directly or indirectly, by any person or group of all or a majority of the then-outstanding voting securities of HLM Design, all outstanding options under the Stock Option Plan will become exercisable in full on and after (i) the 15th day prior to the effective date of such merger, consolidation, sale, transfer or acquisition or (ii) the date of commencement of such tender offer or exchange offer, as the case may be. The Board of Directors of HLM Design on or before the consummation of the Offering intends to grant NSOs and ISOs to purchase an aggregate of shares of Common Stock under the Stock Option Plan to executive officers and other employees of the Company. All executive officers as a group are to be granted NSOs to purchase an aggregate of shares and ISOs to purchase an aggregate of shares. Non-executive officer employees are to be granted NSOs to purchase an aggregate of shares and ISOs to purchase an aggregate of shares. The issuance and exercise of ISOs have no federal income tax consequences to the Company. While the issuance and exercise of ISOs generally have no ordinary income tax consequences to the holder, upon the exercise of an ISO, the holder will treat the excess of the Common Stock's fair market value on the date of exercise over the exercise price as an item of tax adjustment for alternative minimum tax purposes. If the holder of Common Stock acquired upon the exercise of an ISO holds such stock until a date that is more than two years following the grant of the ISO and one year following the exercise of the ISO, the disposition of such Common Stock will ordinarily result in capital gain or loss to the holder for federal income tax purposes equal to the difference between the amount realized on disposition of the Common Stock and the option exercise price. If the holding period requirements described above are not met, the holder will recognize ordinary income for federal income tax purposes upon disposition of the Common Stock in an amount equal to the lesser of (i) the excess of the Common Stock's fair market value on the date of exercise over the option exercise price, and (ii) the excess of the amount realized on disposition of the Common Stock over the option exercise price. Any additional gain upon the disposition will be taxed as capital gains. The Company will be entitled to a compensation expense deduction for the Company's taxable year in which the disposition occurs equal to the amount of ordinary income recognized by the holder. Any capital gain will be subject to reduced rates of tax if such shares were held more than twelve months, and will be subject to further reduced rates if such shares were held more than eighteen months. The issuance of NSOs has no federal income tax consequences to the Company or the holder. Upon the exercise of an NSO, NSO holders will recognize ordinary income for federal income tax purposes at the time of option exercise equal to the amount by which the fair market value of the underlying shares on the date of exercise exceeds the exercise price. The 27 Company generally will be allowed a federal income tax deduction in the same amount. In the event of the disposition of shares acquired by exercise of a NSO, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss; provided, that any gain will be subject to reduced rates of tax if such shares were held for more than twelve months and will be subject to further reduced rates if such shares were held for more than eighteen months. HLM Design intends to register the shares underlying the Stock Option Plan as required by the federal securities laws. If such registration is not required, such shares may be issued upon option exercise in reliance upon the private offering exemption codified in Section 4(2) of the Securities Act. Resale of such shares may be permitted subject to the limitations of Rule 144. EMPLOYEE STOCK PURCHASE PLAN In , 1997, the Board of Directors and stockholders of HLM Design adopted the HLM Design, Inc. Employee Stock Purchase Plan (the "ESPP"). The ESPP is intended to promote the interests of the Company by providing employees of the Company the opportunity to acquire a proprietary interest in the Company through the purchase of Common Stock. The following discussion of the material features of the ESPP is qualified by reference to the text of such Plan filed in an exhibit to the Registration Statement of which this Prospectus is a part. The ESPP is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. The ESPP is administered by the Compensation Committee, which, subject to the terms of the ESPP, has plenary authority in its discretion to interpret and construe the ESPP. The Compensation Committee will construe the provisions of the ESPP so as to extend and limit participation in a manner consistent with the requirements of Section 423 of the Code. A total of shares of Common Stock have been reserved for purchase under the ESPP. On January 1 of each year during the term of the ESPP (and also on the effective date of the ESPP) (the "Grant Date"), all eligible employees electing to participate in the ESPP ("Participating Employees") will be granted options to purchase shares of Common Stock. Prior to each Grant Date, the Compensation Committee will determine the number of shares of Common Stock available for purchase under each option, with the same number of shares to be available under each option granted on the same Grant Date; provided, that the Board of Directors of HLM Design will make such determination with respect to the initial grants made under the ESPP. No Participating Employee may be granted an option which would permit such employee to purchase stock under the ESPP and all other employee stock purchase plans of HLM Design at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. A Participating Employee may elect to designate a limited percentage of such employee's compensation (as defined in the ESPP) to be deferred by payroll deduction as a contribution to the ESPP. To the extent a Participating Employee has accumulated enough funds, his or her contributions to the ESPP will be used to exercise the option granted under the ESPP through purchases of Common Stock on the last business day of January, April, July and October, on which the principal trading market for the Common Stock is open for trading and on any other interim dates during the year which the Compensation Committee designates for such purpose (the "Exercise Date"). Contributions which are not enough to purchase a whole share of Common Stock will be carried forward and applied on the next Exercise Date in that calendar year. The purchase price at which Common Stock will be purchased through the ESPP shall be eighty-five percent of the lesser of (i) the fair market value of the Common Stock on the applicable Grant Date, and (ii) the fair market value of the Common Stock on the applicable Exercise Date. Any option granted to a Participating Employee will be exercised automatically on each Exercise Date during the calendar year of the option's Grant Date in whole or in part such that the Participating Employee's accumulated contributions as of such Exercise Date will be applied to the purchase of the maximum number of whole shares of Common Stock that such contribution will permit at the applicable option price limited to the number of shares available for purchase under the option. Any option granted to a Participating Employee will expire on the last Exercise Date of the calendar year in which granted. However, if a Participating Employee withdraws from the ESPP or terminates employment prior to such Exercise Date, the option may expire earlier. Upon termination of a Participating Employee's employment for any reason other than cause, death or leave of absence in excess of ninety days, such employee may, at his or her election, request the return of contributions not yet used to purchase Common Stock or continue participation in the ESPP until the Exercise Date next following the date of termination of employment such that any unexpired option held will be exercised automatically on such Exercise Date. If a Participating Employee dies while employed by the Company or prior to the Exercise Date next following the date of termination of employment, such employee's estate will have the right to elect to withdraw all contributions not yet used to purchase Common Stock or to exercise the Participating Employee's option for the purchase of Common Stock on the Exercise Date next following the date of such employee's death. 28 The Board of Directors of HLM Design may at any time amend, suspend or terminate the ESPP; provided, however, that the ESPP may not be amended to increase the maximum number of shares of Common Stock for which options may be granted under the ESPP, other than in connection with a change in capitalization, without obtaining the approval of HLM Design stockholders. No federal taxable income will be recognized by Participating Employees upon the grant of an option to purchase Common Stock under the ESPP. In addition, a Participating Employee will not recognize federal taxable income on the exercise of an option granted under the ESPP. If the Participating Employee holds shares of Common Stock acquired upon the exercise of an option granted under the ESPP until a date that is more than two years from the Grant Date of the relevant option and one year from the date of option exercise (or dies while owning such shares), the employee must report as ordinary income in the year of disposition of the shares (or at death) the lesser of (a) the excess of the fair market value of the shares at the time of disposition (or death) over the option exercise price and (b) the excess of the fair market value of the shares on the date the relevant option was granted over the option exercise price. For this purpose, the option exercise price is 85% of the fair market value of the shares on the date the relevant option was granted (assuming the shares are offered at a 15% discount). Any additional income is treated as long-term capital gain. If these holding period requirements are met, the Company is not entitled to any deduction for income tax purposes. If the Participating Employee does not meet the holding period requirements, the employee recognizes at the time of disposition of the shares ordinary income equal to the difference between the option exercise price for the shares and the fair market value of the shares on the date of exercise, irrespective of the price at which the employee disposes of the shares, and an amount equal to such ordinary income is generally deductible by the Company. Any gain or loss realized on the disposition of the shares will generally be capital gain or loss; provided that any gain will be subject to reduced rates of tax if the shares were held for more than twelve months and will be subject to further reduced rates if the shares were held for more than eighteen months. Because the ESPP is based on voluntary participation, benefits thereunder are not determinable. The Company intends to register the shares underlying the ESPP as required by the federal securities laws. If such registration is not required, such shares may be issued upon option exercise in reliance upon the private offering exemption codified in Section 4(2) of the Securities Act. Resale of such shares may be permitted subject to the limitations of Rule 144. 29 CERTAIN TRANSACTIONS RELATIONSHIPS WITH MANAGED FIRMS Joseph Harris and Vernon Brannon, executive officers and principal stockholders of HLM Design, are also the principal stockholders and officers of the Managed Firms, HLMI, HLMNC and HLMO. As officers of the Managed Firms, they caused the Managed Firms to enter into Management and Services Agreements with HLM Design and as stockholders of each of the Managed Firms they entered into Stockholders' Agreements. The primary purpose of the Stockholders' Agreement is to restrict the ability of stockholders to exercise the rights commonly associated with ownership of common stock and to effectively provide stockholders of the Managed Firms with nominee stockholder status in order to facilitate the execution and operation of the Management and Services Agreements. VOTING AGREEMENT Joseph Harris, Vernon Brannon and William Blalock, as stockholders in HLM Design, are all parties to a Voting Agreement. Pursuant to the Voting Agreement, Messrs. Harris, Brannon and Blalock agree to cast all of their votes in unity with respect to all matters of "Fundamental Significance" (as defined below) which are submitted to them in their capacity as stockholders. Matters of Fundamental Significance are defined to be (i) the issuance, exercise, purchase or redemption by HLM Design of any capital stock, stock warrant, stock option or debenture of HLM Design, (ii) the formation, acquisition or divestiture by HLM Design of any business entity, whether in the form of a division, subsidiary or other affiliated or non-affiliated entity, (iii) the incurring of indebtedness, directly or indirectly (including, without way of limitation, the guaranty of debt of any other person or entity) by HLM Design, or the modification of any such existing indebtedness or instrument, or (iv) the merger, share exchange, or dissolution of HLM Design, or any sale of HLM Design's assets other than in the ordinary course of business. The Voting Agreement will be terminated upon the cessation of HLM Design's business, the bankruptcy, receivership or dissolution of HLM Design, or the voluntary agreement of Messrs. Harris, Brannon and Blalock. MERGER TRANSACTION In April 1997, HLMI and BBH Corp., a Delaware corporation controlled by Joseph Harris and Vernon Brannon, entered into a Merger Agreement (the "Merger Agreement") whereby HLMI and BBH Corp. would merge, with HLMI being the surviving corporation. Upon consummation of the transactions contemplated by the Merger Agreement each share of HLMI common stock (excluding shares of common stock held by BBH Corp., which were contributed to BBH Corp. and Messrs. Harris and Brannon as their initial capital contribution to BBH Corp. but including the shares of common stock held by the ESOP) would be converted into the right to receive $64.00 in cash (the "Merger Consideration") and each share of BBH Corp. then outstanding would be converted into one share of HLMI common stock. Following the consummation of the transactions contemplated by the Merger Agreement, Joseph Harris and Vernon Brannon owned all of the outstanding common stock of HLMI. The payment of the Merger Consideration was financed indirectly by the Pacific/Equitas Loan and the First Charter Loan through the purchase of additional HLMI capital stock by BBH Corp., effective simultaneously with the Merger. In connection with the Pacific/Equitas Loan, HLM Design issued the Pacific/Equitas Warrants to Pacific, Equitas and Messrs. Caroland and LeRoy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company intends to repay the principal of and interest on the Pacific/Equitas Loan from the proceeds of the Offering. Once such loan is repaid, Messrs. Harris and Brannon will be released from their personal guarantees of the Pacific/Equitas Loan. BERTHEL LEASING LEASE FINANCING Berthel Leasing, an affiliate of Berthel Fisher & Company Financial Services, Inc., one of the Underwriters in the Offering, has entered into the Lease Financing with HLMI and has provided HLM Design with an $0.8 million term loan for working capital purposes. In addition, Berthel Leasing received the Berthel Warrants and received certain registration rights which begin in September 2000, with respect to the Common Stock which underlies the Berthel Warrants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." A portion of the proceeds of the Offering will be used to repay the $0.8 million term loan. 30 CONSULTING AGREEMENT Blalock and Company, an investment banking firm controlled by William Blalock, a stockholder of HLM Design and a former member of the Board of Directors of HLM Design, entered into a financial advisory agreement (the "Advisory Agreement") with HLMI in February 1995. Blalock and Company agreed to serve as a financial advisor to HLMI in connection with the structuring of one or more potential transactions, including, but not limited to, a financing or financings through the issuance of debt and/or equity, a merger, divestiture or acquisition, or a joint venture. Compensation under such agreement was originally $15,000 per month (plus reimbursement for reasonable out-of-pocket expenses) but has been increased to $20,000 per month (plus reimbursement for reasonable out-of-pocket expenses). During the years ended April 26, 1996 and April 25, 1997 Blalock and Company earned $254,137 and $257,017, respectively under the Advisory Agreement. BOARD REPRESENTATION It is a condition of the Underwriting Agreement that HLM Design has agreed to use its best efforts to cause a designee of Berthel Fisher & Company Financial Services, Inc. (one of the Underwriters in the Offering), who is reasonably satisfactory to HLM Design, to be elected as a full voting member of the Board of Directors of HLM Design upon the consummation of this Offering. As of the date of this Prospectus, Berthel Fisher & Company Financial Services, Inc. has not named a designee for election to board membership. PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of HLM Design's Common Stock as of November 14, 1997 by (i) each stockholder who is known by HLM Design to own beneficially more than five percent of the outstanding Common Stock, (ii) each director of HLM Design, (iii) each executive officer of HLM Design, and (iv) all directors and executive officers of HLM Design as a group, and as adjusted to reflect the sale by HLM Design of the shares of Common Stock in this Offering.
PERCENTAGE OF ALL OUTSTANDING COMMON STOCK NUMBER OF SHARES ----------------------- OF COMMON STOCK BEFORE AFTER NAME (1) OWNED(2) OFFERING OFFERING(3) - ------------------------------------------------------------------------------------- ---------------- -------- ----------- Joseph M. Harris(4)(5) 20,500 40.48% % Vernon B. Brannon(4)(5) 20,500 40.48% % William Blalock(4) 7,500 14.81% % Clay R. Caroland 862 1.7% Shannon LeRoy(6) -- * All directors and executive officers as a group (5 persons) 49,362 97.47%
- --------------- * Less than one percent. (1) Unless otherwise noted, each person has sole voting and investment power over the shares listed opposite his name subject to community property laws where applicable. Messr. Harris, Brannon and Blalock are parties to a Voting Agreement. See "Certain Transactions -- Voting Agreement." (2) Without giving effect to the Stock Split. (3) If the Underwriters' over-allotment option is exercised in full, then after the Offering, will own shares or approximately % of the shares then outstanding. (4) The address of such person is care of HLM Design at 121 West Trade Street, Suite 2950, Charlotte, North Carolina 28202. (5) Does not give effect to options granted under HLM Design's Stock Option Plan to purchase shares of Common Stock at the public offering price since none of such options become exercisable prior to , 1998. See "Management -- Stock Option Plan." (6) Does not include shares of Common Stock which underlie Warrants held by such person. 31 DESCRIPTION OF CAPITAL STOCK HLM Design's authorized capital stock consists of (i) 9,000,000 shares of Common Stock, $.01 par value, and (ii) 1,000,000 shares of Preferred Stock, $.10 par value. Upon completion of this Offering, HLM Design will have outstanding shares of Common Stock (giving effect to the Stock Split) and no shares of preferred stock. The following summary description of HLM Design's capital stock does not purport to be complete and is qualified in its entirety by reference to HLM Design's Certificate of Incorporation, which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, and the Delaware General Corporation Law (the "DGCL"). Reference is made to such exhibit and the DGCL for a detailed description of the provisions thereof summarized below. COMMON STOCK The holders of validly issued and outstanding shares of Common Stock are entitled to one vote per share of record on all matters to be voted upon by stockholders. At a meeting of stockholders at which a quorum is present, a majority of the votes cast decides all questions, unless the matter is one upon which a different vote is required by express provision of law or HLM Design's Certificate of Incorporation or Bylaws. There is no cumulative voting with respect to the election of directors (or any other matter), but HLM Design's Board of Directors is classified. The holders of a majority of the shares at a meeting at which a quorum is present can, therefore, elect all of the directors of the class then to be elected if they choose to do so, and, in such event, the holders of the remaining shares would not be able to elect any directors of that class. The holders of Common Stock have no preemptive rights and have no rights to convert their Common Stock into any other securities. Subject to the rights of holders of Preferred Stock, if any, in the event of a liquidation, dissolution or winding up of HLM Design, holders of Common Stock are entitled to participate equally, share for share, in all assets remaining after payment of liabilities. The holders of Common Stock are entitled to receive ratably such dividends as the Board of Directors may declare out of funds legally available therefor, when and if so declared. The payment by HLM Design of dividends, if any, rests within the discretion of its Board of Directors and will depend upon HLM Design's results of operations, financial condition and capital expenditure plans, as well as other factors considered relevant by the Board of Directors. See "Dividends." TRANSFER AGENT AND REGISTRAR HLM Design has appointed as the transfer agent and registrar for the Common Stock. WARRANTS In May 1997 and September 1997, HLM Design issued Warrants to purchase an aggregate of 16,887 shares of Common Stock at an exercise price of $.01 per share to Pacific, Equitas and Berthel Leasing and two representatives of Pacific and Equitas in connection with financing arrangements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." By their terms, the Pacific/Equitas Warrants will expire in July 2002 and the Berthel Warrants will expire in September of that year; however, for a period of 30 days prior to expiration the holder of any or all of the Warrants has the right and option to sell to HLM Design any or all of the Warrants at a purchase price equal to the Fair Market Value (as defined therein) of the shares of Common Stock issuable to the holder upon exercise of the Warrant less the exercise price. The kind of securities purchasable upon the exercise of the Warrants and the number of shares of Common Stock purchasable upon exercise of the Warrants is subject to adjustment upon the occurrence of certain events such as reclassification of securities, consolidation or merger of HLM Design, subdivision or combination of Common Stock or stock dividends. Additionally, if the indebtedness pursuant to which the Warrants were issued is not repaid in full on or before May 30, 1999, the number of shares of Common Stock each Warrant holder is able to purchase will increase and will further increase on each May 30 thereafter until such indebtedness is repaid in full. The Common Stock underlying the Berthel Warrants and the Warrants issued to Pacific and Equitas are subject to certain registration rights which begin in September 2000. Pursuant to the applicable registration rights agreement, upon the request of holders of at least 25% of Registrable Securities (as defined therein) HLM Design will, within 90 days, effect registration under the Securities Act. Additionally, such agreements provide Berthel Leasing, Pacific and Equitas with certain piggyback registration rights that permit them to have their shares of Common Stock, as selling security holders, included in any registration statements pertaining to the registration of Common Stock for issuance by the Company or for resale by other selling security holders. 32 These registration rights will be limited or restricted to the extent an underwriter of an offering, if an underwritten offering, determines that marketing factors require a limitation of the number of shares to be underwritten. PREFERRED STOCK No shares of Preferred Stock are outstanding. HLM Design's Certificate of Incorporation authorizes the Board of Directors to issue up to 1,000,000 shares of Preferred Stock in one or more series and to establish such designations and such relative voting, dividend, liquidation, conversion and other rights, preferences and limitations as the Board of Directors may determine without further approval of the stockholders of HLM Design. The issuance of Preferred Stock by the Board of Directors could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a person or group to gain control of HLM Design. The issuance of any series of Preferred Stock, and the relative designations, rights, preferences and limitations of such series, if and when established, will depend upon, among other things, the future capital needs of the Company, the then-existing market conditions and other factors that, in the judgment of the Board of Directors, might warrant the issuance of Preferred Stock. As of the date of this Prospectus, there are no plans, agreements or understandings for the issuance of any shares of Preferred Stock. DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Certain provisions of the DGCL and of HLM Design's Certificate of Incorporation and Bylaws, summarized in the following paragraphs, may be considered to have an antitakeover effect and may delay, deter or prevent a tender offer, proxy contest or other takeover attempt that a stockholder might consider to be in such stockholder's best interest, including such an attempt as might result in payment of a premium over the market price for shares held by stockholders. DELAWARE ANTITAKEOVER LAW. HLM Design, a Delaware corporation, is subject to the provisions of the DGCL, including Section 203. In general, Section 203 prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which such person became an interested stockholder unless: (i) prior to such date, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; or (ii) upon becoming an interested stockholder, the stockholder then owned at least 85% of the voting stock, as defined in Section 203; or (iii) subsequent to such date, the business combination is approved by both the Board of Directors and by holders of at least 66 2/3% of the corporation's outstanding voting stock, excluding shares owned by the interested stockholder. For these purposes, the term "business combination" includes mergers, asset sales and other similar transactions with an "interested stockholder." An "interested stockholder" is a person who, together with affiliates and associates, owns (or, within the prior three years, did own) 15% or more of the corporation's voting stock. Although Section 203 permits a corporation to elect not to be governed by its provisions, HLM Design to date has not made this election. SPECIAL MEETINGS OF STOCKHOLDERS. HLM Design's Bylaws provide that special meetings of stockholders may be called only by the President or by the Secretary or any Assistant Secretary at the request in writing of a majority of the Board of Directors of HLM Design. This provision may make it more difficult for stockholders to take action opposed by the Board of Directors. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. HLM Design's Bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or a special meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive office of the Company, (i) in the case of an annual meeting that is called for a date that is within 30 days before or after the anniversary date of the immediately preceding annual meeting of stockholders, not less than 60 days nor more than 90 days prior to such anniversary date, and, (ii) in the case of an annual meeting that is called for a date that is not within 30 days before or after the anniversary date of the immediately preceding annual meeting, or in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. The Bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual meeting or from making nominations for directors at an annual or special meeting. 33 CLASSIFIED BOARD OF DIRECTORS. HLM Design's Bylaws provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. Classification of the Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage a takeover bid for HLM Design. Moreover, under Delaware Law, in the case of a corporation having a classified board of directors, the stockholders may remove a director only for cause. This provision, when coupled with the provision of the Bylaws authorizing only the board of directors to fill vacant directorships, will preclude stockholders of HLM Design from removing incumbent directors without cause, simultaneously gaining control of the Board of Directors by filing the vacancies with their own nominees. 34 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, HLM Design will have outstanding shares of Common Stock (assuming no exercise of the Underwriters' over-allotment option). Of such amount, the Shares sold in this Offering will be freely transferable and may be resold without further registration under the Securities Act, except for any shares purchased by an "affiliate" of HLM Design (as defined below), which shares will be subject to the resale limitations of Rule 144 under the Securities Act ("Rule 144"). The shares (the "Restricted Shares") of Common Stock held by affiliates of the Company are "restricted securities" within the meaning of Rule 144. The shares of Common Stock, which underlie (i) options to be granted on or before the consummation of Offering under the Company's Stock Option Plan, and (ii) the Warrants, may be resold only pursuant to a registration statement under the Securities Act or applicable exemption from registration thereunder, such as an exemption provided by Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned "restricted securities" for at least one year may, under certain circumstances, resell within any three-month period, such number of shares as does not exceed the greater of one percent of the then-outstanding shares of Common Stock or the average weekly trading volume of Common Stock during the four calendar weeks prior to such resale. Rule 144 also permits, under certain circumstances, the resale of shares without any quantity limitation by a person who has satisfied a two-year holding period and who is not, and has not been for the preceding three months, an affiliate of HLM Design. In addition, holding periods of successive non-affiliate owners are aggregated for purposes of determining compliance with these one-and two-year holding period requirements. Upon completion of this Offering, none of the shares of Common Stock outstanding on the date of this Prospectus and not sold in the Offering will have been held for at least one year. Since all such shares are restricted securities, none of them may be resold pursuant to Rule 144 upon completion of this Offering. The Restricted Shares will not be eligible for sale under Rule 144 until the expiration of the one-year holding period from the date such Restricted Shares were acquired. The availability of shares for sale or actual sales under Rule 144 and the perception that such shares may be sold may have an adverse effect on the market price of the Common Stock. Sales under Rule 144 also could impair the Company's ability to market additional equity securities. HLM Design and all directors and executive officers of HLM Design have agreed not to offer, sell, contract to sell, or otherwise dispose of, any shares of Common Stock or securities convertible into or exchangeable for Common Stock for 365 days from the date of this Prospectus without the prior written consent of the representatives of the Underwriters. 35 UNDERWRITING Each of the underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names below. The nature of the obligations of the Underwriters is such that if any of such shares are purchased, all must be purchased.
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------ --------- Berthel Fisher & Company Financial Services, Inc.......................................... Westport Resources Investment Services, Inc............................................... --------- Total................................................................................ ---------
The Underwriters have advised HLM Design that they propose initially to offer the Common Stock offered hereby to the public at the price to the public set forth on the cover page of this Prospectus. The Underwriters may allow a concession to selected dealers who are members of the National Association of Securities Dealers, Inc. ("NASD") not in excess of $ per share, and the Underwriters may allow, and such dealers may reallow, to members of the NASD a concession not in excess of $ per share. After the public offering, the price to the public, the concession and the reallowance may be changed by the Underwriters. HLM Design has granted an option to the Underwriters, exercisable within 45 business days after the date of the Prospectus, to purchase up to an aggregate of additional shares of Common Stock at the initial price to the public, less the underwriting discount, set forth on the cover page of this Prospectus. The Underwriters may exercise the option only for the purpose of covering over-allotments. To the extent that the Underwriters exercise such option, each Underwriter will be committed, subject to certain conditions, to purchase from HLM Design on a pro rata basis that number of additional shares of Common Stock which is proportionate to such Underwriters' initial commitment. HLM Design, certain shareholders and certain executive officers have agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell, grant any option to purchase or otherwise transfer or dispose of any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or part, the economic consequence of ownership of the Common Stock, without the prior written consent of Berthel Fisher, for a period of 365 days after the date of this Prospectus. Prior to this Offering, there has been no market for the Common Stock and there can be no assurance that a regular trading market will develop upon the completion of this Offering. The initial public offering price was determined by negotiations between the Company and the Underwriters. The primary factors considered in determining such offering price included the history of and prospects for the Company's business and the industry in which the Company competes, market valuation of comparable companies, market conditions for public offerings, the prospects for future earnings of the Company, an assessment of the Company's management, the general condition of the securities markets, the demand for similar securities of comparable companies and other relevant factors. HLM Design has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the Underwriter may be required to make in respect thereof. The Underwriters have advised HLM Design that they do not intend to confirm sales of Common Stock offered hereby to any accounts over which they exercise discretionary authority. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriter and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering, I.E., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Underwriters may reduce that short position by purchasing Common Stock in the open market. The Underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option described above. 36 The Underwriters may also impose a penalty bid on certain members of the underwriting group and selling group members. This means that if an Underwriter purchases shares of Common Stock in the open market to reduce the Underwriter's short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriter and selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither HLM Design nor the Underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither HLM Design nor any of the Underwriters make any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. HLM Design has agreed to pay to the Underwriters a nonaccountable expense allowance of 3% of the gross proceeds derived from the sale of the shares of Common Stock underwritten (including the sale of any shares of Common Stock subject to the Underwriters' overallotment option), of which has been paid as of the date of this Prospectus. HLM Design has also agreed to pay all expenses in connection with qualifying the Common Stock offered hereby for sale under the laws of such states as the Underwriters may designate, including filing fees and fees and expenses of counsel retained for such purposes by the Underwriters, and registering the Offering with the NASD. In connection with this Offering, HLM Design has agreed to sell to the Underwriters, for a price of $ per warrant, warrants (the "Underwriters' Warrants") to purchase shares of Common Stock equal to 10% of the total number of shares of Common Stock sold pursuant to this Offering, excluding shares subject to the over-allotment option. The Underwriters' Warrants are exercisable at a price equal to 120% of the initial public offering price ($ assuming an initial public offering price of $ per share (the low point of the range set forth on the cover of this prospectus)) for a period of four years commencing one year from the date of this Prospectus (the "Exercise Period"). The Underwriters' Warrants grant to the holders thereof, with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the Underwriters' Warrants, one demand registration right during the Exercise Period, as well as piggyback registration rights at any time. HLM Design has agreed with the Underwriters to use its best efforts to cause a designee of Berthel Fisher & Co. Financial Services, Inc. who is reasonably satisfactory to HLM Design to be elected as a full voting member of its Board of Directors. As of the date of this Prospectus, Berthel Fisher & Co. Financial Services Inc. has not named a designee for election to board membership. See "Certain Transactions." Berthel Leasing, an affiliate of Berthel Fisher & Company Financial Services, Inc., provided lease financing to HLMI in an aggregate principal amount of $2.8 million under the Lease Financing and provided HLM Design with a $0.8 million term loan for working capital purposes. More than 10% of the net proceeds of the Offering will be received by Berthel Leasing, by reason of the use of such proceeds to repay a portion of such borrowings. Accordingly, the Offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8), which requires that the public offering price of the Common Stock be no higher than the price recommended by a Qualified Independent Underwriter which has participated in the preparation of the Registration Statement and performed its usual standard of due diligence with respect thereto. Westport Resources Investment Services, Inc. will act as the Qualified Independent Underwriter for the Offering, and the public offering price will not be higher than the price recommended by Westport Resources Investment Services, Inc. LEGAL MATTERS Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina, counsel to the Company, will render an opinion that the Shares offered hereby, when issued and paid for in accordance with the terms of the Underwriting Agreement, will be duly authorized, validly issued, fully paid and nonassessable. Bradley & Riley, P.C., Cedar Rapids, Iowa, has served as counsel to the Underwriters in connection with this Offering. EXPERTS The audited financial statements of HLMI (Predecessor) as of April 25, 1997 and for each of the years in the three-year period ended April 25, 1997, and the audited financial statements of HLM Design, Inc. as of April 25, 1997 and from inception, March 6, 1997, to the period ended April 25, 1997, included in this Prospectus and elsewhere in the Registration Statement of which this Prospectus is a part, have been audited by Deloitte & Touche LLP, independent auditors, as stated in 37 their reports appearing herein and elsewhere in the registration statement, and have been so included in reliance upon the reports of such firm given upon the authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form S-1 under the Securities Act with respect to the Shares offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Shares offered hereby, reference is made to the Registration Statement, including the exhibits and schedules filed as part thereof. Statements contained in this Prospectus as to the contents of any contract or any other documents are not necessarily complete, and, in each such instance, reference is made to the copy of the contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference thereto. The Registration Statement, together with its exhibits and schedules, may be inspected at the Public Reference Section of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of such materials may be obtained from any such office upon payment of the fees prescribed by the SEC. Such information may also be inspected and copied at the office of the AMEX at 86 Trinity Place, New York, New York 10006-1881. The Commission also maintains a Website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 38 INDEX TO FINANCIAL INFORMATION
PAGE ----- HLM DESIGN, INC. AND AFFILIATES: INDEPENDENT AUDITORS' REPORT......................................................................................... F-2 FINANCIAL STATEMENTS: Balance Sheet at April 25, 1997 and unaudited Combined Balance Sheet at October 31, 1997.......................... F-3 Statements of Operations (unaudited) for the six months ended October 26, 1996 (Predecessor), the one month ended May 30, 1997 (Predecessor) and the Combined Statements of Income for the six months ended October 31, 1997 (HLM Design Inc.)..................................................................................................... F-4 Statements of Stockholders' Equity for the period ended April 25, 1997 and (unaudited) Combined statement of stockholder's equity for the six months ended October 31, 1997................................................... F-5 Statements of Cash Flows (unaudited) for the six months ended October 26, 1996 (unaudited) (Predecessor), the one month ended May 30, 1997 (Predecessor) and Combined Statements of Cash Flows for the six months ended October 31, 1997 (HLM Design Inc.)........................................................................................... F-6 Notes to Financial Statements..................................................................................... F-7 HANSEN LIND MEYER, INC. ("HLMI") INDEPENDENT AUDITORS' REPORT......................................................................................... F-14 FINANCIAL STATEMENTS: Balance Sheets at April 26, 1996 and April 25, 1997............................................................... F-15 Statements of Operations for the years ended April 30, 1995, April 26, 1996 and April 25, 1997.................... F-16 Statements of Stockholders' Equity for the years ended April 30, 1995, April 26, 1996 and April 25, 1997.......... F-17 Statements of Cash Flows for the years ended April 30, 1995, April 26, 1996 and April 25, 1997.................... F-18 Notes to Financial Statements..................................................................................... F-19
F-1 INDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS HLM DESIGN, INC. Charlotte, North Carolina We have audited the accompanying balance sheet of HLM Design, Inc. (the "Company") as of April 25, 1997, and the related statements of stockholders' equity, for the period from inception March 6, 1997 to April 25, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 25, 1997, and the changes in stockholders equity for the period from inception March 6, 1997 to April 25, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP November 11, 1997 Charlotte, North Carolina F-2 HLM DESIGN, INC. AND AFFILIATES BALANCE SHEETS APRIL 25, 1997 AND OCTOBER 31, 1997
HLM DESIGN COMBINED APRIL 25, OCTOBER 31, 1997 1997 --------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash.............................................................................................. $ 6,508 Trade and other receivables, less allowance for doubtful accounts of $192,000 at October 31, 1997........................................................................................... 7,215,108 Costs and estimated earnings in excess of billings on uncompleted projects (Note 3)............... 4,149,864 Prepaid expenses.................................................................................. 309,492 ----------- Total current assets......................................................................... 11,680,972 ----------- OTHER ASSETS: Deferred income taxes (Note 8).................................................................... 671,865 Goodwill, less amortization of $71,496 at October 31, 1997 (Note 2)............................... 2,502,371 Other noncurrent assets........................................................................... 765,995 ----------- Total other assets........................................................................... 3,940,231 ----------- PROPERTY AND EQUIPMENT: Leasehold improvements............................................................................ 745,760 Furniture and fixtures............................................................................ 1,342,947 Construction in progress.......................................................................... ----------- Total property and equipment................................................................. 2,088,707 ----------- Less accumulated depreciation..................................................................... (283,754) ----------- Property and equipment, net.................................................................. 1,804,953 ----------- TOTAL ASSETS........................................................................................ $17,426,156 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable (Note 4)............................................................................ $ 2,250,000 Accounts payable.................................................................................. 3,455,471 Accrued expenses.................................................................................. 888,692 Income taxes payable.............................................................................. 30,571 Billings in excess of costs and estimated earnings on uncompleted projects (Note 3)............... 3,334,779 Deferred income taxes (Note 7).................................................................... 1,606,472 Current maturities of long-term debt (Note 4)..................................................... 728,011 ----------- Total current liabilities.................................................................... 12,293,996 ----------- LONG-TERM DEBT (Note 4)............................................................................. 4,474,234 ----------- TOTAL LIABILITIES................................................................................... 16,768,230 ----------- COMMITMENTS AND CONTINGENCIES (Note 5) WARRANTS OUTSTANDING (Note 4)....................................................................... 250,078 ----------- STOCKHOLDERS' EQUITY: HLM Design, Inc. Capital Stock Common, $.01 par value, voting, authorized 9,000,000 shares; issued 48,500 and 50,640, respectively.................................................................................. 485 506 Preferred, $.10 par value, voting, authorized 1,000,000, no shares outstanding................. HLMNC and HLMO, Capital Stock, common, $.01 par value, authorized, outstanding 600................ 6 Hansen Lind Meyer Inc. Capital stock, common, $.01 par value (Note 6): Class A, voting, authorized 2,000,000 shares; issued 200....................................... 2 Class B, nonvoting, authorized 1,000,000 shares, no shares outstanding......................... Additional paid in capital........................................................................ 2,515 34,781 Retained earnings................................................................................. 379,115 Stock Subscription Receivable..................................................................... (3,000) (6,562) --------- ----------- Total stockholders' equity.......................................................................... 407,848 --------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................................... $ $17,426,156 --------- ----------- --------- -----------
See notes to financial statements. F-3 HLM DESIGN, INC. AND AFFILIATES STATEMENTS OF OPERATIONS ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR) AND SIX MONTHS ENDED OCTOBER 25, 1996 (PREDECESSOR) AND OCTOBER 31, 1997 (COMBINED)
(HLM (PREDECESSOR (PREDECESSOR DESIGN) COMPANY) COMPANY) COMBINED ----------- ---------- ----------- SIX MONTHS ONE MONTH SIX MONTHS ENDED ENDED ENDED ----------- ---------- ----------- OCTOBER 25, MAY 30, OCTOBER 31, 1996 1997 1997 ----------- ---------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) REVENUES (Note 1): Fee income..................................................................... $12,759,941 $1,852,249 $10,294,060 Reimbursable income............................................................ 743,682 380,787 2,892,743 ----------- ---------- ----------- Total revenues............................................................ 13,503,623 2,233,036 13,186,803 ----------- ---------- ----------- CONSULTANT EXPENSES.............................................................. 3,004,859 192,862 1,976,901 ----------- ---------- ----------- PROJECT EXPENSES: Direct expenses................................................................ 360,099 35,404 535,341 Reimbursable expenses.......................................................... 685,456 68,617 369,677 ----------- ---------- ----------- Total project expenses.................................................... 1,045,555 104,021 905,018 ----------- ---------- ----------- NET PRODUCTION INCOME............................................................ 9,453,209 1,936,153 10,304,884 DIRECT LABOR..................................................................... 3,484,077 602,096 3,062,843 INDIRECT EXPENSES................................................................ 6,400,549 1,172,712 5,991,828 ----------- ---------- ----------- OPERATING INCOME (LOSS).......................................................... (431,417) 161,345 1,250,213 ----------- ---------- ----------- OTHER INCOME (EXPENSE): Interest income................................................................ 2,192 54 1,561 Interest expense............................................................... (194,986) (37,005) (498,534) ----------- ---------- ----------- Total other income (expense), net......................................... (192,794) (36,951) (496,973) ----------- ---------- ----------- INCOME (LOSS) BEFORE TAXES....................................................... (624,211) 124,394 753,240 INCOME TAXES (Note 7): Current tax expense (benefit).................................................. 5,115 (11,907) 65,712 Deferred tax expense (benefit)................................................. (197,461) 54,907 308,413 ----------- ---------- ----------- Total income tax expense (benefit)........................................ (192,346) 43,000 374,125 ----------- ---------- ----------- NET INCOME (LOSS)................................................................ $ (431,865) $ 81,394 $ 379,115 ----------- ---------- ----------- ----------- ---------- -----------
See notes to financial statements. F-4 HLM DESIGN, INC. AND AFFILIATES STATEMENTS OF STOCKHOLDERS' EQUITY INCEPTION MARCH 6, 1997 TO APRIL 25, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 COMBINED
COMMON STOCK STOCK TOTAL ----------------- ADDITIONAL RETAINED SUBSCRIPTION STOCKHOLDERS' SHARES AMOUNT PAID-IN-CAPITAL EARNINGS RECEIVABLE EQUITY ------- ------ --------------- -------- ------------ ------------- ORGANIZATION OF HLM DESIGN, MARCH 6, 1997................................. $ $ $ $ $ Issuance of HLM Design, Inc. shares........... 48,500 485 2,515 (3,000) ------- ------ --------------- ------------ BALANCE, APRIL 25, 1997......................... 48,500 485 2,515 (3,000) ------- ------ --------------- -------- ------------ ------------- Equity of Combining Entities May 31, 1997 (UNAUDITED): HLMI..................................... 200 2 2 HLMNC.................................... 300 3 297 (300) HLMO..................................... 300 3 297 (300) Stock Issuance - HLM Design (unaudited)....... 2,140 21 31,672 (2,962) 28,731 Net Income -- Combined (unaudited)............ 379,115 379,115 ------- ------ --------------- -------- ------------ ------------- BALANCE OCTOBER 31, 1997 -- COMBINED (UNAUDITED)................................... 51,440 $ 514 $34,781 $379,115 $ (6,562) $ 407,848 ------- ------ --------------- -------- ------------ ------------- ------- ------ --------------- -------- ------------ -------------
See notes to financial statements. F-5 HLM DESIGN, INC. AND AFFILIATES STATEMENTS OF CASH FLOWS ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR), AND THE SIX MONTHS ENDED OCTOBER 25, 1996 (PREDECESSOR) AND OCTOBER 31, 1997 (COMBINED)
(PREDECESSOR COMPANY) (HLM ------------------------------ DESIGN) COMBINED SIX MONTHS ONE MONTH SIX MONTHS ENDED ENDED ENDED ------------- ------------- ----------- OCTOBER 25, MAY 30, OCTOBER 31, 1996 1997 1997 ------------- ------------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................................................ $ (431,865) $ 81,394 $ 379,115 Adjustments to reconcile net income to net cash used in operating activities: Depreciation.................................................................. 287,382 55,544 118,176 Amortization of goodwill...................................................... 54,702 9,571 71,496 Amortization of deferred loan fees............................................ 26,922 Deferred rent................................................................. 18,739 Deferred income taxes......................................................... (197,461) 54,907 308,413 Changes in certain working capital items: (Increase) decrease in trade and other receivables.......................... 336,683 (1,500,472) (1,481,816) Increase in costs and estimated earnings compared to billings on uncompleted contracts, net............................................................. 1,282,939 1,199,028 1,506,233 (Increase) decrease in refundable income taxes.............................. 7,520 (11,157) 41,835 (Increase) decrease in prepaid expenses..................................... 33,926 (10,427) (101,899) (Increase) decrease in other assets......................................... (122,251) (1,152) Increase (decrease) in accounts payable..................................... (505,214) 233,659 (1,005,222) Increase (decrease) in accrued expenses..................................... (214,198) (278,500) 88,146 Increase (decrease) in other non-current liabilities........................ 15,000 ------------- ------------- ----------- Net cash (used in) provided by operating activities...................... 550,902 (152,605) (48,601) ------------- ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.............................................. (440,428) (2,023) (391,974) Note receivable from officer..................................................... (20,000) ------------- ------------- ----------- Net cash provided by (used in) investing activities...................... (440,428) (2,023) (411,974) ------------- ------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on line of credit........................................................ (2,360,000) Proceeds from long-term borrowings............................................... 2,800,000 3,750,000 Payments on long-term borrowings................................................. (120,275) (285,372) (240,916) Payment of deferred loan fees.................................................... (40,000) Payment on ESOP buyback.......................................................... (3,221,824) Proceeds from issuance of notes payable to shareholders.......................... 182,308 Proceeds from the issuance of warrants........................................... 23,501 Proceeds from issuance of common stock........................................... 11,693 ------------- ------------- ----------- Net cash provided by (used in) financing activities...................... (120,275) 154,628 464,762 ------------- ------------- ----------- INCREASE (DECREASE) in Cash........................................................ (9,801) 4,187 CASH BALANCE: Beginning of year................................................................ 11,130 2,321 2,321 ------------- ------------- ----------- End of year...................................................................... $ 1,329 $ 2,321 $ 6,508 ------------- ------------- ----------- ------------- ------------- ----------- SUPPLEMENTAL DISCLOSURES: Cash paid (received) during the year for: Interest...................................................................... $ 180,458 $ 6,827 $ 332,414 Income tax payments (refunds)................................................. $ 7,169 $ (750) $ (24,750) Noncash investing and financing transactions: Retirement of common stock through issuance of note payable................... $ 10,170 Reduction of ESOP debt........................................................ $ 206,093 Issuance of warrants to certain debtholders................................... $ 226,577
See notes to financial statements. F-6 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS INCEPTION MARCH 6, 1997 TO APRIL 25, 1997 AND THE SIX MONTHS ENDED OCTOBER 25, 1996 (PREDECESSOR -- UNAUDITED), THE ONE MONTH PERIOD ENDED MAY 30, 1997 (PREDECESSOR -- UNAUDITED) AND THE SIX MONTHS ENDED OCTOBER 31, 1997 COMBINED -- UNAUDITED 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS -- HLM Design, Inc. ("Design") is a Management Services Company incorporated March 6, 1997 for the purpose of providing management and services to architectural, engineering and planning design entities under long term management services agreement. In May 1997, Design executed long term management and services agreements with Hansen Lind Meyer Inc. ("HLMI"), HLM of North Carolina, P.C. ("HLMNC") and HLM of Oregon, Architecture and Planning, P.C. ("HLMO"). HLMNC and HLMO, organized in 1996 and have had no operations as of October 31, 1997 (HLMI, HLMNC and HLMO are referred to herein collectively as "AEP"). Design and AEP are referred to herein collectively as "the Company". In May 1997, HLMI entered into a merger agreement with BBH Corp., a newly formed entity controlled by the principal shareholders of Design, whereby Design loaned BBH Corp $3.2 million which BBH Corp utilized to buy common stock in HLMI. Under the merger agreement, BBH Corp merged into HLMI with HLMI being the surviving entity. As a part of the merger agreement, HLMI redeemed previously outstanding common stock of HLMI, from its' employee Stock Ownership Plan ("ESOP") and other shareholders, except the shareholders of BBH Corp. the shares redeemed represented over 90% of the pre-merger voting interest. As a result of the change in control, the assets and liabilities of HLMI were fair valued using purchase accounting principles and the excess of the fair value over the identified tangible net assets was reflected as goodwill. The management and service agreements are for 40 years. HLM Design is the sole and exclusive manager and administrator of all of the Managed Firm's day-to-day business functions including financial planning, facilities, equipment and supplies, and management and administrative services (bookkeeping and accounts, general administration services, contract negotiation and administration for all non-architectural and non-engineering aspects of all agreements (pertaining to the provision of architectural and engineering services by Managed Firms to third parties), personnel, security and maintenance, architectural and engineering recruiting and training, insurance, issuance of debt and capital stock, billing and collections). For these services, HLM Design receives all but 1% of the firm's positive cash flow (as determined in accordance with generally accepted accounting principles applied on a consistent basis) following the payment by the Managed Firm of all such firm's expenses. In addition, as a result of the consummation of the Management and Services Agreements and the stockholders' agreements with the AEP's, the financial statements of Design and the managed firm's are presented on a Combined basis from May 31, 1997. FINANCIAL STATEMENT PRESENTATION The financial statements included herein reflect the following: (Bullet) HLM Design, Inc. as of April 25, 1997, HLM Design, Inc. had no operations or cash flows from March 6, 1997, date of inception, to April 25, 1997 (Bullet) Hansen Lind Meyer Inc. (Predecessor Company) for the one month ended May 30, 1997 (unaudited) and for the six months ended October 25, 1996 (unaudited) (Bullet) HLM Design, Inc. combined with HLMI, HLMNC and HLMO, all from May 31, 1997 the effective date of the Management Services Agreements a shareholders agreements, as of October 31, 1997 and for the six months then ended (unaudited). HLMI provides architectural and engineering consulting and design services, which constitutes one business segment nationally from offices in Iowa City, Chicago, Denver, Orlando, Atlanta, Bethesda, Philadelphia, Portland and Sacramento. PROPOSED STOCK OFFERING -- HLM Design intends to undertake an initial public offering of HLM Design's Common Stock (the "Offering"). In connection with the anticipated Offering, HLM Design intends to issue shares of its common stock. F-7 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued FISCAL YEAR-END POLICY -- The Company uses a 52-53 week fiscal year for accounting purposes which defines the fiscal year-end date as the last Friday in April. Thus, the current fiscal year-end is April 25, 1997. OPERATING CYCLE -- Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of contract completion, although this may require more than one year. REVENUE RECOGNITION -- Revenue is recognized, at estimated collectible amounts, in the period the services are performed. More specifically, the Company recognizes revenues either on the percentage-of-completion method measured by the percentage of cost incurred to date to estimated total cost for each contract, or based upon a fixed hourly rate. Consultant expenses, project expenses, direct labor and indirect expenses are charged to expense as incurred. Provisions for estimated losses on uncompleted projects are made in the period in which such losses are first subject to reasonable estimation. Unanticipated changes in project performance, project conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The asset "costs and estimated earnings in excess of billings on uncompleted projects" represents revenues recognized in excess of amounts billed. The liability "billings in excess of costs and estimated earnings on uncompleted projects" represents billings in excess of revenues recognized. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimate impacting the accompanying financial statements relates to revenue recognition. PROPERTY AND EQUIPMENT -- Leasehold improvements and equipment are stated at cost. Depreciation is computed using the double-declining balance or straight-line method over the estimated useful lives of the assets or the lease term, including anticipated renewals. The estimated useful lives are as follows:
PREDECESSOR COMBINED ----------------------------- ----------------------------- Computer equipment and software..................... 5 years 5 years Furniture...................... 7 years 5 years Lease term, not to exceed Lease term, not to exceed Leasehold improvements......... the useful life of the asset the useful life of the asset
GOODWILL -- Goodwill represents the excess of purchase price over the estimated fair value of the net assets acquired (HLMI) and is being amortized over a fifteen-year period (Combined) and over a four year period for predecessor acquisition of MPB Architects. DEFERRED INCOME TAXES -- Deferred income tax assets and liabilities are calculated based upon differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset or liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. FINANCIAL INSTRUMENTS -- The carrying amount of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short maturities of these instruments. The Company's bank borrowings approximate fair value because their interest rates are based on variable reference rates. PREFERRED STOCK -- HLM Design's Certificate of Incorporation authorizes the Board of Directors of HLM Design to issue 1,000,000 shares of preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely effect the voting power or other rights of the holders of HLM Design's Common Stock. As of October 31, 1997 there were no preferred shares outstanding. F-8 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued STOCK SUBSCRIPTIONS RECEIVABLE -- The amount due from shareholders for outstanding Common Stock. NEW ACCOUNTING STANDARD -- Effective April 27, 1996, HLMI adopted Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, during the year. It requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management has reviewed all long-lived assets and intangible assets as of October 25, 1996 and October 31, 1997 and believes that the carrying amounts reported in the balance sheet will be recovered over the remaining useful lives of those assets. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Standards No. 128, "Earnings Per Share." This Statement specifies the computation, presentation and disclosure requirements for earnings per share. It will be effective for periods ending December 15, 1997. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Standard establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement will be effective for the Company's fiscal year ending April 24, 1998, and the Company does not intend to adopt this Statement prior to the effective date. INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial information for the six months ended October 25, 1996 (Predecessor) and October 31, 1997 (Combined) has been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. 2. BUSINESS ACQUISITION Effective May 23, 1997, HLMI sold 50,000 newly issued shares to BBH Corp., a Delaware corporation, for approximately $3.2 million. On May 23, 1997, BBH Corp. merged into HLMI and each BBH Corp. share outstanding at the time of merger was converted into one share of HLMI's stock. All HLMI shares held by BBH Corp. were canceled and retired. Effective as of May 31, 1997, HLMI repurchased all 46,858 shares from the ESOP for $64 per share as part of a merger agreement with BBH Corp. As a result of this transaction, the ESOP will effectively cease once the proceeds of the sale have been distributed by the Trustee to the ESOP's participants following IRS approval of the ESOP's termination. The total purchase price as well as acquisition costs has been allocated to the assets and liabilities acquired at their estimated fair market value at acquisition date as follows: Accounts receivable........................................................ $ 5,716,254 Property and equipment..................................................... 1,531,155 Other assets............................................................... 6,320,087 Liabilities assumed........................................................ (12,761,346) Goodwill................................................................... 2,573,867 ----------- Total...................................................................... $ 3,380,017 ----------- -----------
The following unaudited pro forma financial data is presented as if the transaction had occured at the beginning of the respective six month periods.
6 MONTHS ENDED OCTOBER 31, -------------------------- 1996 1997 ----------- ----------- Revenues................................................... $13,503,623 $15,419,839 ----------- ----------- ----------- ----------- Net Income (loss).......................................... $ (426,864) $ 444,148 ----------- ----------- ----------- -----------
F-9 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 2. BUSINESS ACQUISITION -- Continued The pro forma information presented above is not necessarily indicative of the operating results that would have occurred had the transaction occurred at the beginning of the respective six month periods. These results are also not necessarily indicative of the results of future operations. 3. CONTRACTS IN PROGRESS Information relative to contracts in progress at October 31, 1997 is as follows:
OCTOBER 31, 1997 ----------- Costs incurred on uncompleted projects......................................................................... $33,960,220 Estimated earnings thereon..................................................................................... 35,776,610 ----------- Total.......................................................................................................... 69,736,830 Less billings to date.......................................................................................... 68,921,745 ----------- Net underbillings.............................................................................................. $ 815,085 ----------- -----------
Net underbillings are included in the accompanying balance sheet as follows:
OCTOBER 31, 1997 ----------- Costs and estimated earnings in excess of billings on uncompleted projects......................................................................................... $ 4,149,864 Billings in excess of costs and estimated earnings on uncompleted projects......................................................................................... (3,334,779) ----------- Net underbillings.............................................................................................. $ 815,085 ----------- -----------
4. FINANCING ARRANGEMENTS A summary of notes payable at October 31, 1997 is as follows: In September 1996, the Company entered into a financing facility with First Charter National Bank which provides a line of credit of up to $500,000. Interest is charged at the bank's prime rate plus 1.5% and principal payments are to be made at the Company's discretion. The loan has an annual maturity date which is subject to review. In May 1997, the Company entered into a financing facility with First Charter National Bank which provides a line of credit of up to $1,000,000. Interest is charged at the bank's prime rate plus 1.5% and principal payments are to be made at the Company's discretion. The loan has maturity date of May 1998. In September 1997, the Company entered into debt agreements with Berthel Fisher, a planned Underwriter of the Offering, of $250,000 and $500,000. Interest is charged at 12%, and monthly interest payments are due through May 1, 1998. The final payment for all accrued interest and principal is due on May 1, 1998. F-10 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 4. FINANCING ARRANGEMENTS -- Continued A summary of long-term debt at October 31, 1997 is as follows:
10/31/97 ---------- Notes payable to two key employees of the Company at 15%, with a final payment due December 31, 1997 in full.... $ 125,000 Notes payable to a former stockholder, due in annual payments of $49,522, plus interest at the prime interest rate of Chase Manhattan Bank as of the date each installment is due (8.25% at April 25, 1997 and April 26, 1996); collateralized by 3,088 shares of the Company's unissued common stock, with a final payment due April 2000.......................................................................................................... 148,567 Notes payable to former stockholders, due in installments plus interest at prime plus 1% at various dates to October 1999.................................................................................................. 13,594 Notes payable, MPB Architects, due in annual payments of $127,500, including interest at a rate of 10.5%, with a final payment due April 1, 1998............................................................................... 114,850 Notes payable to Pacific Capital/Equitas, payable June 1, 2002.................................................. 1,980,000 Notes payable to shareholders at 6% with final payment due ................................................ 182,308 Lease financing with Berthel Fisher, due in monthly payments of $64,501, including interest at 14.07%, with final lease and interest payments made on 4/30/2002........................................................... 2,637,926 ---------- Total long-term debt............................................................................................ 5,202,245 ---------- Less current maturities (based on refinanced terms)............................................................. 728,011 ---------- Long-term portion............................................................................................... $4,474,234 ---------- ----------
In May 1997 HLMI entered into a financing arrangement, in the form of a capital lease agreement, with Berthel Fisher Leasing, a subsidiary of Berthel Fisher, the proposed underwriter, for $2.8 million. The substance of such agreement is a financing arrangement and has been presented as such in the financial statements. Substantially all assets are pledged under lending agreements. Under certain of the lending arrangements the company is restricted from paying cash dividends. Certain of the financing agreements contain debt service coverage ratios. As of October 31, 1997 the Company was in compliance with such covenants. Repayment of the various financing agreements are as follows: Six months ended April 24, 1998................................. $ 576,877 Fiscal 1999..................................................... 559,441 Fiscal 2000..................................................... 592,345 Fiscal 2001..................................................... 991,006 Fiscal 2002..................................................... 2,449,243 Thereafter...................................................... 33,333 ---------- Total......................................................... $5,202,245 ---------- ----------
In May 1997, warrants to purchase 14,372 shares of common stock were attached to the notes issued to Pacific Capital and Equitas. In addition, warrants to purchase 2,515 shares of common stock were attached to the notes issued to Berthel Fisher in September 1997. All of the warrants issued with the debt were outstanding at October 31, 1997. Each warrant allows holders to purchase a share of stock for $.01 a share for a five year period. In the event that the indebtedness owed by HLM Design to the Holder pursuant to that Note issued to Holder from HLM Design is not repaid in full on or before the two year anniversary of the issuance then the number of shares of HLM Design's Common Stock that may be purchased by the Holder of this Warrant shall increase by a predetermined amount on each annual anniversary thereafter, until the indebtedness is paid in full. HLM Design issued to the Holders the right and option to sell to HLM Design this warrant for a period of 30 days immediately prior to the expiration at a purchase price equal to the fair market value of the shares of common stock issuable to the Holder upon exercise of this warrant less the exercise price. F-11 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 4. FINANCING ARRANGEMENTS -- Continued The Company obtained, as of May 1997, a valuation of the Company as a basis for assigning value to the warrants. The portion of such determined value in excess of the amounts paid for the warrants was $226,605 and has been reflected as deferred financing fees and is being amortized over the respective loan terms using an effective yield method. See Note 9 for discussion of warrant activity subsequent to October 31, 1997. 5. LEASE COMMITMENTS The total minimum rental commitment under non-cancellable operating leases at October 31, 1997, which has been reduced by minimum rentals to be received under subleases, are as follows: 6 months ended April 24, 1998.......................................................... $ 1,167,997 Fiscal 1999............................................................................ 2,072,140 Fiscal 2000............................................................................ 1,913,474 Fiscal 2001............................................................................ 1,798,392 Fiscal 2002............................................................................ 1,721,236 Thereafter............................................................................. 6,664,881 ----------- Total $15,338,120 ----------- -----------
6. CONTINGENCIES The Company is involved in various disputes and legal actions related to contract operations. In the opinion of Company management, the ultimate resolution of these actions will not have a material effect on the Company's financial position or future results of operations. 7. RELATED PARTY TRANSACTIONS During the six months ended October 31, 1997, the Company incurred $22,911 in financing advisory fees related to debt financings, for services provided by a director. See Note 4 for related party transactions with respect to debt financing. 8. INCOME TAXES The provision for income taxes is as follows:
SIX MONTHS SIX MONTHS ENDED ENDED OCTOBER 25, OCTOBER 31, 1996 1997 ----------- ----------- Current: Federal................................................................... $ 4,476 $ 57,827 State..................................................................... 639 7,885 Deferred.................................................................... (197,461) 308,413 ----------- ----------- Provision for Income Taxes.................................................. $ (192,346) $ 374,125 ----------- ----------- ----------- -----------
The reconciliation of the statutory federal income tax rate with the Company's federal and state overall effective income rate is as follows: F-12 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 8. INCOME TAXES -- Continued
SIX MONTHS SIX MONTHS ENDED ENDED OCTOBER 25, OCTOBER 31, 1996 1997 ----------- ----------- Statutory federal rate...................................................... (35.0)% 35.0% State Income Taxes, net of federal benefit.................................. (3.3) 3.3 Penalties................................................................... 4.9 3.8 Meals and Entertainment..................................................... 2.5 2.5 Goodwill.................................................................... -- 5.9 Other....................................................................... .1 (1.0) ----------- ----------- Effective Tax Rates....................................................... (30.8)% 49.5% ----------- ----------- ----------- -----------
The tax effect of temporary differences giving rise to deferred income tax assets and liabilities as of October 31, 1997 is as follows:
OCTOBER 31, 1997 ----------- Deferred income tax liabilities -- difference between the accrual basis and cash basis of accounting related to certain assets and liabilities.............................. $(1,606,472) ----------- Deferred income tax assets: Contribution carryforwards........................................................... 42,980 Property and equipment............................................................... 357,565 Net operating loss carryforward...................................................... 271,320 ----------- Total deferred income tax assets....................................................... 671,865 ----------- Deferred income tax liabilities, net................................................... $ (934,607) ----------- -----------
9. SUBSEQUENT EVENTS In November 1997, 862 warrants were exercised resulting in the issuance of 862 shares of common stock. F-13 INDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS HANSEN LIND MEYER INC. Charlotte, North Carolina We have audited the accompanying balance sheets of Hansen Lind Meyer Inc. ("HLMI") as of April 25, 1997 and April 25, 1996, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended April 25, 1997. These financial statements are the responsibility of HLMI's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HLMI as of April 25, 1997 and April 26, 1996, and the results of its operations and its cash flows for each of the three years in the period ended April 25, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP October 31, 1997 Charlotte, North Carolina F-14 HLMI BALANCE SHEETS APRIL 26, 1996 AND APRIL 25, 1997
APRIL 26, APRIL 25, 1996 1997 ----------- ----------- ASSETS CURRENT ASSETS: Cash......................................................................................... $ 11,130 $ 2,321 Trade and other receivables, less allowance for doubtful accounts of $399,000 at April 26, 1996; $111,000 at April 25, 1997.......................................................... 5,559,290 4,215,782 Costs and estimated earnings in excess of billings on uncompleted projects (Note 3).......... 3,512,711 5,181,432 Refundable income taxes...................................................................... 141,521 59,891 Prepaid expenses............................................................................. 106,250 205,381 ----------- ----------- Total current assets.................................................................... 9,330,902 9,664,807 ----------- ----------- OTHER ASSETS: Deferred income taxes (Note 8)............................................................... 492,505 464,694 Goodwill, less amortization of $93,193 at April 26, 1996; $196,646 at April 25, 1997......... 345,807 242,354 Other noncurrent assets...................................................................... 352,700 511,972 ----------- ----------- Total other assets...................................................................... 1,191,012 1,219,020 ----------- ----------- PROPERTY AND EQUIPMENT: Leasehold improvements....................................................................... 2,153,312 2,307,040 Furniture and fixtures....................................................................... 6,953,360 7,365,909 Automobiles.................................................................................. 16,813 16,813 Construction in progress..................................................................... 28,309 ----------- ----------- Total property and equipment............................................................ 9,151,794 9,689,762 ----------- ----------- Less accumulated depreciation................................................................ (7,095,716) (7,699,086) ----------- ----------- Property and equipment, net............................................................. 2,056,078 1,990,676 ----------- ----------- TOTAL ASSETS................................................................................... $12,577,992 $12,874,503 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable (Note 4)....................................................................... $ 2,450,000 $ 2,860,000 Current maturities of long-term debt (Note 4)................................................ 778,392 642,432 Accounts payable............................................................................. 4,579,651 4,227,034 Accrued expenses............................................................................. 1,139,812 920,853 Billings in excess of costs and estimated earnings on uncompleted projects (Note 3).......... 876,245 1,661,086 Deferred income taxes (Note 8)............................................................... 1,059,316 1,255,765 Deferred rent (Note 5)....................................................................... 67,974 ----------- ----------- Total current liabilities............................................................... 10,951,390 11,567,170 ----------- ----------- LONG-TERM DEBT (Note 4)........................................................................ 564,577 103,792 ----------- ----------- DEFERRED RENT (Note 5)......................................................................... 288,829 ----------- ----------- OTHER NONCURRENT LIABILITIES................................................................... 15,000 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 5, 7, 9 and 10) STOCKHOLDERS' EQUITY: Capital stock, common, $.01 par value (Note 6): Class A, voting, authorized 2,000,000 shares; issued 55,998 and 54,700, respectively...... 560 547 Class B, nonvoting, authorized 1,000,000 shares; issued 740 and 1,111, respectively....... 7 11 Retained earnings......................................................................... 1,140,403 1,202,983 ----------- ----------- 1,140,970 1,203,541 Less ESOP debt guarantee (Notes 4 and 9)....................................................... (382,774) ----------- ----------- Total stockholders' equity.............................................................. 758,196 1,203,541 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $12,577,992 $12,874,503 ----------- ----------- ----------- -----------
See notes to financial statements. F-15 HLMI STATEMENTS OF OPERATIONS YEARS ENDED APRIL 30, 1995, APRIL 26, 1996 AND APRIL 25, 1997
YEAR ENDED ----------------------------------------- APRIL 30, APRIL 26, APRIL 25, 1995 1996 1997 ----------- ----------- ----------- REVENUES: Fee income.................................................................... $27,388,379 $27,206,637 $24,839,560 Reimbursable income........................................................... 1,734,178 1,347,787 1,915,150 ----------- ----------- ----------- Total revenues........................................................... 29,122,557 28,554,424 26,754,710 ----------- ----------- ----------- CONSULTANT EXPENSES............................................................. 5,351,073 4,782,482 4,857,891 ----------- ----------- ----------- PROJECT EXPENSES: Direct expenses............................................................... 854,540 936,962 716,449 Reimbursable expenses......................................................... 1,529,272 928,479 1,183,618 ----------- ----------- ----------- Total project expenses................................................... 2,383,812 1,865,441 1,900,067 ----------- ----------- ----------- NET PRODUCTION INCOME........................................................... 21,387,672 21,906,501 19,996,752 DIRECT LABOR.................................................................... 7,950,786 7,614,029 6,618,293 INDIRECT EXPENSES............................................................... 14,678,518 13,787,625 12,931,174 ----------- ----------- ----------- OPERATING INCOME (LOSS)......................................................... (1,241,632) 504,847 447,285 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest income............................................................... 13,936 10,516 6,502 Interest expense.............................................................. (156,680) (394,068) (402,509) Gain on lease termination (Note 5)............................................ 841,809 344,059 Gain (loss) on sale of property............................................... 428,475 8,464 (58,424) ----------- ----------- ----------- Total other income (expense), net........................................ 285,731 466,721 (110,372) ----------- ----------- ----------- INCOME (LOSS) BEFORE TAXES...................................................... (955,901) 971,568 336,913 INCOME TAXES (Note 8): Current tax benefit........................................................... (3,080) (114,560) (4,461) Deferred tax expense (benefit)................................................ (357,000) 550,019 224,260 ----------- ----------- ----------- Total income tax expense (benefit)....................................... (360,080) 435,459 219,799 ----------- ----------- ----------- NET INCOME (LOSS)............................................................... $ (595,821) $ 536,109 $ 117,114 ----------- ----------- ----------- ----------- ----------- -----------
See notes to financial statements. F-16 HLMI STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED APRIL 30, 1995, APRIL 26, 1996 AND APRIL 25, 1997
COMMON STOCK ESOP DEBT ------------------ RETAINED GUARANTEE CLASS A CLASS B EARNINGS (NOTES 4 AND 9) ------- ------- ---------- --------------- BALANCE, APRIL 30, 1994....................................... $ 638 $ 3 $1,693,915 $(1,260,925) Net Loss.................................................... (595,821) Issuance of 2,119 shares of common stock.................... 21 135,616 Retirement of 7,782 shares of common stock.................. (75) (3) (528,185) Class A common stock exchanged for Class B common stock............................................. (11) 11 Proceeds on Employee Stock Ownership Plan debt.............. (106,000) Payments on Employee Stock Ownership Plan debt.............. 490,603 ------- ------- ---------- --------------- BALANCE, APRIL 30, 1995....................................... 573 11 705,525 (876,322) Net income.................................................. 536,109 Issuance of 44 shares of common stock....................... 2,489 Retirement of 1,743 shares of common stock.................. (10) (7) (103,720) Payments on Employee Stock Ownership Plan debt.............. 493,548 Class A common stock exchanged for Class B common stock............................................. (3) 3 ------- ------- ---------- --------------- BALANCE, APRIL 26, 1996....................................... 560 7 1,140,403 (382,774) Net income.................................................. 117,114 Retirement of 927 shares of common stock.................... (9) (54,534) Payments on Employee Stock Ownership Plan debt.............. 382,774 Class A common stock exchanged for Class B common stock............................................. (13) 13 ------- ------- ---------- --------------- BALANCE, APRIL 25, 1997....................................... $ 547 $11 $1,202,983 $ ------- ------- ---------- --------------- ------- ------- ---------- --------------- TOTAL STOCKHOLDERS' EQUITY ------------- BALANCE, APRIL 30, 1994....................................... $ 433,631 Net Loss.................................................... (595,821) Issuance of 2,119 shares of common stock.................... 135,637 Retirement of 7,782 shares of common stock.................. (528,263) Class A common stock exchanged for Class B common stock............................................. Proceeds on Employee Stock Ownership Plan debt.............. (106,000) Payments on Employee Stock Ownership Plan debt.............. 490,603 ------------- BALANCE, APRIL 30, 1995....................................... (170,213) Net income.................................................. 536,109 Issuance of 44 shares of common stock....................... 2,489 Retirement of 1,743 shares of common stock.................. (103,737) Payments on Employee Stock Ownership Plan debt.............. 493,548 Class A common stock exchanged for Class B common stock............................................. ------------- BALANCE, APRIL 26, 1996....................................... 758,196 Net income.................................................. 117,114 Retirement of 927 shares of common stock.................... (54,543) Payments on Employee Stock Ownership Plan debt.............. 382,774 Class A common stock exchanged for Class B common stock............................................. ------------- BALANCE, APRIL 25, 1997....................................... $ 1,203,541 ------------- -------------
See notes to financial statements. F-17 HLMI STATEMENTS OF CASH FLOWS YEARS ENDED APRIL 30, 1995, APRIL 26, 1996 AND APRIL 25, 1997
YEAR ENDED ---------------------------------------- APRIL 30, APRIL 26, APRIL 25, 1995 1996 1997 ----------- ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................................................... $ (595,821) $ 536,109 $ 117,114 Adjustments to reconcile net income to net cash used in operating activities: Depreciation................................................................. 515,636 680,779 671,877 Amortization................................................................. 5,952 99,145 107,670 Deferred rent................................................................ (384,644) (1,093,278) (356,803) Loss (gain) on sale of property.............................................. (428,475) (8,464) 58,424 Deferred income taxes........................................................ (357,000) 550,019 224,260 Other, net................................................................... 3,229 (49,345) (15,000) Changes in certain working capital items: (Increase) decrease in trade and other receivables......................... 990,949 (1,181,640) 1,343,508 Increase in costs and estimated earnings compared to billings on uncompleted contracts, net................................................ (1,540,637) (1,857,829) (883,880) (Increase) decrease in refundable income taxes............................. 144,707 87,777 72,056 (Increase) decrease in prepaid expenses.................................... 160,417 (176,989) (99,131) Increase in other assets................................................... (159,272) Increase (decrease) in accounts payable.................................... 401,561 2,642,228 (352,617) Increase (decrease) in accrued expenses.................................... 410,559 (455,379) (218,959) ----------- ----------- ---------- Net cash (used in) provided by operating activities..................... (673,567) (226,867) 509,247 ----------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of business............................................................ (206,500) Proceeds from sale of equipment................................................. 600,000 12,084 2,635 Purchases of property and equipment............................................. (882,719) (708,479) (662,179) Note receivable from officer.................................................... (30,000) ----------- ----------- ---------- Net cash used in investing activities................................... (489,219) (726,395) (659,544) ----------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on line of credit................................................ 1,600,000 700,000 410,000 Proceeds from long-term borrowings.............................................. 500,000 145,000 Payments on long-term borrowings................................................ (90,189) (238,134) (410,952) Proceeds from issuance of common stock.......................................... 135,616 2,489 Retirement of common stock...................................................... (528,185) (5,650) (2,560) ----------- ----------- ---------- Net cash provided by financing activities............................... 1,117,242 958,705 141,488 ----------- ----------- ---------- (DECREASE) INCREASE IN CASH....................................................... (45,544) 5,443 (8,809) CASH BALANCE: Beginning of year............................................................... 51,231 5,687 11,130 ----------- ----------- ---------- End of year..................................................................... $ 5,687 $ 11,130 $ 2,321 ----------- ----------- ---------- ----------- ----------- ---------- SUPPLEMENTAL DISCLOSURES: Cash paid (received) during the year for: Interest..................................................................... $ 138,783 $ 392,292 $ 370,167 Interest on Employee Stock Ownership Plan debt............................... $ 82,459 $ 55,199 $ 24,243 Income tax refunds........................................................... $ (150,867) $ (280,466) $ (86,091) Noncash investing and financing transactions: Retirement of common stock through issuance of note payable.................. $ $ 98,087 $ 51,983 Reduction of ESOP debt....................................................... $ 384,603 $ 493,548 $ 382,774 Purchase of business financed through issuance of note payable............... $ 311,500
See notes to financial statements. F-18 HLMI NOTES TO FINANCIAL STATEMENTS YEARS ENDED APRIL 25, 1997 AND APRIL 26, 1996 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS -- Hansen Lind Meyer Inc. ("HLMI") provides architectural and engineering consulting and design services nationally from offices in Iowa City, Chicago, Denver, Orlando, Philadelphia, Atlanta, Bethesda, Sacramento and Portland. Approximately 75%, 70% and 73% of HLMI's 1997, 1996 and 1995 revenues, respectively, are related to health care projects and approximately 25%, 30% and 27% are from criminal justice and other projects. The Company operates in one business segment. FISCAL YEAR-END POLICY -- HLMI uses a 52-53 week fiscal year for accounting purposes which defines the fiscal year-end date as the last Friday in April. Thus, the current fiscal year-end is April 25, 1997. There were 52 weeks in this fiscal year. OPERATING CYCLE -- Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of contract completion, although this may require more than one year. REVENUE RECOGNITION -- Revenue is recognized, at estimated collectible amounts, in the period the services are performed. More specifically, HLMI recognizes revenues either on the percentage-of-completion method measured by the percentage of cost incurred to date to estimated total cost for each contract, or based upon a fixed hourly rate. Consultant expenses, project expenses, direct labor and indirect expenses are charged to expense as incurred. Provisions for estimated losses on uncompleted projects are made in the period in which such losses are first subject to reasonable estimation. Unanticipated changes in project performance, project conditions and estimated profitability may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The asset "costs and estimated earnings in excess of billings on uncompleted projects" represents revenues recognized in excess of amounts billed. The liability "billings in excess of costs and estimated earnings on uncompleted projects" represents billings in excess of revenues recognized. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimate impacting the accompanying financial statements relates to revenue recognition. PROPERTY AND EQUIPMENT -- Leasehold improvements and equipment are stated at cost. Depreciation is computed using the double-declining balance or straight-line method over the estimated useful lives of the assets or the lease term, including anticipated renewals. The estimated useful lives are as follows: Computer equipment and software......................... 5 years Furniture............................................... 7 years Leasehold improvements.................................. Lease term, not to exceed the useful life of the asset
GOODWILL -- Goodwill represents the excess of purchase price over the estimated fair value of the net assets acquired from MPB Architects and is being amortized over a four-year period. DEFERRED INCOME TAXES -- Deferred income tax assets and liabilities are calculated based upon differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset or liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. FINANCIAL INSTRUMENTS -- The carrying amount of cash, accounts receivable, accounts payable and accrued liabilities approximates fair value because of the short maturities of these instruments. HLMI's bank borrowings approximate fair value because their interest rates are based on variable reference rates. F-19 HLMI NOTES TO FINANCIAL STATEMENTS -- CONTINUED 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued RECLASSIFICATION -- Certain amounts in the 1996 financial statements have been reclassified to conform with the 1997 financial statement presentation. NEW ACCOUNTING STANDARD -- Effective April 27, 1996, HLMI adopted Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, during the year. It requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management has reviewed all long-lived assets and intangible assets as of April 25, 1997 and April 26, 1996 and believes that the carrying amounts reported in the balance sheet will be recovered over the remaining useful lives of those assets. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Standard establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement will be effective for HLMI's fiscal year ending April 24, 1998, and HLMI does not intend to adopt this Statement prior to the effective date. 2. BUSINESS ACQUISITIONS On April 1, 1995, HLMI acquired MPB Architects, Inc., an architectural firm located in Philadelphia, Pennsylvania, for a total purchase price of $518,000. The acquisition has been accounted for as a purchase and the results of operations of MPB Architects, Inc., have been included in the accompanying financial statements from the date of acquisition. The total purchase price has been allocated to the assets acquired at their estimated fair market value at acquisition date as follows: Property and equipment........................................................ $ 79,000 Goodwill...................................................................... 439,000 -------- Total......................................................................... $518,000 -------- --------
The following unaudited pro forma financial data is presented as if MPB Architects, Inc. was acquired on May 1, 1994.
YEAR ENDED APRIL 30, 1995 ------------------------- Revenues......................................................... $31,743,366 ------------------------- Net Loss......................................................... $ (782,024) ------------------------- -------------------------
The pro forma information presented above is not necessarily indicative of the operating results that would have occurred had MPB Architects, Inc. been acquired on May 1, 1994. These results are also not necessarily indicative of the results of future operations. 3. CONTRACTS IN PROGRESS Information relative to contracts in progress at April 30, 1995, April 26, 1996 and April 25, 1997 is as follows:
APRIL 30, APRIL 26, APRIL 25, 1995 1996 1997 ------------ ------------ ----------- Costs incurred on uncompleted projects....................................... $ 77,486,548 $ 67,612,169 $53,448,215 Estimated earnings thereon................................................... 46,358,806 42,252,119 33,500,189 ------------ ------------ ----------- Total........................................................................ 123,845,354 109,864,288 86,948,404 Less billings to date........................................................ 123,066,717 107,227,822 83,428,058 ------------ ------------ ----------- Net underbillings............................................................ $ 778,637 $ 2,636,466 $ 3,520,346 ------------ ------------ ----------- ------------ ------------ -----------
F-20 HLMI NOTES TO FINANCIAL STATEMENTS -- CONTINUED 3. CONTRACTS IN PROGRESS -- Continued Net underbillings are included in the accompanying balance sheet as follows:
APRIL 30, APRIL 26, APRIL 25, 1995 1996 1997 ----------- ---------- ----------- Costs and estimated earnings in excess of billings on uncompleted projects............................................................ $ 2,571,447 $3,512,711 $ 5,181,432 Billings in excess of costs and estimated earnings on uncompleted projects............................................................ (1,792,810) (876,245) (1,661,086) ----------- ---------- ----------- Net underbillings................................................................. $ 778,637 $2,636,466 $ 3,520,346 ----------- ---------- ----------- ----------- ---------- -----------
4. FINANCING ARRANGEMENTS Effective October 14, 1996, HLMI entered into a new financing arrangement with Firstar Bank Iowa, N.A. ("Firstar"). In connection with this new financing arrangement, two previous lines of credit, with a combined balance outstanding at April 26, 1996 of $2,450,000, were consolidated into one revolving line of credit providing for availability up to the lesser of $2,450,000 or 80% of eligible accounts receivable through March 1, 1997. The line of credit will be payable in full on May 1, 1998. Interest is payable monthly at Firstar's prime rate plus 3% (11.5% at April 25, 1997). Three term loans payable to Firstar with a combined amount outstanding at April 26, 1996 of $423,903 were consolidated into one new term loan. Interest is charged at the bank's prime rate plus 2%, and monthly principal and interest payments of $45,000 are payable through February 1, 1997. The original loans were made to enable the Company's ESOP (see Note 8) to acquire common stock from certain stockholders. This financing facility is collateralized by substantially all of HLMI's assets. In September 1996, HLMI entered into a financing facility with First Charter National Bank which provides a line of credit of up to $500,000. Interest is charged at the bank's prime rate plus 1.5% and principal payments are to be made at HLMI's discretion. The loan has an annual maturity date which is subject to review. See Note 12 for financing events occurring subsequent to April 25, 1997. A summary of notes payable at April 26, 1996 and April 25, 1997 is as follows:
1996 1997 ---------- ---------- Line of credit -- Firstar......................................................................... $2,450,000 $2,360,000 Line of credit -- First Charter................................................................... 500,000 ---------- ---------- Total............................................................................................. $2,450,000 $2,860,000 ---------- ---------- ---------- ----------
F-21 HLMI NOTES TO FINANCIAL STATEMENTS -- CONTINUED 4. FINANCING ARRANGEMENTS -- Continued A summary of long-term debt at April 25, 1997 and April 26, 1996 is as follows:
1996 1997 ---------- -------- Term loan payable to Firstar, due in monthly payments of $45,000, including interest at 2% over the Bank's prime rate................................................................................. $ 423,903 $ Note payable to Firstar, due in monthly payments of $16,405, including interest at 2.5% over the Bank's prime rate................................................................................. 428,399 271,134 Notes payable to two key employees of the Company at 15%, with a final payment due December 31, 1997 in full........................................................................................... 145,000 Notes payable to a former stockholder, due in annual payments of $49,522, plus interest at the prime interest rate of Chase Manhattan Bank as of the date each installment is due (8.25% at April 25, 1997 and April 26, 1996); collateralized by 3,088 shares of the Company's unissued common stock, with a final payment due April 2000............................................................... 198,090 148,567 Notes payable to former stockholders, due in installments plus interest at prime plus 1% at various dates to October 1999............................................................................. 74,270 66,673 Notes payable, MPB Architects, due in annual payments of $127,500, including interest at a rate of 10.5%, with a final payment due April 1, 1998..................................................... 218,307 114,850 ---------- -------- Total long-term debt................................................................................ 1,342,969 746,224 Less current maturities (based on refinanced terms)................................................. 778,392 642,432 ---------- -------- Long-term portion................................................................................... $ 564,577 $103,792 ---------- -------- ---------- --------
Scheduled maturities of long-term debt based on refinanced terms are as follows: Fiscal Year: 1999........................................................................... $642,432 2000........................................................................... 49,522 Thereafter..................................................................... 54,270 -------- Total............................................................................ $746,224 -------- --------
Borrowings from Firstar are subject to certain restrictive covenants. At April 25, 1997, HLMI was in violation of the negative working capital and the current ratio requirements. As set forth in Note 12, all outstanding debt due to Firstar has been repaid subsequent to April 25, 1997. On May 30, 1997, HLMI entered into financing arrangement in the form of a sale-leaseback agreement. Under this arrangement, HLMI sold all of its property, excluding leasehold improvements, for $2.8 million. This property is being leased back over 60 months. The proceeds of this transaction were used to repay the line of credit and the note payable due to Firstar. Under certain of the lending arrangements the Company is restricted from paying cash dividends. 5. LEASE COMMITMENTS At April 26, 1996, rent payments due under certain leases were less than the amount of rent expense computed on a straight-line basis. The deferred rent liability at April 26, 1996 was $356,803. There was no deferred rent liability as of April 25, 1997. In 1996, and 1997, HLMI terminated facility leases which were being accounted for as operating leases, resulting in a gain of $841,809 and $344,059, respectively. There were no facility lease terminations in 1995 which resulted in a gain. The recorded gains represent the cumulative excess of lease expense over the lease payments made as of the termination dates. The Iowa City, Orlando, McLean and Charlotte facilities require the payment of certain operating expenses in addition to the base rents. F-22 HLMI NOTES TO FINANCIAL STATEMENTS -- CONTINUED 5. LEASE COMMITMENTS -- Continued Rent expense of $2,946,542 $1,112,562 and $1,606,678 as of April 30, 1995, April 26, 1996 and April 25, 1997 is included in indirect expenses. The total minimum rental commitment under non-cancellable operating leases, at April 25, 1997, which has been reduced by minimum rentals to be received under subleases, are as follows: Fiscal Year: 1998..................................................................... $ 2,172,403 1999..................................................................... 1,899,397 2000..................................................................... 1,881,442 2001..................................................................... 1,798,392 2002..................................................................... 1,721,236 Thereafter............................................................... 6,664,881 ----------- Total...................................................................... $16,137,751 ----------- -----------
6. CAPITAL STOCK HLMI's authorized capital consists of 3,000,000 shares of $.01 par value common stock, consisting of two classes, 2,000,000 shares of Class A voting and 1,000,000 shares of Class B nonvoting. Class A stock may only be owned by employees of the Company. Class A stock will be immediately converted to Class B stock following the termination of a shareholder's employment with the Company. See Note 12 for subsequent events regarding HLMI's ESOP. 7. RESTRICTIONS OF TRANSFER OF COMMON STOCK The bylaws of HLMI contain certain restrictions on transfer of common stock. Upon the death, disability or retirement of a stockholder, HLMI is obligated to purchase the common stock if the estate of the stockholder or the stockholder offers to sell. The stockholder's estate or the stockholder has the right to offer the shares to the Employee Stock Ownership Plan which has the right of first refusal with regard to this stock. The sale price shall be based upon the most recent appraised value of HLMI stock. If a stockholder voluntarily terminates employment, the employee shall sell, and the ESOP may acquire the shares, or HLMI shall purchase all of the stockholder's stock based on the most recent appraisal. If a stockholder is involuntarily terminated, the stockholder may offer his stock to the ESOP or HLMI, and the ESOP may, or HLMI shall purchase all of the shares based on the most recent appraisal. A stockholder who is terminated from employment for cause shall sell, and the ESOP may, or HLMI shall purchase all of the stockholder's shares at a price equal to 80% of the most recent appraisal. The purchase price of any purchase will be paid by first applying life insurance proceeds, if any, with the balance being paid in a single payment or installments depending upon the circumstances of the sale and upon the amount of the purchase price. If the aggregate of principal payments for the purchase of stock shall exceed $120,000 within any six-month period, HLMI may adjust downward all current payments proportionately to limit the payments to the $120,000 amount. Transfers of shares of HLMI's stock to or from the Employee Stock Ownership Plan Trust are exempt from the provisions of the bylaws on restrictions of transfer. 8. INCOME TAXES The provision for income taxes is as follows:
1995 1996 1997 --------- --------- -------- Current: Federal............................................................................... $ (2,695) $(100,240) $ (3,903) State................................................................................. (385) (14,320) (558) Deferred................................................................................ (357,000) 550,019 224,260 --------- --------- -------- Provision for income taxes.............................................................. $(360,080) $ 435,459 $219,799 --------- --------- -------- --------- --------- --------
F-23 HLMI NOTES TO FINANCIAL STATEMENTS -- CONTINUED 8. INCOME TAXES -- Continued The reconciliation of the statutory federal income tax rate with the Company's federal and state overall effective income rate is as follows:
1995 1996 1997 ------ ----- ----- Statutory federal rate.............................................................................. (35.0)% 35.0% 35.0% State Income Taxes.................................................................................. (2.0) 3.3 3.3 Penalties........................................................................................... .2 .4 17.4 Meals and Entertainment............................................................................. 4.3 4.4 9.3 Other............................................................................................... (5.1) 1.8 .3 ------ ----- ----- Effective Tax rates............................................................................... (37.6)% 44.9% 65.3% ------ ----- ----- ------ ----- -----
The tax effect of temporary differences giving rise to deferred income tax assets and liabilities as of April 25, 1997 and April 26, 1996 is as follows:
1996 1997 ----------- ----------- Deferred income tax liabilities -- difference between the accrual basis and cash basis of accounting related to certain assets and liabilities.......................................... $(1,059,316) $(1,255,765) ----------- ----------- Deferred income tax assets: Contribution carryforwards.................................................................... 52,892 64,361 Property and equipment........................................................................ 63,368 96,177 Deferred rent liability....................................................................... 136,477 -- Net operating loss carryforward............................................................... 239,768 304,156 ----------- ----------- Total deferred income tax assets................................................................ 492,505 464,694 ----------- ----------- Deferred income tax liabilities, net............................................................ $ (566,811) $ (791,071) ----------- ----------- ----------- -----------
As of April 26, 1996 and April 25, 1997, HLMI had approximately $627,000 and $795,000 of net operating loss carryforwards, respectively, for federal tax purposes and no loss carryforwards for financial reporting purposes. These tax net operating losses will respectively expire in fiscal years 2012 and 2011. 9. EMPLOYEE STOCK OWNERSHIP PLAN In September 1987, HLMI established an Employee Stock Ownership Plan to provide retirement benefits to its employees. In October 1987, the Plan obtained a $4,800,000 bank loan, the proceeds of which were used to purchase 32,000 shares of common stock from certain stockholders. During the year ended April 30, 1991, the Plan acquired 11,597 shares of common stock from a shareholder at a cost of $1,054,389, a portion of which was financed by borrowings from a bank in the amount of $687,389. During the year ended April 30, 1995, the Plan acquired 2,000 shares of common stock from a shareholder at a cost of $106,000, which was financed by borrowings from a bank. HLMI is committed to make cash payments to the Plan in an amount sufficient for the Plan to meet the debt service requirements of these three notes. Accordingly, the debt was recorded in the accompanying financial statements with a corresponding deduction from stockholders' equity. The debt and the deduction from stockholders' equity are reduced as principal payments are made on the loans. The terms of the notes payable are disclosed in Note 4. These notes were repaid in full during the year ended April 25, 1997. Subject to certain provisions of the Plan, in the event a terminated plan participant desires to sell his or her shares of HLMI's stock, or for certain employees who elect to diversify their account balances, HLMI may be required to purchase the shares from the participant at their fair market value. During the year ended April 26, 1996, HLMI had stock purchases of 557 shares from plan participants. As of April 26, 1996, 43,343 shares were allocated to participant accounts and the fair value per share was $56.50 based on an April 30, 1995 valuation. During the year ended April 25, 1997, HLMI did not purchase any shares from plan participants and as of April 25, 1997, 46,858 shares were allocated to participant accounts. F-24 HLMI NOTES TO FINANCIAL STATEMENTS -- CONTINUED 10. CONTINGENCIES HLMI is involved in various disputes and legal actions related to contract operations. In the opinion of HLMI management, the ultimate resolution of these actions will not have a material effect on HLMI's financial position or future results of operations. 11. RELATED PARTY TRANSACTIONS During the years ended April 26, 1996 and April 25, 1997, HLMI incurred $254,137 and $257,017, respectively, in financing advisory fees related to debt financings, for services provided by a director. 12. OTHER MATTERS On May 29, 1997, HLMI executed a Management and Services Agreement with HLM Design Inc ("HLM, Design"). The majority shareholders of Design are officers of HLMI and own 100% of the common stock of HLMI. Under the Management and Services Agreement, Design will manage all functions of HLMI except for architectural services regulated by the various states in which HLMI operates. As compensation for such management services, Design will be entitled to substantially all the net cash flow generated by HLMI. In addition, HLM, Design and the shareholders of HLMI have entered into agreements that provide HLM Design with the right of first refusal, by selection of qualified individuals, for any purchase or sale of shares of HLMI's stock. Effective May 23, 1997, HLMI sold 50,000 newly issued shares to BBH Corp., a Delaware corporation, purchased 50,000 shares in HLMI for $3.2 million. On May 23, 1997, BBH Corp. merged into HLMI and each BBH Corp. share outstanding at the time of merger was converted into one share of HLMI's stock. All of HLMI's shares held by BBH Corp. were canceled and retired. Effective as of May 31, 1997, HLMI repurchased all 46,858 shares from the ESOP for $64 per share as part of a merger agreement with BBH Corp. As a result of this transaction, the ESOP will effectively cease once the proceeds of the sale have been distributed by the Trustee to the ESOP's participants following IRS approval of the ESOP's termination. F-25 - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HLM DESIGN OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary................................... 3 Risk Factors......................................... 6 Use of Proceeds...................................... 9 Dividend Policy...................................... 9 Capitalization....................................... 9 Dilution............................................. 10 Selected Financial Data.............................. 11 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 14 Business............................................. 19 Management........................................... 23 Certain Transactions................................. 30 Principal Stockholders............................... 31 Description of Capital Stock......................... 32 Shares Eligible for Future Sale...................... 35 Underwriting......................................... 36 Legal Matters........................................ 37 Experts.............................................. 37 Additional Information............................... 38 Index to Financial Statements........................ F-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. SHARES HLM DESIGN, INC. COMMON STOCK ---------------- PROSPECTUS ---------------- BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. WESTPORT RESOURCES INVESTMENT SERVICES, INC. , 1997 - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses to be borne by the Registrant in connection with the issuance and distribution of the securities being registered hereby other than underwriting discounts and commissions. All the amounts shown are estimates, except for the registration fee with the Securities and Exchange Commission, the NASD filing fee and the AMEX fees. SEC Registration fee...................................................................... $ NASD filing fee........................................................................... AMEX fees................................................................................. Transfer agent and registrar fees......................................................... Accounting fees and expenses.............................................................. Legal fees and expenses................................................................... "Blue Sky" fees and expenses (including legal fees)....................................... Costs of printing and engraving........................................................... Miscellaneous............................................................................. -------- Total................................................................................ $ -------- --------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant's Bylaws effectively provide that the Registrant shall, to the full extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 145"), indemnify all persons whom it may indemnify pursuant thereto. In addition, the Registrant's Certificate of Incorporation eliminates personal liability of its directors to the full extent permitted by Section 102(b)(7) of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 102(b)(7)"). Section 145 permits a corporation to indemnify its directors and officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by a third party if such directors or officers acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, indemnification may be made only for expenses actually and reasonably incurred by directors and officers in connection with the defense or settlement of an action or suit and only with respect to matters as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interest of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant officers or directors are reasonably entitled to indemnification for such expenses despite such adjudication of liability. Section 102(b)(7) provides that a corporation may eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds or (iv) for any transaction from which the director derived an improper personal benefit. No such provisions shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. The Company intends to obtain, prior to the effective date of the Registration Statement, insurance against liabilities under the Securities Act of 1933 for the benefit of its officers and directors. Section of the Underwriting Agreement (filed as Exhibit 1.1 to this Registration Statement) provides that the Underwriters severally and not jointly will indemnify and hold harmless the Registrant and each director, officer or controlling person of the Registrant from and against any liability caused by any statement or omission in the Registration Statement or Prospectus based upon information furnished to the Registrant by the Underwriters for use therein. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Except as hereinafter set forth, there have been no sales of unregistered securities by the Registrant within the past three years. As of March 20, 1997, as part of the original organization of HLM Design, the Registrant issued 20,500 shares of Common Stock to Joseph Harris, 20,500 shares of Common Stock to Vernon Brannon and 7,500 shares of Common Stock to William Blalock in exchange for $1,000 from each person. On May 16, 1997, May 19, 1997, May 28, 1997, July 8, 1997, July 14, 1997 and August 22, 1997 the Registrant issued an aggregate of 2,140 shares of Common Stock to senior level employees of the Company in exchange for $14.81 per share. As of May 30, 1997 and September 10, 1997 the Registrant issued warrants to purchase 16,887 shares of Common Stock for an aggregate of $23,500 in connection with financing arrangements. On November 10, 1997, Clay R. Caroland exercised his Warrant and purchased 862 shares of Common Stock at an excercise price of $.01 per share. In each of the foregoing transactions, the securities were not registered under the Securities Act, in reliance upon the exemption from registration provided by Section 4(2) of said Act in view of the sophistication of the foregoing purchasers, their access to material information, the disclosures actually made to them by the Registrant and the absence of any general solicitation or advertising. On or before the consummation of the Offering, the Registrant will issue to of its officers and employees, pursuant to the Registrant's Stock Option Plan, options to purchase shares of Common Stock in the aggregate. Such securities will not be registered under the Securities Act because such grants will be without consideration to the Registrant and, consequently, will not constitute offers or sales within Section 5 of the Securities Act. ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION - ------- -------------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement 3.1* Certificate of Incorporation of the Registrant 3.2 Bylaws of the Registrant 4.1* Form of Common Stock Certificate 4.2* Form of Common Stock Purchase Warrant 4.3* Registration Rights Agreement dated as of May 30, 1997 by and among HLM Design, Inc., Pacific Capital, L.P. and Equitas, L.P. 5.1 Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities registered. 10.1 Management and Services Agreement dated as of May 29, 1997 by and between Hansen Lind Meyer Inc. and HLM Design. 10.2 Management and Services Agreement dated as of May 29, 1997 by and between HLM of North Carolina, P.C. and HLM Design. 10.3 Management and Services Agreement dated as of May 29, 1997 by and between HLM of Oregon, Architecture and Planning, P.C. and HLM Design. 10.4 Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and Hansen Lind Meyer Inc. 10.5 Stockholders' Agreement dated as of May 29, 1997, by and among Joseph M. Harris, Vernon B. Brannon, Phillip J. Antis and HLM of North Carolina, P.C. 10.6 Stockholders' Agreememt dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon, Viktor A. Lituczy and HLM of Oregon, Architecture and Planning, P.C. 10.7 Stockholders' Voting Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and William J. Blalock. 10.8* Note Purchase Agreement dated as of May 30, 1997 by and among HLM Design, Inc., Hansen Lind Meyer Inc., BBH Corp., Pacific Capital, L.P., and Equitas, L.P. 10.9* Promissory Note A-1 dated as of May 30, 1997 by HLM Design, Inc. in favor of Pacific Capital, L.P. 10.10* Promissory Note A-2 dated as of May 30, 1997 by HLM Design, Inc. in favor of Equitas, L.P. 10.11* Collateral Assignment of Contract Rights dated as of May 30, 1997 by and between HLM Design, Inc. and Pacific Capital, L.P. and Equitas, L.P. 10.12* Security Agreement dated as of May 30, 1997 by and between HLM Design, Inc. and Pacific Capital, L.P. and Equitas, L.P. 10.13* Affiliate Promissory Note dated May 30, 1997 by BBH Corp. in favor of HLM Design, Inc. 10.14* Collateral Assignment of Promissory Note dated as of May 30, 1997 by and between HLM Design, Inc. and Pacific Capital, L.P. and Equitas, L.P.
II-2
EXHIBIT NO. DESCRIPTION - ------- -------------------------------------------------------------------------------------------------------------- 10.15* Unconditional Guaranty dated as of May 30, 1997 by and between Hansen Lind Meyer Inc. and BBH Corp. in favor of Pacific Capital, L.P. and Equitas, L.P. 10.16* Guaranty dated as of May 30, 1997 by Joe Harris in favor of Pacific Capital, L.P. and Equitas, L.P. 10.17* Guaranty dated as of May 30, 1997 by Vernon Brannon in favor of Pacific Capital, L.P. and Equitas, L.P. 10.18* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc. and Joseph M. Harris. 10.19* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc. and Vernon B. Brannon. 10.20* Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and Hansen Lind Meyer Inc. 10.21* Security Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and Hansen Lind Meyer Inc. 10.22* Guaranty (Limited in Amount) dated as of May 30, 1997 by and among Vernon B. Brannon, William J. Blalock and Joseph M. Harris. 10.23* Form of HLM Design, Inc. Stock Option Plan. 10.24* Form of HLM Design, Inc. Employee Stock Purchase Plan. 10.25* Form of Employment Agreement between HLM Design, Inc. and Joseph M. Harris. 10.26* Form of Employment Agreement between HLM Design, Inc. and Vernon B. Brannon. 10.27* Financial Advisory Agreement dated as of February 17, 1995 by and between Blalock and Company and HLMI. 21.1* Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche LLP 23.2 Form of Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration Statement) 24.1 Power of Attorney (contained on the signature page to the Registration Statement)
- --------------- * To be furnished by Amendment. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing or closings specified in the Underwriting Agreement, certificates in such denominations and registered in such names as may be required by the Underwriters in order to permit prompt delivery to each purchaser. The undersigned Registrant hereby further undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Charlotte, North Carolina on November 20, 1997. HLM DESIGN, INC. By: /s/_______JOSEPH M. HARRIS_________ JOSEPH M. HARRIS PRESIDENT POWER OF ATTORNEY We, the undersigned directors and officers of HLM Design, Inc., do hereby constitute and appoint each of Joseph M. Harris and Vernon B. Brannon, each with full power of substitution, our true and lawful attorney-in-fact and agent to do any and all acts and things in our names and in our behalf in our capacities stated below, which acts and things either of them may deem necessary or advisable to enable HLM Design, Inc. to comply with the Securities Act of 1933, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but not limited to, power and authority to sign for any or all of us in our names, in the capacities stated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that they shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE - ------------------------------------------------------ ------------------------------------------- ------------------ /s/JOSEPH M. HARRIS President, Chief Executive Officer November 20, 1997 JOSEPH M. HARRIS (principal executive officer) and Chairman /s/VERNON B. BRANNON Senior Vice President, Treasurer, Chief November 20, 1997 VERNON B. BRANNON Financial Officer (principal financial and accounting officer) and Director /s/CLAY R. CAROLAND III Director November 20, 1997 CLAY R. CAROLAND III /s/SHANNON LEROY Director November 20, 1997 SHANNON LEROY
II-4 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- -------------------------------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement 3.1* Certificate of Incorporation of the Registrant 3.2 Bylaws of the Registrant 4.1* Form of Common Stock Certificate 4.2* Form of Common Stock Purchase Warrant 4.3* Registration Rights Agreement dated as of May 30, 1997 by and among HLM Design, Inc., Pacific Capital, L.P. and Equitas, L.P. 5.1 Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities registered. 10.1 Management and Services Agreement dated as of May 29, 1997 by and between Hansen Lind Meyer Inc. and HLM Design. 10.2 Management and Services Agreement dated as of May 29, 1997 by and between HLM of North Carolina, P.C. and HLM Design. 10.3 Management and Services Agreement dated as of May 29, 1997 by and between HLM of Oregon, Architecture and Planning, P.C. and HLM Design. 10.4 Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and Hansen Lind Meyer Inc. 10.5 Stockholders' Agreement dated as of May 29, 1997, by and among Joseph M. Harris, Vernon B. Brannon, Phillip J. Antis and HLM of North Carolina, P.C. 10.6 Stockholders' Agreememt dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon, Viktor A. Lituczy and HLM of Oregon, Architecture and Planning, P.C. 10.7 Stockholders' Voting Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and William J. Blalock. 10.8* Note Purchase Agreement dated as of May 30, 1997 by and among HLM Design, Inc., Hansen Lind Meyer Inc., BBH Corp., Pacific Capital, L.P., and Equitas, L.P. 10.9* Promissory Note A-1 dated as of May 30, 1997 by HLM Design, Inc. in favor of Pacific Capital, L.P. 10.10* Promissory Note A-2 dated as of May 30, 1997 by HLM Design, Inc. in favor of Equitas, L.P. 10.11* Collateral Assignment of Contract Rights dated as of May 30, 1997 by and between HLM Design, Inc. and Pacific Capital, L.P. and Equitas, L.P. 10.12* Security Agreement dated as of May 30, 1997 by and between HLM Design, Inc. and Pacific Capital, L.P. and Equitas, L.P. 10.13* Affiliate Promissory Note dated May 30, 1997 by BBH Corp. in favor of HLM Design, Inc. 10.14* Collateral Assignment of Promissory Note dated as of May 30, 1997 by and between HLM Design, Inc. and Pacific Capital, L.P. and Equitas, L.P. 10.15* Unconditional Guaranty dated as of May 30, 1997 by and between Hansen Lind Meyer Inc. and BBH Corp. in favor of Pacific Capital, L.P. and Equitas, L.P. 10.16* Guaranty dated as of May 30, 1997 by Joe Harris in favor of Pacific Capital, L.P. and Equitas, L.P. 10.17* Guaranty dated as of May 30, 1997 by Vernon Brannon in favor of Pacific Capital, L.P. and Equitas, L.P. 10.18* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc. and Joseph M. Harris. 10.19* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc. and Vernon B. Brannon. 10.20* Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and Hansen Lind Meyer Inc. 10.21* Security Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and Hansen Lind Meyer Inc. 10.22* Guaranty (Limited in Amount) dated as of May 30, 1997 by and among Vernon B. Brannon, William J. Blalock and Joseph M. Harris. 10.23* Form of HLM Design, Inc. Stock Option Plan. 10.24* Form of HLM Design, Inc. Employee Stock Purchase Plan. 10.25* Form of Employment Agreement between HLM Design, Inc. and Joseph M. Harris. 10.26* Form of Employment Agreement between HLM Design, Inc. and Vernon B. Brannon. 10.27* Financial Advisory Agreement dated as of February 17, 1995 by and between Blalock and Company and HLMI. 21.1* Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche LLP 23.2 Form of Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration Statement) 24.1 Power of Attorney (contained on the signature page to this Registration Statement)
- --------------- * To be furnished by Amendment. EX-3 2 EXHIBIT 3.2 Exhibit 3.2 BYLAWS OF HLM DESIGN, INC. ARTICLE 1 - REGISTERED AND OTHER OFFICES SECTION 1.01. REGISTERED OFFICE. The address of the initial registered office in the State of Delaware and the name of the initial registered agent of HLM Design, Inc. (the "Corporation") at such address are set forth in the Amended and Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"). The Corporation may, from time to time, designate a different address as its registered office or a different person as its registered agent, or both; provided, however, that such designation shall become effective upon the filing of a statement of such change with the Department of State of the State of Delaware as is required by law. SECTION 1.02. OTHER OFFICES. The Corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors (the "Board") may from time to time determine or the business of the Corporation may require. ARTICLE 2 - MEETINGS OF STOCKHOLDERS SECTION 2.01. ANNUAL MEETINGS. Annual meetings of stockholders for the election of directors and for the transaction of any other business properly brought before the stockholders in accordance with Section 2.08 hereof shall be held at such place, either within or without the State of Delaware, and at such time and date as the Board, by resolution, shall determine and as set forth in the notice of the meeting. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect directors to succeed those directors whose term expires at such annual meeting and may transact such other business as is properly brought before the stockholders in accordance with Section 2.08 hereof. SECTION 2.02. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called only by the President at the request in writing of a majority of the directors. Such request shall state the purpose of the proposed meeting. At each special meeting, the stockholders may transact only the business that is properly brought before the stockholders in accordance with Section 2.08 hereof. If a special meeting is adjourned to another time or place, the stockholders may only transact business at the adjourned meeting that may have properly been transacted at the original meeting. SECTION 2.03. NOTICE OF MEETINGS. Written notice, stating the place, date and time of any annual or special meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting in accordance with Delaware law, by or at the direction of the Board or the person or persons calling the meeting, not less than ten (10) nor more than sixty (60) days before the date of the meeting. If mailed, then such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, addressed to the stockholder at his address as it appears on the stock transfer books of the Corporation. SECTION 2.04. STOCKHOLDER LIST. The officer or agent who has charge of the stock ledger of the Corporation shall, at least ten (10) days before each meeting of stockholders, prepare a complete alphabetical list of the stockholders entitled to vote at the ensuing meeting, with the address and the number and class and series, if any, of shares held by each. Said list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be available for inspection at the meeting. SECTION 2.05. QUORUM. Except as otherwise required by the General Corporation Law of the State of Delaware (the "Act"), by the Certificate of Incorporation or by these Bylaws, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. When a specified item of business is required to be voted on by a class or series of stock, a majority of the shares of such class or series, represented in person or by proxy, shall constitute a quorum for the transaction of such item of business by that class or series. After a quorum has been established at a stockholders' meeting, the subsequent withdrawal of stockholders, so as to reduce the number of shares entitled to vote at the meeting below the number required for a quorum, shall not affect the validity of any action taken at the meeting or any adjournment thereof. SECTION 2.06. VOTING. If a quorum is present, the affirmative vote of a majority of the votes cast by shares entitled to vote on the subject matter shall be the act of the stockholders, unless the vote of a greater number or voting by class is required by the Act, the Certificate of Incorporation or these Bylaws. Where a separate vote by class is required, the affirmative vote of a majority of the 2 votes cast by shares of such class shall be the act of such class unless the vote of a greater number is required by the Act, the Certificate of Incorporation or these Bylaws. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders, except as may otherwise be provided by the Act or by the Certificate of Incorporation. The affirmative vote of a plurality of the votes cast by shares entitled to vote on the election of directors shall be sufficient to elect directors. Cumulative voting of shares is prohibited. A stockholder may vote either in person or by proxy executed in writing by the stockholder or his duly authorized attorney-in-fact. SECTION 2.07. ACTION WITHOUT A MEETING. Any action required to be taken or which may be taken at any annual or special meeting of stockholders of the Corporation, may be taken without a meeting, without prior notice and without a vote, if a written consent setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that no written consent shall be effective unless such consent (i) bears the date of signature by each stockholder signing such consent and (ii) is delivered to the Corporation within sixty (60) days of the date on which the earliest consent was delivered to the Corporation. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION 2.08. ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND OTHER BUSINESS. (a) Director Nominations. Subject to any rights of holders of Preferred Stock, only persons who are selected and recommended by the Board of Directors or a committee of the Board of Directors established to make nominations, or who are nominated by stockholders in accordance with the procedures set forth in this Section 2.08, shall be eligible for election at any annual or special stockholders meeting. Nominations of individuals for election to the Board of Directors of the Corporation at any annual meeting or any special meeting of stockholders at which directors are to be elected may be made by a stockholder of the Corporation entitled to vote for the election of directors at that meeting as hereinafter set forth. Nominations by stockholders shall be delivered to the Corporation in accordance with subsection 2.08(c) hereof and shall be made by written notice (a "Nomination Notice"), which shall set forth, (i) as to each individual nominated, (A) the name, date of birth, business address and residence address of such individual and (B) such other information regarding each individual nominated that is to be disclosed in solicitations of proxies for an election of directors, or is otherwise required, in each case pursuant to the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder, and, (ii) as to the stockholder submitting the Nomination Notice and any person acting in concert with such stockholder, (w) the name and business address of such stockholder and each such person, (x) the name and business address of such stockholder and each such person as they appear on the Corporation's books along with a representation that such stockholder is a stockholder of record of shares of the Corporation's capital stock entitled to vote at the meeting to which the notice pertains and intends to appear in person or by proxy at the meeting to nominate the person(s) in the notice, (y) a description of all arrangements, 3 understandings or relationships between the stockholder and each nominee and any other person or persons (naming such person(s)) pursuant to which the nomination(s) are to be made by the stockholder and (z) the class and number of shares of the Corporation which are beneficially owned by such stockholder and each such person. A written consent to being named in the proxy statement as a nominee and to serving as a director of the Corporation if elected, signed by each nominee, shall be filed with any Nomination Notice. If the presiding officer at any meeting of the stockholders determines that any nomination was not made in accordance with the procedures prescribed by these Bylaws, then he shall so declare to the stockholders at the meeting, and the defective nomination shall be disregarded. (b) Stockholder Business. At any meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (c) properly brought before an annual meeting by a stockholder of record (who was also a stockholder of record at the time of giving of the notice) in accordance with the procedures set forth in this Section 2.08. A stockholder's written notice (a "Business Notice") shall set forth, as to each matter the stockholder proposes to bring before the meeting: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and business address of record of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder and (iv) any material interest of the stockholder in such business. If the presiding officer at any meeting of stockholders determines that business was not properly brought before the meeting, then he shall so declare to the stockholders at the meeting, and any such business not properly brought before the meeting shall not be transacted. (c) Delivery of Notices. To be timely, any Nomination Notice or Business Notice must be delivered to, or mailed and received at, the principal executive office of the Corporation, (i) in the case of an annual meeting that is called for a date that is within thirty (30) days before or after the anniversary date of the immediately preceding annual meeting of stockholders, not less than sixty (60) days nor more than ninety (90) days prior to such anniversary date, and (ii) in the case of an annual meeting that is called for a date that is not within thirty (30) days before or after the anniversary date of the immediately preceding annual meeting, or in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. ARTICLE 3 - DIRECTORS SECTION 3.01. POWERS. The business of the Corporation shall be managed by or under the direction of the Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws specifically reserved to the stockholders. 4 SECTION 3.02. NUMBER AND TERM. The Board shall consist of not less than five (5) nor more than seven (7) directors as a majority of the Board shall from time to time specify. No reduction in the number of directors shall have the effect of shortening the term of any incumbent director and when so fixed such number shall continue to be the authorized number of directors until changed in accordance herewith. The Board shall be divided into three classes, as nearly equal in number as possible. Each of the Class I, Class II and Class III directors shall initially be elected to serve until the 1998, 1999 and 2000 annual meetings of stockholders, respectively, and, thereafter, the successors in each class of directors shall be elected to serve until the third (3rd) annual meeting of stockholders following his election and qualification. Each director shall serve until his successor shall have been elected and qualified or until his earlier resignation, removal or death. SECTION 3.03. RESIGNATIONS. Any director or member of a committee may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and, if no time be specified, at the time of its receipt by the Chairman of the Board, the President or the Secretary. The acceptance of a resignation shall not be necessary to make it effective, unless otherwise specified therein. SECTION 3.04. VACANCIES. Subject to any rights of holders of Preferred Stock, any vacancy occurring in the Board of Directors, including any vacancy created by reason of an increase in the number of directors, removal, resignation or death, may only be filled by the affirmative vote of a majority of the remaining directors then in office though less than a quorum of the Board of Directors, or by a sole remaining director, as the case may be, and the director(s) so chosen shall hold office until the next election of the class for which such director(s) has(have) been chosen, and until his(their) successors are duly elected and qualified, or until his(their) earlier resignation or removal. In the event of any increase or decrease in the number of directors, the additional or eliminated directors shall be classified or chosen so that all classes of directors shall remain or become as nearly equal in number as possible. SECTION 3.05. REMOVAL. Notwithstanding any other provision of these Bylaws to the contrary, a director may not be removed during his term except for cause. SECTION 3.06. MEETINGS; PLACE AND TIME. The Board may hold meetings, both regular and special, either within or without the State of Delaware, as it may from time to time determine. 5 SECTION 3.07. REGULAR ANNUAL MEETING. A regular annual meeting of the Board shall be held immediately following the annual meeting of stockholders at the same place or at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a majority of such Board shall be present. SECTION 3.08. OTHER REGULAR MEETINGS. Regular meetings of the Board may be held without notice at such time and at such place as shall from time to time be determined by the Board. SECTION 3.09. SPECIAL MEETINGS; NOTICE. Special meetings of the Board may be called by the President or by the written request of a majority of directors. Written notice of the time and place of special meetings shall be given to each director by either personal delivery, telegram, cablegram or telefax at least two (2) days before the meeting, or by notice mailed to each director at least five (5) days before the meeting. Notice of a meeting need not be given to any director who submits a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. SECTION 3.10. QUORUM. At all meetings of the Board, a majority of the directors then serving shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 3.11. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 3.12. TELEPHONE MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, members of the Board, or of any committee thereof, may participate in a meeting of the Board or such committee by means of conference telephone or similar communications equipment by means of which all persons 6 participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. SECTION 3.13. COMMITTEES OF DIRECTORS. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. Each such committee may be terminated by the Board at such time as the Board may determine. SECTION 3.14. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board shall have the authority to fix the compensation of directors. By resolution of the Board, the directors may be paid their expenses, if any, of attendance at each meeting of the Board (and any committee thereof), a fixed sum for attendance at each meeting of the Board (and any committee thereof), and a stated salary as director; provided, however, that any officer who is also a director shall not be entitled to receive a director's salary or fees for Board or Committee meeting attendance but shall be entitled to reimbursement for expenses. Nothing herein contained shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. SECTION 3.15. DIRECTOR CONFLICTS OF INTEREST. No contract or other transaction between the Corporation and one or more of its directors or between the Corporation and any other corporation, firm, association or entity in which one or more of the directors of this Corporation are directors or officers or are financially interested, shall be void or voidable solely because of such relationship or interest or solely because such director or directors are present at or participate in the meeting of the Board or a committee thereof which authorizes, approves or ratifies such contract or transaction or solely because his or their votes are counted for such purpose, if: A. The material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board or committee, and the Board or committee in good faith authorizes, approves or ratifies the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or B. The material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of such stockholders, or C. The contract or transaction is fair as to the corporation at the time it is authorized, approved or ratified by the Board, a committee or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board or a committee thereof which authorizes, approves or ratifies such contract or transaction. 7 ARTICLE 4 - OFFICERS SECTION 4.01. OFFICERS. The officers of the Corporation shall consist of a President, a Treasurer and a Secretary, shall be elected by the Board and shall hold office until their successors are elected and qualified, unless such officers resign, die or are removed prior thereto. In addition, the Board may elect a Chairman, a Vice Chairman, a Chief Executive Officer, a Chief Operating Officer, a Chief Financial Officer, a Controller, one or more Vice Presidents or Executive Vice Presidents, and such Assistant Secretaries and Assistant Treasurers or other officers as it may deem proper. None of the officers of the Corporation need be stockholders. The officers shall be elected at the first meeting of the Board after each annual meeting. More than two offices may be held by the same person, except the offices of President and Secretary, unless the Certificate of Incorporation or these Bylaws otherwise provide. The Board shall designate the President as the Chief Executive Officer of the Corporation. SECTION 4.02. CHAIRMAN; CHIEF EXECUTIVE OFFICER. The Chairman of the Board, if one is elected, shall preside at all meetings of the stockholders and of the Board. The Chairman shall also have and perform such other duties as from time to time may be assigned to him by the Board. The Chief Executive Officer shall also have and perform such other duties as from time to time may be assigned to him by the Board. SECTION 4.03. PRESIDENT. The President shall have and perform all duties incident to the office of President and such other duties as from time to time may be assigned to him by the Board. If designated as the Chief Executive Officer by the Board, the President shall, subject to the direction of the Board, supervise and control the business and management of the Corporation. If there is no Chairman, or in his absence, the President shall preside at all meetings of the stockholders. SECTION 4.04. CHIEF OPERATING OFFICER. The Chief Operating Officer, if one is elected, shall have and perform such duties as from time to time may be assigned to him by the Chief Executive Officer. SECTION 4.05. CHIEF FINANCIAL OFFICER. The Chief Financial Officer, if one is elected, shall have and perform such duties as from time to time may be assigned to him by the Chief Executive Officer. SECTION 4.06. VICE PRESIDENTS OR EXECUTIVE VICE PRESIDENTS. If Vice Presidents or Executive Vice Presidents be elected, they shall have such powers and shall perform such duties as shall be assigned to them by the President. 8 SECTION 4.07. TREASURER. The Treasurer shall be responsible for the administration of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. The Treasurer shall disburse the funds of the Corporation as may be ordered by the President, taking proper vouchers for such disbursements. He shall render to the President and the Board at the regular meetings of the Board, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board, he shall give the Corporation a bond for the faithful performance of his duties in such amount and with such surety as the Board shall prescribe. SECTION 4.08. SECRETARY. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these Bylaws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the the President or the Board. He shall record all the proceedings of the meetings of the Corporation and of the Board in a book to be kept for that purpose. He shall keep in safe custody the seal of the Corporation, and, when authorized by the Board, shall affix the same to any instrument requiring it, and when so affixed, it shall be attested by his signature or by the signature of any Assistant Secretary. SECTION 4.09. CONTROLLER, ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Controller, Assistant Treasurers and Assistant Secretaries, if any be elected, shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the the President. SECTION 4.10. REMOVAL; RESIGNATIONS; VACANCIES. Any officer elected or appointed by the Board may be removed at any time, either for or without cause, by the affirmative vote of a majority of the Board. Section 3.03 shall apply similarly to resignations of officers. Any vacancy occurring in any office of the Corporation may be filled by the Board. SECTION 4.11. COMPENSATION. The compensation of officers of the Corporation shall be established by the Board or any compensation committee thereof. The fact that an officer is also a director shall not preclude such person from receiving compensation as an officer, nor shall it affect the validity of any resolution by the Board fixing such compensation. The President shall have authority to establish the salaries of all other employees of the Corporation. 9 SECTION 4.12. MECHANICAL ENDORSEMENT. The President, any Executive Vice President, any Vice President, or the Secretary may authorize any endorsement on behalf of the Corporation to be made by such mechanical means or stamps as any of such officers may deem appropriate. ARTICLE 5 - MISCELLANEOUS SECTION 5.01. STOCK CERTIFICATES. (a) Issuance. The Corporation may issue the shares of stock authorized by its Certificate of Incorporation and none other. Shares may be issued only pursuant to a resolution adopted by the Board. Every holder of shares in the Corporation shall be entitled to have a certificate representing all shares to which he is entitled. No certificate shall be issued for any share until such share is fully paid. (b) Signatures. Certificates representing shares in the Corporation shall be signed by or in the name of the Corporation by the President, Executive Vice President or Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, and may be sealed with the seal of the Corporation or a facsimile thereof. Any or all of the signatures on a certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. (c) Form. Each certificate representing shares shall state upon the face thereof: the name of the Corporation; that the Corporation is organized under the laws of Delaware; the name of the person or persons to whom it is issued; the number and class of shares, and the designation of the series, if any, which such certificate represents; and the par value of each share represented by such certificate, or a statement that the shares are without par value. Each certificate shall otherwise comply, in all respects, with the requirements of law. (d) Transfer of Stock. The Corporation shall register a stock certificate presented to it for transfer if the certificate is properly endorsed by the holder of record or by his duly authorized attorney; provided, however, that the Corporation or its transfer agent may require the signature of such person to be guaranteed by a commercial bank or trust company or by a member of the New York or American Stock Exchange. (e) Lost, Stolen or Destroyed Certificates. The Board may authorize the Corporation to issue a new stock certificate in the place of any certificate previously issued if the holder of record of the certificate (i) makes proof in affidavit form that it has been lost, destroyed or wrongfully taken; (ii) requests the issue of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of any adverse claim; (iii) gives bond in such form, if any, as the Corporation may direct, to indemnify the Corporation, the transfer agent and registrar against any claim that may be made 10 on account of the alleged loss, destruction or theft of a certificate; and (iv) satisfies any other reasonable requirements imposed by the Corporation. (f) Transfer Agents; Registrars; Rules Respecting Certificate. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. The Board may make such further rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates of the Corporation. SECTION 5.02. STOCKHOLDERS RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted and, with respect to record dates to be established in connection with stockholders meetings, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, or, with respect to record dates to be established in connection with other actions, which shall not be more than sixty (60) days prior to such other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. SECTION 5.03. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware. SECTION 5.04. DIVIDENDS. Subject to the provisions of the Certificate of Incorporation, the Board may, out of funds legally available therefor at any regular or special meeting, declare dividends upon the capital stock of the Corporation as and when they deem expedient. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Before declaring any dividends, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board from time to time in its discretion deems proper for working capital or as a reserve fund to meet contingencies or for such other purpose as the Board shall deem conducive to the interests of the Corporation, and the Board may modify or abolish any such reserve. 11 SECTION 5.05. SEAL. The corporate seal shall be circular in form and shall contain the name of the Corporation and the words "CORPORATE SEAL, DELAWARE." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. SECTION 5.06. FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board. SECTION 5.07. CHECKS. All checks, drafts, or other orders for the payment of money and notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the Corporation, and in such manner as shall be determined from time to time by resolution of the Board. The Treasurer shall deposit all moneys and other valuables in the name and to the credit of the Corporation in such depositories as may be authorized by the President. SECTION 5.08. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required by these Bylaws to be given, personal notice is not meant unless expressly stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, airmail postage prepaid, addressed to the person entitled thereto at his address as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such mailing. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by statute. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation or these Bylaws, a waiver thereof in writing signed by the person or person entitled to said notice, whether before or after the time stated therein, shall be deemed proper notice. SECTION 5.09. BOOKS AND RECORDS. The Corporation shall keep correct and complete books and records of accounts and shall keep minutes of the proceedings of its stockholders, the Board and committees thereof. 12 ARTICLE 6 - INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS SECTION 6.01. INDEMNIFICATION. Any person who has been made or is made a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) (hereinafter a "proceeding"), by reason of the fact that he is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, fiduciary or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection therewith; provided, however, that the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) that was initiated by such person only if such proceeding (or part thereof) was authorized or ratified by the Board. The right to indemnification conferred in this Section 6.01 shall be a contract right. For purposes of this Section 6.01, reference to the "Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, fiduciaries and agents so that any person who is or was a director, officer, fiduciary or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, fiduciary or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall stand in the same position under the provisions of this Section 6.01, with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. SECTION 6.02. PROCEDURE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS. Any indemnification of a director or officer of the Corporation under Section 6.01 above or advance of expenses under Section 6.03 below shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer subject to the following provisions. If a determination by the Board that the director or officer is entitled to indemnification pursuant to this Article 6 is required, and the Corporation fails to respond within sixty (60) days to a written request for indemnity, the Corporation shall be deemed to have approved the request. If the Corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as granted by this Article 6 shall be enforceable by the director or officer in any court of competent jurisdiction. Such 13 person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Act for the Corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the Corporation. Neither the failure of the Corporation (including the Board, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Act, nor an actual determination by the Corporation (including the Board, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. SECTION 6.03. PAYMENT OF EXPENSES IN ADVANCE. Expenses (including reasonable attorneys' fees) incurred by any person described in Section 6.01 in defending an action, suit or proceeding referred to in Section 6.01 above may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board in the specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in Section 6.01. SECTION 6.04. INDEMNIFICATION NOT EXCLUSIVE. The indemnification and right to payment of expenses in advance of final disposition provided for under this Article 6 shall not be deemed exclusive of (i) any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, any agreement, any insurance purchased by the Corporation, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office or (ii) the power of the Corporation to indemnify any person who is or was an employee or agent of the Corporation or of another corporation, joint venture, trust or enterprise that he is serving or has served at the request of the Corporation, to the same extent and in the same situations and subject to the same determinations with respect to directors and officers. SECTION 6.05. OTHER. Any repeal or modification of this Article 6 by the stockholders of the Corporation shall be prospective only, and shall not adversely affect the indemnification of any officer or director of the Corporation existing at the time of such repeal or modification. 14 SECTION 6.06. INDEMNIFICATION AGREEMENTS. The Corporation may enter into indemnification agreements with its officers and directors. SECTION 6.07. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such and which insurance coverage may extend indemnification protection that is broader and more comprehensive than the indemnification benefits granted under this Article. SECTION 6.08. CONTINUED COVERAGE. Unless otherwise provided herein, the indemnification and advancement of expenses extended to a person that has qualified for indemnification and advancement of expenses under the provisions of this Article shall not be terminated when the person has ceased to be a director, officer, employee or agent for all causes of action against the indemnified party based on acts and events occurring prior to the termination of the relationship with the Corporation and shall inure to the benefit of the heirs, executors and administrators of such person. ARTICLE 7- AMENDMENTS In furtherance and not in limitation of the powers conferred by statute, the Board is expressly authorized to adopt, amend or repeal these Bylaws by a majority vote at any regular or special meeting of the Board or by written consent, subject to the power of the stockholders of the Corporation to amend or repeal any Bylaw whether adopted by the Board or the stockholders. ARTICLE 8- CONFLICT OF TERMS Except as otherwise explicitly provided in these Bylaws, if any provision contained in these Bylaws is in conflict with, inconsistent with, or imposes greater obligations or burdens than any provision in the Certificate of Incorporation, the provision contained in the Certificate of Incorporation shall govern and control to the extent of such conflict, inconsistency or obligation or burden. * * * * * * * * * * 15 EX-5 3 EXHIBIT 5.1 EXHIBIT 5.1 , 1997 Board of Directors HLM Design, Inc. 121 West Trade Street, Suite 2950 Charlotte, North Carolina Dear Sirs: We are acting as counsel to HLM Design, Inc., a Delaware corporation (the "Company"), in connection with the preparation, execution, filing and processing, with the Securities and Exchange Commission (the "Commission"), pursuant to the Securities Act of 1933, as amended (the "Act"), of a Registration Statement (No. 333- ) on Form S-1 (as amended through the date hereof, the "Registration Statement") and the issuance and sale of the Shares referred to below. This opinion is furnished to you for filing with the Commission pursuant to Item 601(b)(5) of Regulation S-K promulgated under the Act. The Registration Statement covers the issuance and sale of up to shares (the "Shares") of Common Stock, par value $.01 per share (the "Common Stock"), consisting of shares to be offered by the Company, and up to shares that the several underwriters to be party to the Underwriting Agreement referred to below (the "Underwriters") will have an option to purchase from the Company solely to cover over-allotments. The Shares are proposed to be sold pursuant to an Underwriting Agreement among the Company, Berthel Fisher & Co. Financial Services, Inc. and Westport Resources, Inc., as representatives of the Underwriters, a form of which Underwriting Agreement is filed as Exhibit 1.1 to the Registration Statement (the "Underwriting Agreement"). In our representation of the Company, we have examined the Registration Statement, the Underwriting Agreement, the Company's Amended and Restated Certificate of Incorporation and Bylaws, each as amended to date, all applicable actions of the Company's Board of Directors recorded in the Company's minute book, the form of certificate evidencing the Shares and such other documents as we have considered necessary for purposes of rendering the opinions expressed below. Board of Directors HLM Design, Inc. , 1997 Page 2 Based upon the foregoing, we are of the following opinion: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 2. The completion, execution, attestation, issuance and delivery against payment by the Company of the Shares pursuant to the terms of the Underwriting Agreement have been duly authorized by all necessary corporate action on behalf of the Company. 3. When (a) the Underwriting Agreement in definitive form shall have been duly completed by including therein the purchase price of the Shares and related terms, (b) the Underwriting Agreement as so completed shall have been duly executed and delivered by or on behalf of the Underwriters and by or on behalf of the Company, and (c) the Shares shall have been duly completed, executed, attested, issued, delivered and paid for in accordance with the terms of the Underwriting Agreement, then the Shares will be validly issued, fully paid and nonassessable. The opinions expressed herein are limited to the laws of the State of North Carolina, the General Corporation Law of the State of Delaware and the Act. We hereby consent to the use of this opinion letter as Exhibit 5.1 to the Registration Statement and to the use of our name under the heading "Legal Matters" in related prospectuses. In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. Very truly yours, EX-10 4 EXHIBIT 10.1 EXHIBIT 10.1 MANAGEMENT AND SERVICES AGREEMENT This Management and Services Agreement (the "Agreement") is entered into effective as of May 29, 1997, by and between HANSEN LIND MEYER INC., an Iowa corporation (hereinafter referred to as "HLM"), and HLM DESIGN, INC., a Delaware corporation (hereinafter referred to as "Design"). RECITALS WHEREAS, HLM provides architectural and engineering services through the services of duly licensed architects and engineers engaged by HLM as employees or independent contractors; WHEREAS, Design is in the business of providing comprehensive management services to architectural and engineering firms, including the provision of office space and equipment, the recruitment, hiring and employment of architectural and engineering personnel and support personnel, and the provision of billing and collection services; WHEREAS, Design has special expertise and experience in the operation, management and marketing of the non-architectural and non-engineering aspects of architectural and engineering firms of the type intended to be operated by HLM; and WHEREAS, HLM desires that Design provide the above-described services to HLM, and Design desires to provide such services to HLM, pursuant to the provisions of this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual promises of the parties hereto and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. Term of Agreement; Termination. Commencing on the effective date set forth above, and subject to the termination provisions set forth below, this Agreement shall continue in effect until the fortieth (40th) annual anniversary of the effective date hereof. Thereafter, this Agreement shall automatically renew for successive one (1) year terms, unless either party shall provide the other with written notice of termination at least thirty (30) days prior to the expiration of the then current term hereof. Notwithstanding the foregoing, either party hereto may terminate this Agreement at any time upon written notice to the other in the event of any of the following: a. The filing of a petition in voluntary bankruptcy or an assignment for the benefit of creditors by the other, or -2- upon other action taken or suffered, voluntarily or involuntarily, under any federal or state law for the benefit of debtors by the other, except for the filing of a petition in involuntary bankruptcy against the other which is dismissed within thirty (30) days thereafter; or b. In the event the other shall materially default in the performance of any duty or obligation imposed upon it by this Agreement and such default shall continue for a period of thirty (30) days after written notice thereof has been given to the defaulting party by the non-defaulting party. 2. Obligations of Design. a. General. HLM hereby appoints Design as its sole and exclusive manager and administrator of all of HLM's day-to-day business functions. HLM acknowledges and agrees that the purpose and intent of this Agreement is to relieve HLM to the maximum extent possible of the administrative, accounting, personnel and business aspects of HLM's operations, with Design assuming responsibility and being given any and all necessary authority to perform these functions. In connection with the foregoing, HLM hereby agrees that Design shall have the authority, duties and obligations set forth in Sections -3- 2.b. through 2.d. below, and HLM agrees to take no actions in contravention thereof without the express prior written consent of Design. b. Financial Planning. Design shall prepare such budgets, plans and policies as are necessary and appropriate in connection with the operations of HLM, reflecting the anticipated sources and uses of capital for HLM, and HLM's anticipated revenues and expenses. All operations of HLM shall be conducted in accordance with such budgets, plans and policies, which shall establish, by way of example and not limitation, the following: (1) the amounts, purpose and priority of all capital expenditures; (2) the amounts and sources of all additional capital, including without way of limitation the issuance of any and all additional capital stock and the incurring of any and all indebtedness; (3) the amounts, manner of payment and timing of all dividends; and -4- (4) the amount, form and manner of payment of all employee compensation and benefits, including without way of limitation all compensation and benefits pertaining to personnel employed or engaged by HLM, or pertaining to personnel employed or engaged by Design on HLM's behalf. c. Facilities, Equipment and Supplies. During the term of this Agreement, and all renewals and extensions hereof, Design shall analyze, select and negotiate for the lease and/or purchase by HLM or Design, as the case may be, of (1) suitable office facilities ("Offices") in which HLM can provide architectural and engineering services, (2) such architectural and engineering equipment, office equipment, furniture, fixtures, furnishings and leasehold improvements (collectively, "Equipment") as necessary for the performance by HLM of its architectural and engineering services, and (3) business supplies of every kind, name or nature, which may reasonably be required by HLM for its operations. Design shall have the authority to negotiate for the purchase or lease of any or all such items on HLM's behalf, either in HLM's or Design's name, as shall be deemed appropriate by Design in its sole discretion, and all such items shall in all events be subject to, and leased or purchased in accordance -5- with, the budgets, plans and policies referenced in Section 2.b. above. d. Development, Management and Administrative Services. During the term of this Agreement, and all renewals and extensions hereof, Design shall furnish to HLM, or assist HLM in obtaining, as deemed appropriate by Design in its sole discretion, all of the non-architectural and non-engineering development, management and administrative services as may be needed by HLM in connection with HLM's operations. Additionally, Design shall provide HLM with such advice and supervision regarding all aspects of HLM's architectural and engineering services as HLM may request from time to time, subject in all events to the limitations set forth in Section 4 hereof. Such non-architectural and non-engineering development, management and administrative services shall include, by way of example and not limitation, the following: (1) Bookkeeping and Accounts. Design shall establish and maintain all bookkeeping and accounting services necessary and appropriate to support the Offices, including, without limitation, maintenance, custody and supervision of all business records, papers, documents, ledgers, journals and reports, and the -6- preparation, distribution and recordation of all bills and statements for professional services rendered by HLM (collectively, "Books and Records"). Notwithstanding the foregoing, HLM shall be responsible for maintaining full and accurate accounting records of all services rendered and such additional information as may be required in order for HLM to satisfy any and all applicable reporting requirements. (2) General Administrative Services. Design shall provide HLM with overall supervision and management, including the maintenance and repair, of the Offices, and of all Equipment located in or at the Offices. (3) Contract Negotiation and Administration. Design shall negotiate and administer all non- architectural and non-engineering aspects of all agreements pertaining to the provision of architectural and engineering services by HLM to third parties ("Architectural and Engineering Agreements"). By way of example and not limitation, Design shall have the authority to negotiate and administer the provisions of the Architectural and Engineering Agreements pertaining to such matters as pricing and scheduling, and shall also -7- provide HLM with such advice and supervision regarding all other aspects of the Architectural and Engineering Agreements as HLM may request from time to time, subject in all events to the limitations set forth in Section 4 hereof. Additionally, Design shall negotiate and administer all aspects of HLM's agreements which do not pertain directly to the provision of architectural or engineering services by HLM to third parties ("General Business Contracts"). (4) Personnel. Subject to the provisions of Section 4 hereof, Design shall provide such personnel to HLM as Design shall determine in its sole discretion to be necessary to enable HLM to perform all services contemplated under the Architectural and Engineering Agreements and the General Business Contracts. Design shall provide such personnel by either (1) engaging such personnel directly on HLM's behalf (for example, as employees or independent contractors of HLM), or (2) engaging such personnel directly (for example, as employees or independent contractors of Design) and then leasing or subcontracting such personnel to HLM. Design shall have the sole discretion to determine the manner in which such personnel are provided to HLM. In no event -8- shall Design provide or be required to provide architect or engineer employees or independent contractors (whether licensed or unlicensed) to HLM in any manner not in compliance with all applicable codes, rules and regulations adopted by any authority regulating the licensing of architects or engineers for the applicable jurisdiction. Design shall advise HLM with respect to the hiring and termination of all HLM personnel, and shall determine compensation for all HLM and all Design personnel, including determination of salaries, fringe benefits, bonuses, health and disability insurance, workers' compensation insurance, and any other benefits that each such employee shall receive. HLM shall compensate all HLM personnel (including those leased or subcontracted to HLM by Design) and make any and all applicable withholding filings and payments in connection therewith. Additionally, Design shall manage and supervise any licensed personnel employed or engaged by HLM, or employed or engaged by Design on behalf of HLM, regarding those aspects of their employment that do not involve performance under the scope of their licensure; provided, however, that HLM shall manage and supervise all activities of such licensed personnel performed under the scope of their licensure. -9- (5) Security and Maintenance. Design shall advise HLM with respect to all services and personnel necessary to provide HLM with proper security, maintenance, and cleanliness of the Offices and the Equipment. (6) Architectural and Engineering Recruiting and Training. Design shall, in its sole discretion, either perform on HLM's behalf, or assist HLM in performing, all recruiting, screening and evaluating of prospective architect and engineer employees and contractors for HLM, and Design shall assist HLM in training HLM's architects and engineers in the delivery of architectural and engineering services at the Offices in a manner consistent with HLM's and Design's established standards, practices, procedures and policies. (7) Insurance. Design shall, in its sole discretion, either provide directly or advise and direct HLM with respect to selecting and negotiating for the provision of professional liability, commercial general liability and property insurance to protect against loss in the nature of fire, other catastrophe, theft, business -10- interruption, general liability, and non-architectural and non-engineering negligence. (8) Billing and Collections. In order to relieve HLM of the administrative burden of handling the billing and collection of sums due under Architectural and Engineering Agreements, Design shall be responsible, on behalf of and for HLM, for billing and collecting the charges made with respect to Architectural and Engineering Agreements and any or all other services provided at the Offices; provided that responsibility for specific accounts may be retained by HLM at the mutual agreement of HLM and Design. In such event HLM agrees that it will keep and provide to Design all invoices, documents, evidence and records necessary for the purpose of supporting the fees charged for all architectural and engineering services from time to time. It is expressly understood that the extent to which Design will endeavor to collect such charges, the methods of collecting, the settling of disputes with respect to charges, and the writing off of charges that may be or appear to be uncollectible shall at all times be within the sole discretion of Design (but subject to all applicable governmental regulations and the terms and conditions -11- of applicable agreements), and that Design does not guarantee the extent to which any charges billed will be collected. At HLM's request, Design will reassign to HLM for collection by HLM, any accounts which Design has determined to be uncollectible. (9) Bank Accounts and Disbursements. During the term of this Agreement, Design shall have access to any and all bank accounts of HLM, and in connection therewith HLM hereby appoints Design for the term hereof as its lawful attorney-in-fact to deposit in such accounts fees generated from HLM's architectural and engineering practice which are collected by Design, and to make withdrawals from such accounts for the payment of expenses arising from or relating to HLM's operations, for Design's compensation hereunder, and for all other costs, expenses and disbursements which are required or authorized by this Agreement. Such withdrawals and payments may be made by Design at any time and from time to time as Design deems appropriate in its sole discretion. For administrative convenience, HLM shall not make any withdrawal(s) from such accounts without the prior written consent of Design. HLM agrees to execute from time to time any and all additional documents -12- required by the banks at which HLM's accounts are maintained to effectuate the power of attorney granted above. (10) Approval of Stock Transfers. Design shall have the sole authority and discretion to approve or deny on behalf of HLM any and all proposals by stockholders of HLM to encumber, sell, pledge, give or otherwise transfer HLM capital stock. (11) Marketing Support. Design shall provide HLM with such marketing support as Design in its sole discretion deems appropriate to develop, enhance and continue HLM's practice. Such support may include, by way of example and not limitation, making available such brochures, literature and sales aids as Design develops, providing HLM with access to pertinent economic and market data acquired or developed by Design, and developing and implementing a comprehensive marketing plan designed to foster client relations and enhance HLM's name recognition as a high quality provider of professional architectural and engineering services. -13- 3. Compliance with Architectural and Engineering Agreements. Design agrees to perform its duties hereunder so as to comply with HLM's obligations under the Architectural and Engineering Agreements. 4. Conduct of Architectural and Engineering Practice. HLM agrees to assign a duly licensed architect and, to the extent engineering services are provided, a duly licensed engineer to assure that its Offices are adequately staffed with such architectural and engineering personnel as may be necessary to efficiently perform architectural and engineering services at such Offices. Notwithstanding any provision in this Agreement to the contrary, Design shall have no authority, directly or indirectly, to perform, and shall not perform, any function of HLM's operations pertaining to services ("Professional Services") which are required to be performed by duly licensed architects and/or engineers pursuant to any and all applicable codes, or rules or regulations adopted by any authority regulating the licensing of architects (the "Architecture Board") or engineers (the "Engineering Board"). Design may, however, advise HLM as to the relationship between HLM's performance of Professional Services and the overall administrative and business functions of HLM's operations. To the extent Design assists HLM in performing Professional Services, all personnel employed or engaged by HLM or by Design on HLM's behalf -14- shall be subject to the professional direction and supervision of HLM, and in the performance of such Professional Services, such personnel shall not be subject to any direction or control by, or liability to, Design, except as may be specifically authorized by HLM in accordance with applicable codes, rules or regulations. To the extent any provision of this Agreement is determined to violate any provision of the applicable codes, or any rule or regulation of the Architecture Board or of the Engineering Board, then such provision of this Agreement shall be deemed modified to the minimum extent necessary to cure such violation. 5. Non-Exclusive Nature of Design's Duties. The parties acknowledge that Design is in the business of providing services of the nature provided to HLM hereunder to architectural and engineering firms located throughout the United States, and that Design may currently be a party to or may at any time hereafter enter into contracts with other architectural and engineering firms in that regard. Additionally, Design may also directly or indirectly provide architectural and engineering services from time to time. No such activities by Design shall be deemed a breach of or a conflict with the duties of Design hereunder. -15- 6. Design's Compensation. As compensation for the provision of its services hereunder, Design shall be paid, no less frequently than on a quarterly basis, an estimate of the balance, if any, of HLM's cash flow (as determined in accordance with generally accepted accounting principles applied on a consistent basis) following the payment by HLM or by Design on HLM's behalf of all of HLM's expenses, and the deduction from such cash flow of an amount equal to one percent (1.00%) of HLM's net profits (as determined in accordance with generally accepted accounting principles applied on a consistent basis) for such time period as has elapsed subsequent to the last payment to Design (such deducted amount to be retained by HLM as compensation for services provided to HLM by HLM or by HLM's personnel, and to be distributed or retained by HLM as HLM deems appropriate in its sole discretion). 7. Ownership of Books and Records. The books and records generated and maintained by each of the parties hereto shall be and remain the property of each such party. HLM agrees to make all of its books and records (subject to applicable ethical and legal confidentiality requirements) available for inspection, examination or copying by duly authorized representatives of Design from time to time throughout the term hereof, and upon written request by Design to HLM following the termination hereof, all to enable Design to better perform its duties hereunder. -16- 8. Liability and Indemnification. Neither Design nor its stockholders, directors, officers, employees or agents shall have any liability for action taken or omitted by such person(s) in the performance of its duties hereunder if such action or omission is taken in good faith and without negligence. Each party to this Agreement respectively assumes responsibility for liability, actual or alleged, arising from its respective activities performed pursuant to this Agreement. HLM agrees, during the term of this Agreement and thereafter, to the extent necessary to effectuate the purpose hereof, to indemnify and hold harmless Design against any claims or liabilities arising under this Agreement which arise out of or in connection with the Architectural and Engineering Agreements, the General Business Contracts or the actions of HLM's architect and engineer employees or contractors (including, without way of limitation, those employees and contractors employed or engaged by Design on HLM's behalf or otherwise). 9. Confidentiality. HLM acknowledges that due to the nature of this Agreement, HLM will have access to information of a proprietary nature owned by Design including, but not limited to, any and all computer programs (whether or not completed or in use) and any and all operating manuals or similar materials which constitute the non-architectural and non-engineering systems, -17- policies and procedures, and methods of doing business, developed by Design for the operation of facilities managed by Design. Consequently, HLM acknowledges and agrees that Design has a proprietary interest in all such information and that all such information constitutes confidential and proprietary information and the trade secret property of Design. HLM hereby waives any and all right, title and interest in and to such confidential information and trade secrets and agrees to return all copies of such confidential information and trade secrets to Design, at HLM's expense, upon the termination of the Agreement. HLM further acknowledges and agrees that Design is entitled to prevent its competitors from obtaining and utilizing its confidential information and trade secrets. Therefore, HLM agrees to hold Design's confidential information and trade secrets in strictest confidence and not to disclose them to or allow them to be disclosed to or used by, directly or indirectly, any person or entity other than those persons or entities who are employed by or affiliated with Design or HLM, either during the term of this Agreement, or at any time after the expiration or sooner termination of this Agreement, without the prior written consent of Design. HLM agrees to require each independent contractor and employee of HLM, and any such persons or entities to whom such information is disclosed for the purpose of performance of Design's -18- or HLM's obligations under this Agreement, to execute a "Confidentiality Agreement" in a form acceptable to Design, upon the request of Design. HLM acknowledges and agrees that a breach of this Section 9 will result in irreparable harm to Design which cannot be reasonably or adequately compensated in damages, and therefore Design shall be entitled to injunctive and equitable relief to prevent a breach and to secure enforcement thereof, in addition to any other relief or award to which Design may be entitled. 10. Cooperation. HLM and Design agree that they shall at all times maintain an effective liaison and close cooperation with each other to facilitate the provision of high quality and cost effective architectural and engineering services. Each of the parties agrees to cooperate fully with each other in connection with the performance of their respective obligations under this Agreement, and both parties agree to employ their best efforts to resolve any dispute that may arise under or in connection with this Agreement. HLM shall provide to Design full and complete access to HLM's premises, and to HLM's Books and Records (as defined in Section 2.d.(1) hereof), in order that Design may perform its functions hereunder. Notwithstanding any other provisions contained herein, Design shall not be liable to HLM, and shall not -19- be deemed to be in default hereunder, for the failure to perform or provide any of the supplies, services, personnel, or other obligations to be performed or provided by Design pursuant to this Agreement if such failure is a result of a labor dispute, act of God, or any other event which is beyond the reasonable control of Design. 11. Arbitration. If a dispute or matter in controversy arises between the parties hereto which they are unable to resolve to their mutual satisfaction within ten (10) days of written notice from one to the other of the existence of such dispute, then either party may notify the other party in writing (the "Notice") that the dispute be submitted to binding arbitration as provided herein. Such arbitration shall take place in Charlotte, North Carolina, in accordance with the Rules of Commercial Arbitration of the American Arbitration Association, or its successor. The provisions of ss.ss. 1-567.1 et seq. of the General Statutes of North Carolina, or any successor or amended statute or law containing similar provisions, shall apply in any such arbitration. Any arbitration pursuant to this Agreement shall be conducted by one (1) arbitrator. The judgment upon the award rendered in any such arbitration shall be final and binding upon the parties and may be entered in any court having jurisdiction over any party. -20- 12. Waiver of Violation. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. 13. Miscellaneous. a. Notices. All notices, offers and acceptances or rejections thereof required to be given hereunder, shall be given by certified mail to the parties hereto at the addresses listed below, or at such other address as may be stated from time to time, and shall be deemed delivered upon deposit in the United States mail, postage prepaid: -21- To HLM: Hansen Lind Meyer Inc. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon To Design: HLM Design, Inc. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon With a Copy to: Shirley J. Linn, Esq. Underwood Kinsey Warren & Tucker, P.A. 2020 Charlotte Plaza 201 S. College Street Charlotte, NC 28244-2020 b. Severability. The provisions of this Agreement shall be separable and a determination that any provision of this Agreement, or subpart thereof, is either unenforceable or void shall not affect the validity of any other provision of this Agreement, or subpart thereof. Wherever possible all provisions shall be interpreted so as not to be unenforceable and any court of competent jurisdiction is authorized and directed by the parties hereto to enforce any otherwise unenforceable provision in part, to modify it, to enforce it only to a degree and not fully, or otherwise to enforce that provision only in a manner and to an extent, that renders the provision valid or enforceable. The intent of the parties is that this Agreement be enforceable and enforced to the maximum extent possible after excising (or deeming excised) all -22- invalid or unenforceable provisions, whether or not the remaining provisions are grammatically correct. c. Amendments or Modifications. This Agreement constitutes the entire understanding between the parties hereto with respect to the subject matter hereof, and no changes, amendments or alterations shall be effective unless agreed to in writing by both parties hereto, provided that no such amendment shall conflict with applicable laws or regulations. d. Relationship of the Parties. The relationship of the parties hereto shall at all times be that of independent contractors. Except as expressly provided herein, nothing contained in this Agreement shall be construed to constitute either party as an agent, legal representative, partner, joint venturer or employee of the other, and neither party hereto shall have the power to bind the other with respect to any obligation to any third party. e. Assignability. Design may assign this Agreement, and/or transfer, assign or delegate any or all of its rights, obligations and responsibilities under this Agreement, without the consent of HLM, to one or more of Design's Affiliated -23- Entities and/or one or more of Pacific Capital, L.P., a Delaware limited partnership, and/or Equitas, L.P., a Delaware limited partnership. For purposes of this Agreement, "Affiliated Entities" are defined to include any and all entities which: (1) are owned by Design, (2) are under common control with Design, (3) are licensees of Design, or (4) are otherwise affiliated with Design. Except as expressly provided above, this Agreement is not transferrable or assignable by either party. f. Governing Law. This Agreement shall be construed in accordance with the laws of the State of North Carolina. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives. HLM DESIGN, INC. By: /s/ Joseph M. Harris _________________________________ President HANSEN LIND MEYER INC. By: /s/ Vernon B. Brannon _________________________________ Senior Vice President -24- EX-10 5 EXHIBIT 10.2 EXHIBIT 10.2 MANAGEMENT AND SERVICES AGREEMENT This Management and Services Agreement (the "Agreement") is entered into effective as of May 29, 1997, by and between HLM OF NORTH CAROLINA, P.C., a North Carolina corporation (hereinafter referred to as "HLM"), and HLM DESIGN, INC., a Delaware corporation (hereinafter referred to as "Design"). RECITALS WHEREAS, HLM provides architectural and engineering services through the services of duly licensed architects and engineers engaged by HLM as employees or independent contractors; WHEREAS, Design is in the business of providing comprehensive management services to architectural and engineering firms, including the provision of office space and equipment, the recruitment, hiring and employment of architectural and engineering personnel and support personnel, and the provision of billing and collection services; WHEREAS, Design has special expertise and experience in the operation, management and marketing of the non-architectural and non-engineering aspects of architectural and engineering firms of the type intended to be operated by HLM; and WHEREAS, HLM desires that Design provide the above-described services to HLM, and Design desires to provide such services to HLM, pursuant to the provisions of this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual promises of the parties hereto and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. TERM OF AGREEMENT; TERMINATION. Commencing on the effective date set forth above, and subject to the termination provisions set forth below, this Agreement shall continue in effect until the fortieth (40th) annual anniversary of the effective date hereof. Thereafter, this Agreement shall automatically renew for successive one (1) year terms, unless either party shall provide the other with written notice of termination at least thirty (30) days prior to the expiration of the then current term hereof. Notwithstanding the foregoing, either party hereto may terminate this Agreement at any time upon written notice to the other in the event of any of the following: a. The filing of a petition in voluntary bankruptcy or an assignment for the benefit of creditors by the other, or upon other action taken or suffered, voluntarily or involuntarily, under any federal or state law for the benefit -2- of debtors by the other, except for the filing of a petition in involuntary bankruptcy against the other which is dismissed within thirty (30) days thereafter; or b. In the event the other shall materially default in the performance of any duty or obligation imposed upon it by this Agreement and such default shall continue for a period of thirty (30) days after written notice thereof has been given to the defaulting party by the non-defaulting party. 2. OBLIGATIONS OF DESIGN. a. GENERAL. HLM hereby appoints Design as its sole and exclusive manager and administrator of all of HLM's day-to-day business functions. HLM acknowledges and agrees that the purpose and intent of this Agreement is to relieve HLM to the maximum extent possible of the administrative, accounting, personnel and business aspects of HLM's operations, with Design assuming responsibility and being given any and all necessary authority to perform these functions. In connection with the foregoing, HLM hereby agrees that Design shall have the authority, duties and obligations set forth in Sections 2.b. through 2.d. below, and HLM agrees to take no actions in contravention thereof without the express prior written consent of Design. -3- b. FINANCIAL PLANNING. Design shall prepare such budgets, plans and policies as are necessary and appropriate in connection with the operations of HLM, reflecting the anticipated sources and uses of capital for HLM, and HLM's anticipated revenues and expenses. All operations of HLM shall be conducted in accordance with such budgets, plans and policies, which shall establish, by way of example and not limitation, the following: (1) the amounts, purpose and priority of all capital expenditures; (2) the amounts and sources of all additional capital, including without way of limitation the issuance of any and all additional capital stock and the incurring of any and all indebtedness; (3) the amounts, manner of payment and timing of all dividends; and (4) the amount, form and manner of payment of all employee compensation and benefits, including without way of limitation all compensation and benefits pertaining to personnel employed or engaged by HLM, or pertaining to personnel employed or engaged by Design on HLM's behalf. -4- c. FACILITIES, EQUIPMENT AND SUPPLIES. During the term of this Agreement, and all renewals and extensions hereof, Design shall analyze, select and negotiate for the lease and/or purchase by HLM or Design, as the case may be, of (1) suitable office facilities ("Offices") in which HLM can provide architectural and engineering services, (2) such architectural and engineering equipment, office equipment, furniture, fixtures, furnishings and leasehold improvements (collectively, "Equipment") as necessary for the performance by HLM of its architectural and engineering services, and (3) business supplies of every kind, name or nature, which may reasonably be required by HLM for its operations. Design shall have the authority to negotiate for the purchase or lease of any or all such items on HLM's behalf, either in HLM's or Design's name, as shall be deemed appropriate by Design in its sole discretion, and all such items shall in all events be subject to, and leased or purchased in accordance with, the budgets, plans and policies referenced in Section 2.b. above. -5- d. DEVELOPMENT, MANAGEMENT AND ADMINISTRATIVE SERVICES. During the term of this Agreement, and all renewals and extensions hereof, Design shall furnish to HLM, or assist HLM in obtaining, as deemed appropriate by Design in its sole discretion, all of the non-architectural and non-engineering development, management and administrative services as may be needed by HLM in connection with HLM's operations. Additionally, Design shall provide HLM with such advice and supervision regarding all aspects of HLM's architectural and engineering services as HLM may request from time to time, subject in all events to the limitations set forth in Section 4 hereof. Such non-architectural and non-engineering development, management and administrative services shall include, by way of example and not limitation, the following: (1) BOOKKEEPING AND ACCOUNTS. Design shall establish and maintain all bookkeeping and accounting services necessary and appropriate to support the Offices, including, without limitation, maintenance, custody and supervision of all business records, papers, documents, ledgers, journals and reports, and the preparation, distribution and recordation of all bills and statements for professional services rendered by HLM (collectively, "Books and Records"). Notwithstanding the foregoing, HLM shall be responsible for maintaining full and accurate accounting records of all services rendered and such additional information as may be required in order for HLM to satisfy any and all applicable reporting requirements. (2) GENERAL ADMINISTRATIVE SERVICES. Design shall provide HLM with overall supervision and management, -6- including the maintenance and repair, of the Offices, and of all Equipment located in or at the Offices. (3) CONTRACT NEGOTIATION AND ADMINISTRATION. Design shall negotiate and administer all non- architectural and non-engineering aspects of all agreements pertaining to the provision of architectural and engineering services by HLM to third parties ("Architectural and Engineering Agreements"). By way of example and not limitation, Design shall have the authority to negotiate and administer the provisions of the Architectural and Engineering Agreements pertaining to such matters as pricing and scheduling, and shall also provide HLM with such advice and supervision regarding all other aspects of the Architectural and Engineering Agreements as HLM may request from time to time, subject in all events to the limitations set forth in Section 4 hereof. Additionally, Design shall negotiate and administer all aspects of HLM's agreements which do not pertain directly to the provision of architectural or engineering services by HLM to third parties ("General Business Contracts"). (4) PERSONNEL. Subject to the provisions of Section 4 hereof, Design shall provide such personnel to HLM as Design shall determine in its sole discretion to -7- be necessary to enable HLM to perform all services contemplated under the Architectural and Engineering Agreements and the General Business Contracts. Design shall provide such personnel by either (1) engaging such personnel directly on HLM's behalf (for example, as employees or independent contractors of HLM), or (2) engaging such personnel directly (for example, as employees or independent contractors of Design) and then leasing or subcontracting such personnel to HLM. Design shall have the sole discretion to determine the manner in which such personnel are provided to HLM. In no event shall Design provide or be required to provide architect or engineer employees or independent contractors (whether licensed or unlicensed) to HLM in any manner not in compliance with all applicable codes, rules and regulations adopted by any authority regulating the licensing of architects or engineers for the applicable jurisdiction. Design shall advise HLM with respect to the hiring and termination of all HLM personnel, and shall determine compensation for all HLM and all Design personnel, including determination of salaries, fringe benefits, bonuses, health and disability insurance, workers' compensation insurance, and any other benefits that each such employee shall receive. HLM shall compensate all HLM personnel (including those leased or subcontracted to HLM by Design) and make any and all -8- applicable withholding filings and payments in connection therewith. Additionally, Design shall manage and supervise any licensed personnel employed or engaged by HLM, or employed or engaged by Design on behalf of HLM, regarding those aspects of their employment that do not involve performance under the scope of their licensure; provided, however, that HLM shall manage and supervise all activities of such licensed personnel performed under the scope of their licensure. (5) SECURITY AND MAINTENANCE. Design shall advise HLM with respect to all services and personnel necessary to provide HLM with proper security, maintenance, and cleanliness of the Offices and the Equipment. (6) ARCHITECTURAL AND ENGINEERING RECRUITING AND TRAINING. Design shall, in its sole discretion, either perform on HLM's behalf, or assist HLM in performing, all recruiting, screening and evaluating of prospective architect and engineer employees and contractors for HLM, and Design shall assist HLM in training HLM's architects and engineers in the delivery of architectural and engineering services at the Offices in a manner consistent with HLM's and Design's established standards, practices, procedures and policies. -9- (7) INSURANCE. Design shall, in its sole discretion, either provide directly or advise and direct HLM with respect to selecting and negotiating for the provision of professional liability, commercial general liability and property insurance to protect against loss in the nature of fire, other catastrophe, theft, business interruption, general liability, and non-architectural and non-engineering negligence. (8) BILLING AND COLLECTIONS. In order to relieve HLM of the administrative burden of handling the billing and collection of sums due under Architectural and Engineering Agreements, Design shall be responsible, on behalf of and for HLM, for billing and collecting the charges made with respect to Architectural and Engineering Agreements and any or all other services provided at the Offices; provided that responsibility for specific accounts may be retained by HLM at the mutual agreement of HLM and Design. In such event HLM agrees that it will keep and provide to Design all invoices, documents, evidence and records necessary for the purpose of supporting the fees charged for all architectural and engineering services from time to time. It is expressly understood that the extent to which Design will endeavor to collect such charges, the methods of collecting, the settling of disputes with respect to charges, and the -10- writing off of charges that may be or appear to be uncollectible shall at all times be within the sole discretion of Design (but subject to all applicable governmental regulations and the terms and conditions of applicable agreements), and that Design does not guarantee the extent to which any charges billed will be collected. At HLM's request, Design will reassign to HLM for collection by HLM, any accounts which Design has determined to be uncollectible. (9) BANK ACCOUNTS AND DISBURSEMENTS. During the term of this Agreement, Design shall have access to any and all bank accounts of HLM, and in connection therewith HLM hereby appoints Design for the term hereof as its lawful attorney-in-fact to deposit in such accounts fees generated from HLM's architectural and engineering practice which are collected by Design, and to make withdrawals from such accounts for the payment of expenses arising from or relating to HLM's operations, for Design's compensation hereunder, and for all other costs, expenses and disbursements which are required or authorized by this Agreement. Such withdrawals and payments may be made by Design at any time and from time to time as Design deems appropriate in its sole discretion. For administrative convenience, HLM shall not make any withdrawal(s) from such accounts without the -11- prior written consent of Design. HLM agrees to execute from time to time any and all additional documents required by the banks at which HLM's accounts are maintained to effectuate the power of attorney granted above. (10) APPROVAL OF STOCK TRANSFERS. Design shall have the sole authority and discretion to approve or deny on behalf of HLM any and all proposals by stockholders of HLM to encumber, sell, pledge, give or otherwise transfer HLM capital stock. (11) MARKETING SUPPORT. Design shall provide HLM with such marketing support as Design in its sole discretion deems appropriate to develop, enhance and continue HLM's practice. Such support may include, by way of example and not limitation, making available such brochures, literature and sales aids as Design develops, providing HLM with access to pertinent economic and market data acquired or developed by Design, and developing and implementing a comprehensive marketing plan designed to foster client relations and enhance HLM's name recognition as a high quality provider of professional architectural and engineering services. -12- 3. COMPLIANCE WITH ARCHITECTURAL AND ENGINEERING AGREEMENTS. Design agrees to perform its duties hereunder so as to comply with HLM's obligations under the Architectural and Engineering Agreements. 4. CONDUCT OF ARCHITECTURAL AND ENGINEERING PRACTICE. HLM agrees to assign a duly licensed architect and, to the extent engineering services are provided, a duly licensed engineer to assure that its Offices are adequately staffed with such architectural and engineering personnel as may be necessary to efficiently perform architectural and engineering services at such Offices. Notwithstanding any provision in this Agreement to the contrary, Design shall have no authority, directly or indirectly, to perform, and shall not perform, any function of HLM's operations pertaining to services ("Professional Services") which are required to be performed by duly licensed architects and/or engineers pursuant to any and all applicable codes, or rules or regulations adopted by any authority regulating the licensing of architects (the "Architecture Board") or engineers (the "Engineering Board"). Design may, however, advise HLM as to the relationship between HLM's performance of Professional Services and the overall administrative and business functions of HLM's operations. To the extent Design assists HLM in performing Professional Services, all personnel employed or engaged by HLM or by Design on HLM's behalf shall be subject to the professional direction and supervision of HLM, and in the performance of such Professional Services, such personnel -13- shall not be subject to any direction or control by, or liability to, Design, except as may be specifically authorized by HLM in accordance with applicable codes, rules or regulations. To the extent any provision of this Agreement is determined to violate any provision of the applicable codes, or any rule or regulation of the Architecture Board or of the Engineering Board, then such provision of this Agreement shall be deemed modified to the minimum extent necessary to cure such violation. 5. NON-EXCLUSIVE NATURE OF DESIGN'S DUTIES. The parties acknowledge that Design is in the business of providing services of the nature provided to HLM hereunder to architectural and engineering firms located throughout the United States, and that Design may currently be a party to or may at any time hereafter enter into contracts with other architectural and engineering firms in that regard. Additionally, Design may also directly or indirectly provide architectural and engineering services from time to time. No such activities by Design shall be deemed a breach of or a conflict with the duties of Design hereunder. 6. DESIGN'S COMPENSATION. As compensation for the provision of its services hereunder, Design shall be paid, no less frequently than on a quarterly basis, an estimate of the balance, if any, of HLM's cash flow (as determined in accordance with generally accepted accounting principles applied on a consistent basis) following the -14- payment by HLM or by Design on HLM's behalf of all of HLM's expenses, and the deduction from such cash flow of an amount equal to one percent (1.00%) of HLM's net profits (as determined in accordance with generally accepted accounting principles applied on a consistent basis) for such time period as has elapsed subsequent to the last payment to Design (such deducted amount to be retained by HLM as compensation for services provided to HLM by HLM or by HLM's personnel, and to be distributed or retained by HLM as HLM deems appropriate in its sole discretion). 7. OWNERSHIP OF BOOKS AND RECORDS. The books and records generated and maintained by each of the parties hereto shall be and remain the property of each such party. HLM agrees to make all of its books and records (subject to applicable ethical and legal confidentiality requirements) available for inspection, examination or copying by duly authorized representatives of Design from time to time throughout the term hereof, and upon written request by Design to HLM following the termination hereof, all to enable Design to better perform its duties hereunder. 8. LIABILITY AND INDEMNIFICATION. Neither Design nor its stockholders, directors, officers, employees or agents shall have any liability for action taken or omitted by such person(s) in the performance of its duties hereunder if such action or omission is taken in good faith and without negligence. Each party to this Agreement respectively assumes responsibility for liability, actual -15- or alleged, arising from its respective activities performed pursuant to this Agreement. HLM agrees, during the term of this Agreement and thereafter, to the extent necessary to effectuate the purpose hereof, to indemnify and hold harmless Design against any claims or liabilities arising under this Agreement which arise out of or in connection with the Architectural and Engineering Agreements, the General Business Contracts or the actions of HLM's architect and engineer employees or contractors (including, without way of limitation, those employees and contractors employed or engaged by Design on HLM's behalf or otherwise). 9. ONFIDENTIALITY. HLM acknowledges that due to the nature of this Agreement, HLM will have access to information of a proprietary nature owned by Design including, but not limited to, any and all computer programs (whether or not completed or in use) and any and all operating manuals or similar materials which constitute the non-architectural and non-engineering systems, policies and procedures, and methods of doing business, developed by Design for the operation of facilities managed by Design. Consequently, HLM acknowledges and agrees that Design has a proprietary interest in all such information and that all such information constitutes confidential and proprietary information and the trade secret property of Design. HLM hereby waives any and all right, title and interest in and to such confidential information and trade secrets and agrees to return all copies of -16- such confidential information and trade secrets to Design, at HLM's expense, upon the termination of the Agreement. HLM further acknowledges and agrees that Design is entitled to prevent its competitors from obtaining and utilizing its confidential information and trade secrets. Therefore, HLM agrees to hold Design's confidential information and trade secrets in strictest confidence and not to disclose them to or allow them to be disclosed to or used by, directly or indirectly, any person or entity other than those persons or entities who are employed by or affiliated with Design or HLM, either during the term of this Agreement, or at any time after the expiration or sooner termination of this Agreement, without the prior written consent of Design. HLM agrees to require each independent contractor and employee of HLM, and any such persons or entities to whom such information is disclosed for the purpose of performance of Design's or HLM's obligations under this Agreement, to execute a "Confidentiality Agreement" in a form acceptable to Design, upon the request of Design. HLM acknowledges and agrees that a breach of this Section 9 will result in irreparable harm to Design which cannot be reasonably or adequately compensated in damages, and therefore Design shall be entitled to injunctive and equitable relief to prevent a breach and to secure enforcement thereof, in addition to any other relief or award to which Design may be entitled. -17- 10. COOPERATION. HLM and Design agree that they shall at all times maintain an effective liaison and close cooperation with each other to facilitate the provision of high quality and cost effective architectural and engineering services. Each of the parties agrees to cooperate fully with each other in connection with the performance of their respective obligations under this Agreement, and both parties agree to employ their best efforts to resolve any dispute that may arise under or in connection with this Agreement. HLM shall provide to Design full and complete access to HLM's premises, and to HLM's Books and Records (as defined in Section 2.d.(1) hereof), in order that Design may perform its functions hereunder. Notwithstanding any other provisions contained herein, Design shall not be liable to HLM, and shall not be deemed to be in default hereunder, for the failure to perform or provide any of the supplies, services, personnel, or other obligations to be performed or provided by Design pursuant to this Agreement if such failure is a result of a labor dispute, act of God, or any other event which is beyond the reasonable control of Design. -18- 11. ARBITRATION. If a dispute or matter in controversy arises between the parties hereto which they are unable to resolve to their mutual satisfaction within ten (10) days of written notice from one to the other of the existence of such dispute, then either party may notify the other party in writing (the "Notice") that the dispute be submitted to binding arbitration as provided herein. Such arbitration shall take place in Charlotte, North Carolina, in accordance with the Rules of Commercial Arbitration of the American Arbitration Association, or its successor. The provisions of ss.ss. 1-567.1 ET SEQ. of the General Statutes of North Carolina, or any successor or amended statute or law containing similar provisions, shall apply in any such arbitration. Any arbitration pursuant to this Agreement shall be conducted by one (1) arbitrator. The judgment upon the award rendered in any such arbitration shall be final and binding upon the parties and may be entered in any court having jurisdiction over any party. 12. WAIVER OF VIOLATION. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. 13. MISCELLANEOUS. a. NOTICES. All notices, offers and acceptances or rejections thereof required to be given hereunder, shall be given by certified mail to the parties hereto at the addresses listed below, or at such other address as may be stated from time to time, and shall be deemed delivered upon deposit in the United States mail, postage prepaid: -19- To HLM: HLM of North Carolina, P.C. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon To Design: HLM Design, Inc. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon With a Copy to: Shirley J. Linn, Esq. Underwood Kinsey Warren & Tucker, P.A. 2020 Charlotte Plaza 201 S. College Street Charlotte, NC 28244-2020 b. SEVERABILITY. The provisions of this Agreement shall be separable and a determination that any provision of this Agreement, or subpart thereof, is either unenforceable or void shall not affect the validity of any other provision of this Agreement, or subpart thereof. Wherever possible all provisions shall be interpreted so as not to be unenforceable and any court of competent jurisdiction is authorized and directed by the parties hereto to enforce any otherwise unenforceable provision in part, to modify it, to enforce it only to a degree and not fully, or otherwise to enforce that provision only in a manner and to an extent, that renders the provision valid or enforceable. The intent of the parties is that this Agreement be enforceable and enforced to the maximum extent possible after excising (or deeming excised) all invalid or unenforceable provisions, whether or not the remaining provisions are grammatically correct. -20- c. AMENDMENTS OR MODIFICATIONS. This Agreement constitutes the entire understanding between the parties hereto with respect to the subject matter hereof, and no changes, amendments or alterations shall be effective unless agreed to in writing by both parties hereto, provided that no such amendment shall conflict with applicable laws or regulations. d. RELATIONSHIP OF THE PARTIES. The relationship of the parties hereto shall at all times be that of independent contractors. Except as expressly provided herein, nothing contained in this Agreement shall be construed to constitute either party as an agent, legal representative, partner, joint venturer or employee of the other, and neither party hereto shall have the power to bind the other with respect to any obligation to any third party. e. ASSIGNABILITY. Design may assign this Agreement, and/or transfer, assign or delegate any or all of its rights, obligations and responsibilities under this Agreement, without the consent of HLM, to one or more of Design's Affiliated Entities and/or one or more of Pacific Capital, L.P., a Delaware limited partnership, and/or Equitas, L.P., a Delaware limited partnership. For purposes of this Agreement, "Affiliated Entities" are defined to include any and all entities which: (1) are owned by Design, (2) are under common -21- control with Design, (3) are licensees of Design, or (4) are otherwise affiliated with Design. Except as expressly provided above, this Agreement is not transferrable or assignable by either party. f. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of North Carolina. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives. HLM DESIGN, INC. By: /s/ Joseph M. Harris _________________________________ President HLM OF NORTH CAROLINA, P.C. By: /s/ Philip J. Antis _________________________________ President -22- EX-10 6 EXHIBIT 10.3 Exhibit 10.3 MANAGEMENT AND SERVICES AGREEMENT This Management and Services Agreement (the "Agreement") is entered into effective as of May 29, 1997, by and between HLM OF OREGON, ARCHITECTURE AND PLANNING, P.C., an Oregon corporation (hereinafter referred to as "HLM"), and HLM DESIGN, INC., a Delaware corporation (hereinafter referred to as "Design"). RECITALS WHEREAS, HLM provides architectural and engineering services through the services of duly licensed architects and engineers engaged by HLM as employees or independent contractors; WHEREAS, Design is in the business of providing comprehensive management services to architectural and engineering firms, including the provision of office space and equipment, the recruitment, hiring and employment of architectural and engineering personnel and support personnel, and the provision of billing and collection services; WHEREAS, Design has special expertise and experience in the operation, management and marketing of the non-architectural and non-engineering aspects of architectural and engineering firms of the type intended to be operated by HLM; and WHEREAS, HLM desires that Design provide the above-described services to HLM, and Design desires to provide such services to HLM, pursuant to the provisions of this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual promises of the parties hereto and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: 1. Term of Agreement; Termination. Commencing on the effective date set forth above, and subject to the termination provisions set forth below, this Agreement shall continue in effect until the fortieth (40th) annual anniversary of the effective date hereof. Thereafter, this Agreement shall automatically renew for successive one (1) year terms, unless either party shall provide the other with written notice of termination at least thirty (30) days prior to the expiration of the then current term hereof. Notwithstanding the foregoing, either party hereto may terminate this Agreement at any time upon written notice to the other in the event of any of the following: a. The filing of a petition in voluntary bankruptcy or an assignment for the benefit of creditors by the other, or upon other action taken or suffered, voluntarily or involuntarily, under any federal or state law for the benefit -2- of debtors by the other, except for the filing of a petition in involuntary bankruptcy against the other which is dismissed within thirty (30) days thereafter; or b. In the event the other shall materially default in the performance of any duty or obligation imposed upon it by this Agreement and such default shall continue for a period of thirty (30) days after written notice thereof has been given to the defaulting party by the non-defaulting party. 2. Obligations of Design. a. General. HLM hereby appoints Design as its sole and exclusive manager and administrator of all of HLM's day-to-day business functions. HLM acknowledges and agrees that the purpose and intent of this Agreement is to relieve HLM to the maximum extent possible of the administrative, accounting, personnel and business aspects of HLM's operations, with Design assuming responsibility and being given any and all necessary authority to perform these functions. In connection with the foregoing, HLM hereby agrees that Design shall have the authority, duties and obligations set forth in Sections 2.b. through 2.d. below, and HLM agrees to take no actions in contravention thereof without the express prior written consent of Design. -3- b. Financial Planning. Design shall prepare such budgets, plans and policies as are necessary and appropriate in connection with the operations of HLM, reflecting the anticipated sources and uses of capital for HLM, and HLM's anticipated revenues and expenses. All operations of HLM shall be conducted in accordance with such budgets, plans and policies, which shall establish, by way of example and not limitation, the following: (1) the amounts, purpose and priority of all capital expenditures; (2) the amounts and sources of all additional capital, including without way of limitation the issuance of any and all additional capital stock and the incurring of any and all indebtedness; (3) the amounts, manner of payment and timing of all dividends; and (4) the amount, form and manner of payment of all employee compensation and benefits, including without way of limitation all compensation and benefits pertaining to personnel employed or engaged by HLM, or pertaining to personnel employed or engaged by Design on HLM's behalf. -4- c. Facilities, Equipment and Supplies. During the term of this Agreement, and all renewals and extensions hereof, Design shall analyze, select and negotiate for the lease and/or purchase by HLM or Design, as the case may be, of (1) suitable office facilities ("Offices") in which HLM can provide architectural and engineering services, (2) such architectural and engineering equipment, office equipment, furniture, fixtures, furnishings and leasehold improvements (collectively, "Equipment") as necessary for the performance by HLM of its architectural and engineering services, and (3) business supplies of every kind, name or nature, which may reasonably be required by HLM for its operations. Design shall have the authority to negotiate for the purchase or lease of any or all such items on HLM's behalf, either in HLM's or Design's name, as shall be deemed appropriate by Design in its sole discretion, and all such items shall in all events be subject to, and leased or purchased in accordance with, the budgets, plans and policies referenced in Section 2.b. above. d. Development, Management and Administrative Services. During the term of this Agreement, and all renewals and extensions hereof, Design shall furnish to HLM, or assist HLM in obtaining, as deemed appropriate by Design in its sole discretion, all of the non-architectural and non-engineering development, management and administrative services as may be needed by HLM in connection with HLM's operations. -5- Additionally, Design shall provide HLM with such advice and supervision regarding all aspects of HLM's architectural and engineering services as HLM may request from time to time, subject in all events to the limitations set forth in Section 4 hereof. Such non-architectural and non-engineering development, management and administrative services shall include, by way of example and not limitation, the following: (1) Bookkeeping and Accounts. Design shall establish and maintain all bookkeeping and accounting services necessary and appropriate to support the Offices, including, without limitation, maintenance, custody and supervision of all business records, papers, documents, ledgers, journals and reports, and the preparation, distribution and recordation of all bills and statements for professional services rendered by HLM (collectively, "Books and Records"). Notwithstanding the foregoing, HLM shall be responsible for maintaining full and accurate accounting records of all services rendered and such additional information as may be required in order for HLM to satisfy any and all applicable reporting requirements. (2) General Administrative Services. Design shall provide HLM with overall supervision and management, -6- including the maintenance and repair, of the Offices, and of all Equipment located in or at the Offices. (3) Contract Negotiation and Administration. Design shall negotiate and administer all non- architectural and non-engineering aspects of all agreements pertaining to the provision of architectural and engineering services by HLM to third parties ("Architectural and Engineering Agreements"). By way of example and not limitation, Design shall have the authority to negotiate and administer the provisions of the Architectural and Engineering Agreements pertaining to such matters as pricing and scheduling, and shall also provide HLM with such advice and supervision regarding all other aspects of the Architectural and Engineering Agreements as HLM may request from time to time, subject in all events to the limitations set forth in Section 4 hereof. Additionally, Design shall negotiate and administer all aspects of HLM's agreements which do not pertain directly to the provision of architectural or engineering services by HLM to third parties ("General Business Contracts"). (4) Personnel. Subject to the provisions of Section 4 hereof, Design shall provide such personnel to HLM as Design shall determine in its sole discretion to -7- be necessary to enable HLM to perform all services contemplated under the Architectural and Engineering Agreements and the General Business Contracts. Design shall provide such personnel by either (1) engaging such personnel directly on HLM's behalf (for example, as employees or independent contractors of HLM), or (2) engaging such personnel directly (for example, as employees or independent contractors of Design) and then leasing or subcontracting such personnel to HLM. Design shall have the sole discretion to determine the manner in which such personnel are provided to HLM. In no event shall Design provide or be required to provide architect or engineer employees or independent contractors (whether licensed or unlicensed) to HLM in any manner not in compliance with all applicable codes, rules and regulations adopted by any authority regulating the licensing of architects or engineers for the applicable jurisdiction. Design shall advise HLM with respect to the hiring and termination of all HLM personnel, and shall determine compensation for all HLM and all Design personnel, including determination of salaries, fringe benefits, bonuses, health and disability insurance, workers' compensation insurance, and any other benefits that each such employee shall receive. HLM shall compensate all HLM personnel (including those leased or subcontracted to HLM by Design) and make any and all -8- applicable withholding filings and payments in connection therewith. Additionally, Design shall manage and supervise any licensed personnel employed or engaged by HLM, or employed or engaged by Design on behalf of HLM, regarding those aspects of their employment that do not involve performance under the scope of their licensure; provided, however, that HLM shall manage and supervise all activities of such licensed personnel performed under the scope of their licensure. (5) Security and Maintenance. Design shall advise HLM with respect to all services and personnel necessary to provide HLM with proper security, maintenance, and cleanliness of the Offices and the Equipment. (6) Architectural and Engineering Recruiting and Training. Design shall, in its sole discretion, either perform on HLM's behalf, or assist HLM in performing, all recruiting, screening and evaluating of prospective architect and engineer employees and contractors for HLM, and Design shall assist HLM in training HLM's architects and engineers in the delivery of architectural and engineering services at the Offices in a manner consistent with HLM's and Design's established standards, practices, procedures and policies. -9- (7) Insurance. Design shall, in its sole discretion, either provide directly or advise and direct HLM with respect to selecting and negotiating for the provision of professional liability, commercial general liability and property insurance to protect against loss in the nature of fire, other catastrophe, theft, business interruption, general liability, and non-architectural and non-engineering negligence. (8) Billing and Collections. In order to relieve HLM of the administrative burden of handling the billing and collection of sums due under Architectural and Engineering Agreements, Design shall be responsible, on behalf of and for HLM, for billing and collecting the charges made with respect to Architectural and Engineering Agreements and any or all other services provided at the Offices; provided that responsibility for specific accounts may be retained by HLM at the mutual agreement of HLM and Design. In such event HLM agrees that it will keep and provide to Design all invoices, documents, evidence and records necessary for the purpose of supporting the fees charged for all architectural and engineering services from time to time. It is expressly understood that the extent to which Design will endeavor to collect such charges, the methods of collecting, the settling of disputes with respect to charges, and the -10- writing off of charges that may be or appear to be uncollectible shall at all times be within the sole discretion of Design (but subject to all applicable governmental regulations and the terms and conditions of applicable agreements), and that Design does not guarantee the extent to which any charges billed will be collected. At HLM's request, Design will reassign to HLM for collection by HLM, any accounts which Design has determined to be uncollectible. (9) Bank Accounts and Disbursements. During the term of this Agreement, Design shall have access to any and all bank accounts of HLM, and in connection therewith HLM hereby appoints Design for the term hereof as its lawful attorney-in-fact to deposit in such accounts fees generated from HLM's architectural and engineering practice which are collected by Design, and to make withdrawals from such accounts for the payment of expenses arising from or relating to HLM's operations, for Design's compensation hereunder, and for all other costs, expenses and disbursements which are required or authorized by this Agreement. Such withdrawals and payments may be made by Design at any time and from time to time as Design deems appropriate in its sole discretion. For administrative convenience, HLM shall not make any withdrawal(s) from such accounts without the -11- prior written consent of Design. HLM agrees to execute from time to time any and all additional documents required by the banks at which HLM's accounts are maintained to effectuate the power of attorney granted above. (10) Approval of Stock Transfers. Design shall have the sole authority and discretion to approve or deny on behalf of HLM any and all proposals by stockholders of HLM to encumber, sell, pledge, give or otherwise transfer HLM capital stock. (11) Marketing Support. Design shall provide HLM with such marketing support as Design in its sole discretion deems appropriate to develop, enhance and continue HLM's practice. Such support may include, by way of example and not limitation, making available such brochures, literature and sales aids as Design develops, providing HLM with access to pertinent economic and market data acquired or developed by Design, and developing and implementing a comprehensive marketing plan designed to foster client relations and enhance HLM's name recognition as a high quality provider of professional architectural and engineering services. -12- 3. Compliance with Architectural and Engineering Agreements. Design agrees to perform its duties hereunder so as to comply with HLM's obligations under the Architectural and Engineering Agreements. 4. Conduct of Architectural and Engineering Practice. HLM agrees to assign a duly licensed architect and, to the extent engineering services are provided, a duly licensed engineer to assure that its Offices are adequately staffed with such architectural and engineering personnel as may be necessary to efficiently perform architectural and engineering services at such Offices. Notwithstanding any provision in this Agreement to the contrary, Design shall have no authority, directly or indirectly, to perform, and shall not perform, any function of HLM's operations pertaining to services ("Professional Services") which are required to be performed by duly licensed architects and/or engineers pursuant to any and all applicable codes, or rules or regulations adopted by any authority regulating the licensing of architects (the "Architecture Board") or engineers (the "Engineering Board"). Design may, however, advise HLM as to the relationship between HLM's performance of Professional Services and the overall administrative and business functions of HLM's operations. To the extent Design assists HLM in performing Professional Services, all personnel employed or engaged by HLM or by Design on HLM's behalf shall be subject to the professional direction and supervision of HLM, and in the performance of such Professional Services, such personnel -13- shall not be subject to any direction or control by, or liability to, Design, except as may be specifically authorized by HLM in accordance with applicable codes, rules or regulations. To the extent any provision of this Agreement is determined to violate any provision of the applicable codes, or any rule or regulation of the Architecture Board or of the Engineering Board, then such provision of this Agreement shall be deemed modified to the minimum extent necessary to cure such violation. 5. Non-Exclusive Nature of Design's Duties. The parties acknowledge that Design is in the business of providing services of the nature provided to HLM hereunder to architectural and engineering firms located throughout the United States, and that Design may currently be a party to or may at any time hereafter enter into contracts with other architectural and engineering firms in that regard. Additionally, Design may also directly or indirectly provide architectural and engineering services from time to time. No such activities by Design shall be deemed a breach of or a conflict with the duties of Design hereunder. 6. Design's Compensation. As compensation for the provision of its services hereunder, Design shall be paid, no less frequently than on a quarterly basis, an estimate of the balance, if any, of HLM's cash flow (as determined in accordance with generally accepted accounting principles applied on a consistent basis) following the -14- payment by HLM or by Design on HLM's behalf of all of HLM's expenses, and the deduction from such cash flow of an amount equal to one percent (1.00%) of HLM's net profits (as determined in accordance with generally accepted accounting principles applied on a consistent basis) for such time period as has elapsed subsequent to the last payment to Design (such deducted amount to be retained by HLM as compensation for services provided to HLM by HLM or by HLM's personnel, and to be distributed or retained by HLM as HLM deems appropriate in its sole discretion). 7. Ownership of Books and Records. The books and records generated and maintained by each of the parties hereto shall be and remain the property of each such party. HLM agrees to make all of its books and records (subject to applicable ethical and legal confidentiality requirements) available for inspection, examination or copying by duly authorized representatives of Design from time to time throughout the term hereof, and upon written request by Design to HLM following the termination hereof, all to enable Design to better perform its duties hereunder. 8. Liability and Indemnification. Neither Design nor its stockholders, directors, officers, employees or agents shall have any liability for action taken or omitted by such person(s) in the performance of its duties hereunder if such action or omission is taken in good faith and without negligence. Each party to this Agreement respectively assumes responsibility for liability, actual -15- or alleged, arising from its respective activities performed pursuant to this Agreement. HLM agrees, during the term of this Agreement and thereafter, to the extent necessary to effectuate the purpose hereof, to indemnify and hold harmless Design against any claims or liabilities arising under this Agreement which arise out of or in connection with the Architectural and Engineering Agreements, the General Business Contracts or the actions of HLM's architect and engineer employees or contractors (including, without way of limitation, those employees and contractors employed or engaged by Design on HLM's behalf or otherwise). 9. Confidentiality. HLM acknowledges that due to the nature of this Agreement, HLM will have access to information of a proprietary nature owned by Design including, but not limited to, any and all computer programs (whether or not completed or in use) and any and all operating manuals or similar materials which constitute the non-architectural and non-engineering systems, policies and procedures, and methods of doing business, developed by Design for the operation of facilities managed by Design. Consequently, HLM acknowledges and agrees that Design has a proprietary interest in all such information and that all such information constitutes confidential and proprietary information and the trade secret property of Design. HLM hereby waives any and all right, title and interest in and to such confidential information and trade secrets and agrees to return all copies of -16- such confidential information and trade secrets to Design, at HLM's expense, upon the termination of the Agreement. HLM further acknowledges and agrees that Design is entitled to prevent its competitors from obtaining and utilizing its confidential information and trade secrets. Therefore, HLM agrees to hold Design's confidential information and trade secrets in strictest confidence and not to disclose them to or allow them to be disclosed to or used by, directly or indirectly, any person or entity other than those persons or entities who are employed by or affiliated with Design or HLM, either during the term of this Agreement, or at any time after the expiration or sooner termination of this Agreement, without the prior written consent of Design. HLM agrees to require each independent contractor and employee of HLM, and any such persons or entities to whom such information is disclosed for the purpose of performance of Design's or HLM's obligations under this Agreement, to execute a "Confidentiality Agreement" in a form acceptable to Design, upon the request of Design. HLM acknowledges and agrees that a breach of this Section 9 will result in irreparable harm to Design which cannot be reasonably or adequately compensated in damages, and therefore Design shall be entitled to injunctive and equitable relief to prevent a breach and to secure enforcement thereof, in addition to any other relief or award to which Design may be entitled. -17- 10. Cooperation. HLM and Design agree that they shall at all times maintain an effective liaison and close cooperation with each other to facilitate the provision of high quality and cost effective architectural and engineering services. Each of the parties agrees to cooperate fully with each other in connection with the performance of their respective obligations under this Agreement, and both parties agree to employ their best efforts to resolve any dispute that may arise under or in connection with this Agreement. HLM shall provide to Design full and complete access to HLM's premises, and to HLM's Books and Records (as defined in Section 2.d.(1) hereof), in order that Design may perform its functions hereunder. Notwithstanding any other provisions contained herein, Design shall not be liable to HLM, and shall not be deemed to be in default hereunder, for the failure to perform or provide any of the supplies, services, personnel, or other obligations to be performed or provided by Design pursuant to this Agreement if such failure is a result of a labor dispute, act of God, or any other event which is beyond the reasonable control of Design. -18- 11. Arbitration. If a dispute or matter in controversy arises between the parties hereto which they are unable to resolve to their mutual satisfaction within ten (10) days of written notice from one to the other of the existence of such dispute, then either party may notify the other party in writing (the "Notice") that the dispute be submitted to binding arbitration as provided herein Such arbitration shall take place in Charlotte, North Carolina, in accordance with the Rules of Commercial Arbitration of the American Arbitration Association, or its successor. The provisions of ss.ss. 1-567.1 et seq. of the General Statutes of North Carolina, or any successor or amended statute or law containing similar provisions, shall apply in any such arbitration. Any arbitration pursuant to this Agreement shall be conducted by one (1) arbitrator. The judgment upon the award rendered in any such arbitration shall be final and binding upon the parties and may be entered in any court having jurisdiction over any party. 12. Waiver of Violation. The waiver by either party of a breach or violation of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. 13. Miscellaneous. a. Notices. All notices, offers and acceptances or rejections thereof required to be given hereunder, shall be given by certified mail to the parties hereto at the addresses listed below, or at such other address as may be stated from time to time, and shall be deemed delivered upon deposit in the United States mail, postage prepaid: -19- To HLM: HLM of Oregon, Architecture and Planning, P.C. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon To Design: HLM Design, Inc. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon With a Copy to: Shirley J. Linn, Esq. Underwood Kinsey Warren & Tucker, P.A. 2020 Charlotte Plaza 201 S. College Street Charlotte, NC 28244-2020 b. Severability. The provisions of this Agreement shall be separable and a determination that any provision of this Agreement, or subpart thereof, is either unenforceable or void shall not affect the validity of any other provision of this Agreement, or subpart thereof. Wherever possible all provisions shall be interpreted so as not to be unenforceable and any court of competent jurisdiction is authorized and directed by the parties hereto to enforce any otherwise unenforceable provision in part, to modify it, to enforce it only to a degree and not fully, or otherwise to enforce that provision only in a manner and to an extent, that renders the provision valid or enforceable. The intent of the parties is that this Agreement be enforceable and enforced to the maximum extent possible after excising (or deeming excised) all invalid or unenforceable provisions, whether or not the remaining provisions are grammatically correct. -20- c. Amendments or Modifications. This Agreement constitutes the entire understanding between the parties hereto with respect to the subject matter hereof, and no changes, amendments or alterations shall be effective unless agreed to in writing by both parties hereto, provided that no such amendment shall conflict with applicable laws or regulations. d. Relationship of the Parties. The relationship of the parties hereto shall at all times be that of independent contractors. Except as expressly provided herein, nothing contained in this Agreement shall be construed to constitute either party as an agent, legal representative, partner, joint venturer or employee of the other, and neither party hereto shall have the power to bind the other with respect to any obligation to any third party. e. Assignability. Design may assign this Agreement, and/or transfer, assign or delegate any or all of its rights, obligations and responsibilities under this Agreement, without the consent of HLM, to one or more of Design's Affiliated Entities and/or one or more of Pacific Capital, L.P., a Delaware limited partnership, and/or Equitas, L.P., a Delaware limited partnership. For purposes of this Agreement, "Affiliated Entities" are defined to include any and all entities which: (1) are owned by Design, (2) are under common control with Design, (3) are licensees of Design, or (4) are -21- otherwise affiliated with Design. Except as expressly provided above, this Agreement is not transferrable or assignable by either party. f. Governing Law. This Agreement shall be construed in accordance with the laws of the State of North Carolina. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives. HLM DESIGN, INC. By: /s/ Vernon B. Brannon _________________________________ Senior Vice President HLM OF OREGON, ARCHITECTURE AND PLANNING, P.C. By: /s/ Joseph M. Harris _________________________________ President -22- EX-10 7 EXHIBIT 10.4 EXHIBIT 10.4 STATE OF NORTH CAROLINA STOCKHOLDERS' AGREEMENT COUNTY OF MECKLENBURG THIS STOCKHOLDERS' AGREEMENT (the "Agreement") is executed effective as of the 29th day of May, 1997, between and among JOSEPH M. HARRIS, a resident of the State of North Carolina ("Harris"), VERNON B. BRANNON, a resident of the State of North Carolina ("Brannon"), (Harris and Brannon hereinafter sometimes referred to jointly as the "Stockholders" and singularly as "Stockholder"), and HANSEN LIND MEYER INC., an Iowa corporation (the "Corporation"). W I T N E S S E T H: WHEREAS, Harris owns one-half (1/2) of the issued and outstanding common stock of the Corporation (the "Harris Shares"); and WHEREAS, Brannon owns one-half (1/2) of the issued and outstanding common stock of the Corporation (the "Brannon Shares"); and WHEREAS, the Harris Shares and the Brannon Shares collectively constitute all of the currently issued and outstanding common stock of the Corporation (the Harris Shares and the Brannon Shares being sometimes referred to individually and collectively hereinafter as the "Stock"); and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation to provide for the purchase by the Corporation of a Stockholder's Stock upon his death; and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation to restrict the transferability of the Stock as provided in this Agreement; and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation that the Corporation have the ability to call the Stock of the Stockholders as provided in this Agreement; and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation that the Stockholders act with unity with respect to all matters of the Corporation which are submitted to the Stockholders for approval, both in their capacity as stockholders and as Directors of the Corporation. NOW, THEREFORE, in consideration of the premises and the mutual promises of the parties hereto and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: -2- 1. STOCK TRANSFER RESTRICTIONS. The Stockholders agree that no shares of the Stock shall be transferred except pursuant to and in compliance with the provisions of this Agreement. Transfers made in contravention hereof shall be void and shall not be recognized by the Corporation. No Stockholder may pledge or encumber all or any portion of the Stock without the prior written approval of the Corporation. 2. OBLIGATORY PURCHASE UPON DEATH. Upon the death of a Stockholder, the Corporation shall purchase, and the personal representative of the decedent's estate shall sell to the Corporation, all of the Stock owned by the deceased Stockholder at the time of his death, at such price as is determined in accordance with the provisions of Paragraph 5 and upon the terms and conditions of Paragraph 6 hereof. In the alternative, the deceased Stockholder's personal representative may propose a sale of the decedent's Stock to one (1) or more third parties, subject to the Corporation's approval thereof as provided in Paragraph 3 hereof. 3. THIRD PARTY TRANSFERS. (a) NOTICE OF INTENT TO TRANSFER. No Stockholder may sell, pledge, give, or otherwise transfer (collectively, "Transfer") any or all of his Stock to any third party, whether voluntarily or involuntarily, without first obtaining the -3- Corporation's written approval of such transfer. In the event a Stockholder desires to Transfer any or all of his Stock to a third party, he shall first provide the Corporation with written notice of such proposed Transfer, delivered in the manner provided herein (the "Transfer Notice"), naming the proposed third party transferee and all transfer terms, including, without way of limitation, any proposed purchase price and terms. (b) APPROVAL OR DENIAL OF PROPOSED TRANSFER. The Corporation shall have the absolute discretion to approve or deny all or any part of any proposed Transfer (a "Stock Transfer"). The Corporation's approval or denial of a proposed Transfer shall be communicated in writing to the Stockholder proposing such Transfer within thirty (30) days following the Corporation's receipt of the Transfer Notice. (c) PURCHASE BY CORPORATION. In the event the Corporation denies or fails to approve as provided above a proposed Transfer to a third party of all or any portion of a Stockholder's Stock, then the Corporation shall purchase such Stock at such price as is determined in accordance with the provisions of Paragraph 5 and upon the terms and conditions of Paragraph 6 hereof. 4. CORPORATION'S RIGHT TO CALL. The Corporation shall have the right at any time to purchase ("Call") all, but not less than -4- all, of the Stock then owned by either or both of the Stockholders, at such purchase price as is determined in accordance with the provisions of Paragraph 5 and upon the terms and conditions of Paragraph 6 hereof. The Corporation shall exercise its right to Call (a "Stock Call") a Stockholder's Stock by way of written notice to such Stockholder (the "Call Notice"), delivered in the manner provided herein. 5. PURCHASE PRICE. The purchase price per share with respect to any and all purchases by the Corporation of a Stockholder's Stock hereunder shall be the Stockholder's adjusted cost basis per share of such Stock, as determined by the Corporation in its sole discretion (the "Purchase Price"). 6. PAYMENT OF PURCHASE PRICE. (a) CLOSING. The closing (the "Closing") for the purchase of the Stock of a Stockholder disposing of the same under this Agreement shall occur within sixty (60) days after (i) the qualification of such Stockholder's personal representative, in the event of a purchase following a Stockholder's death (but in no event later than one (1) year following the date of death), (ii) the delivery date of a Stockholder's Transfer Notice, in the event of a purchase following the Corporation's denial of or failure to approve a proposed Transfer by such Stockholder, or -5- (iii) the delivery date of a Call Notice, in the event of a Call by the Corporation. (b) DELIVERY OF PROMISSORY NOTE. At the option of the Corporation, the Purchase Price shall be paid in good funds at the Closing or by the delivery of the Corporation's promissory note in the amount of the Purchase Price for such Stock, payable to the order of the selling Stockholder or his estate, as the case may be (the "Purchase Note"). The Purchase Note shall be due and payable in sixty (60) consecutive, equal, monthly installments, together with interest at the minimum annual rate allowable under the provisions of the Internal Revenue Code then in effect to prevent imputed interest, original issue discount or unstated interest. The first such installment of the Purchase Note shall be due thirty (30) days from the date of Closing and the remaining installments shall be due on the same date of each month thereafter until principal and interest shall be fully paid. The Purchase Note shall be prepayable at any time and from time to time in whole or in part, without penalty or unaccrued interest, at the option of the Corporation. (c) TRANSFER OF TITLE. Upon receipt of the Purchase Note, the selling Stockholder or his personal representative, as the case may be, shall deliver to the Corporation the certificate(s) for the purchased Stock and such other instruments as are necessary and proper to transfer full and complete title -6- thereto and said selling Stockholder or his estate shall thereafter have no further interest in the Corporation. 7. ASSIGNMENT OF RIGHTS TO HLM DESIGN, INC. The parties hereto acknowledge that it is in the parties' best interests that certain of the Corporation's administrative and managerial functions be performed by an outside managerial entity with established expertise in the Corporation's fields of endeavor, and that toward such end the Corporation has entered into a Management and Services Agreement with HLM Design, Inc., a Delaware corporation ("HLM Design") for the provision of such services. The parties further acknowledge and agree that in order to assure consistency and continuity in the management of the Corporation's business and affairs, that with respect to all matters pertaining to the initiation of Stock Calls or the approval or denial of proposed Stock Transfers, the Corporation shall in all cases act in accordance with the written recommendations of HLM Design. 8. ENDORSEMENT ON CERTIFICATES. Upon the execution of this Agreement, the certificates of Stock subject hereto shall be surrendered to the Corporation and endorsed as follows: "This certificate is transferable only upon compliance with the provisions of a Stockholders' Agreement dated as of the 29th -7- day of May, 1997, between and among the Corporation and certain of its stockholders, a copy of which is on file in the office of the Secretary of the Corporation." After endorsement, the certificates shall be returned to the Stockholders, who shall, subject to the terms of this Agreement, be entitled to exercise all rights of ownership of such Stock. 9. UNITY IN VOTING; DEADLOCK. The Stockholders each agree that with respect to all matters which are submitted to stockholder vote (and, to the extent that both of the Stockholders serve in the capacity of Directors, then also with respect to all matters which are submitted to Director vote), neither Stockholder shall cast any vote with respect to any such matter unless all votes to be cast by the Stockholders collectively are cast in unity. Prior to casting any such vote, the Stockholders shall disclose to one another their voting intentions. In the event the Stockholders are not in agreement with respect to any particular matter to be voted upon, then they shall immediately move for an adjournment of any meeting at which such matter is to be voted upon. During such adjournment, the Stockholders shall attempt in good faith to reconcile their respective positions with one another. In the event the Stockholders are unable to reach a reconciliation within thirty (30) days following such adjournment, then the Stockholders agree -8- that such matter shall be submitted within ten (10) days thereafter to HLM Design, Inc., a Delaware corporation ("HLM Design"), for resolution. The Stockholders agree to cooperate with HLM Design by providing any and all information, documentation, statements of their respective positions and other materials requested by HLM Design in the course of HLM Design's determination. The determination of HLM Design with respect to such matter shall be final and binding upon the Stockholders, and the Stockholders agree to vote their Stock (or cast their votes as Directors, as the case may be) in accordance therewith immediately upon receiving such determination. 10. TERMINATION. This Agreement shall terminate upon the occurrence of any of the following events: (a) Cessation of the Corporation's business; (b) Bankruptcy, receivership or dissolution of the Corporation; or (c) The voluntary agreement of all parties who are then bound by the terms hereof. Upon the termination of this Agreement, each Stockholder shall surrender to the Corporation the certificates for his Stock and the Corporation shall issue to such -9- Stockholder, in lieu thereof, new certificates for an equal number of shares without the endorsement set forth in Paragraph 8 hereof. 11. NOTICES. All notices, offers and acceptances or rejections thereof required to be given hereunder, shall be given by certified mail to the parties hereto at the addresses listed below, or at such other address as may be stated from time to time, and shall be deemed delivered upon deposit in the United States mail, postage prepaid: To the Corporation: Hansen Lind Meyer Inc. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon With a Copy to: Shirley J. Linn, Esq. Underwood Kinsey Warren & Tucker, P.A. 2020 Charlotte Plaza 201 S. College Street Charlotte, NC 28244-2020 To Harris: Joseph M. Harris 21120 Blakely Shores Drive Davidson, NC 28031 To Brannon: Vernon B. Brannon 5301 Mirabell Road Charlotte, NC 28226 12. BINDING EFFECT. This Agreement shall be binding not only upon the parties hereto, but also upon their heirs, executors, personal representatives, successors and/or permitted assigns; and the parties hereby agree for themselves and their heirs, executors, personal representatives, successors and/or -10- permitted assigns, to execute any instruments and to perform any acts which may be necessary or proper to carry out the purposes of this Agreement. This Agreement may be amended or modified only by a unanimous vote of all parties then bound hereunder. 13. APPLICABLE LAW. This Agreement shall be governed by the laws of the State of North Carolina and constitutes the entire agreement between the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed and sealed, effective as of the day and year first above written. /s/ Joseph M. Harris (SEAL) ------------------------------- JOSEPH M. HARRIS /s/ Vernon B. Brannon (SEAL) -------------------------------- VERNON B. BRANNON HANSEN LIND MEYER INC. By: /s/ Joseph M. Harris ---------------------------------- President -11- EX-10 8 EXHIBIT 10.5 EXHIBIT 10.5 STATE OF NORTH CAROLINA STOCKHOLDERS' AGREEMENT COUNTY OF MECKLENBURG THIS STOCKHOLDERS' AGREEMENT (the "Agreement") is executed effective as of the 29th day of May, 1997, between and among VERNON B. BRANNON, a resident of the State of North Carolina ("Brannon"), JOSEPH M. HARRIS, a resident of the State of North Carolina ("Harris"), PHILLIP J. ANTIS, a resident of the State of Virginia ("Antis"), (Brannon, Harris and Antis hereinafter sometimes referred to jointly as the "Stockholders" and singularly as "Stockholder"), and HLM OF NORTH CAROLINA, P.C., a North Carolina professional corporation with its principal office in Mecklenburg County, North Carolina (the "Corporation"). W I T N E S S E T H: WHEREAS, Brannon is a certified public accountant duly licensed by the State of North Carolina, and owns one-third (1/3) of the issued and outstanding common stock of the Corporation (the "Brannon Shares"); and WHEREAS, Harris is an architect duly licensed by the North Carolina Board of Architects, and owns one-third (1/3) of the issued and outstanding common stock of the Corporation (the "Harris Shares"); and WHEREAS, Antis is an engineer duly licensed by the North Carolina State Board of Registration for Professional Engineers and Land Surveyors, and owns one-third (1/3) of the issued and outstanding common stock of the Corporation (the "Antis Shares"); and WHEREAS, the Brannon Shares, the Harris Shares and the Antis Shares collectively constitute all of the currently issued and outstanding common stock of the Corporation (the Brannon Shares, the Harris Shares and the Antis Shares being sometimes referred to individually and collectively hereinafter as the "Stock"); and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation to provide for the purchase by the Corporation of a Stockholder's Stock upon his death; and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation to restrict the transferability of the Stock as provided in this Agreement; and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation that the -2- Corporation have the ability to call the Stock of the Stockholders as provided in this Agreement; and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation that the Stockholders act with unity with respect to all matters of the Corporation which are submitted to the Stockholders for approval, both in their capacity as stockholders and as Directors of the Corporation. NOW, THEREFORE, in consideration of the premises and the mutual promises of the parties hereto and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Stock Transfer Restrictions. The Stockholders agree that no shares of the Stock shall be transferred except pursuant to and in compliance with the provisions of this Agreement. Transfers made in contravention hereof shall be void and shall not be recognized by the Corporation. No Stockholder may pledge or encumber all or any portion of the Stock without the prior written approval of the Corporation. -3- 2. Obligatory Purchase Upon Death. Upon the death of a Stockholder, the Corporation shall purchase, and the personal representative of the decedent's estate shall sell to the Corporation, all of the Stock owned by the deceased Stockholder at the time of his death, at such price as is determined in accordance with the provisions of Paragraph 5 and upon the terms and conditions of Paragraph 6 hereof. In the alternative, the deceased Stockholder's personal representative may propose a sale of the decedent's Stock to one (1) or more third parties, subject to the Corporation's approval thereof as provided in Paragraph 3 hereof. 3. Third Party Transfers. (a) Notice of Intent to Transfer. No Stockholder may sell, pledge, give, or otherwise transfer (collectively, "Transfer") any or all of his Stock to any third party, whether voluntarily or involuntarily, without first obtaining the Corporation's written approval of such transfer. In the event a Stockholder desires to Transfer any or all of his Stock to a third party, he shall first provide the Corporation with written notice of such proposed Transfer, delivered in the manner provided herein (the "Transfer Notice"), naming the proposed third party -4- transferee and all transfer terms, including, without way of limitation, any proposed purchase price and terms. (b) Approval or Denial of Proposed Transfer. The Corporation shall have the absolute discretion to approve or deny all or any part of any proposed Transfer (a "Stock Transfer"). The Corporation's approval or denial of a proposed Transfer shall be communicated in writing to the Stockholder proposing such Transfer within thirty (30) days following the Corporation's receipt of the Transfer Notice. (c) Purchase by Corporation. In the event the Corporation denies or fails to approve as provided above a proposed Transfer to a third party of all or any portion of a Stockholder's Stock, then the Corporation shall purchase such Stock at such price as is determined in accordance with the provisions of Paragraph 5 and upon the terms and conditions of Paragraph 6 hereof. 4. Corporation's Right to Call. The Corporation shall have the right at any time to purchase ("Call") all, but not less than all, of the Stock then owned by any or all of the Stockholders, at such purchase price as is determined in accordance with the provisions of Paragraph 5 and upon the terms and conditions of -5- Paragraph 6 hereof. The Corporation shall exercise its right to Call (a "Stock Call") a Stockholder's Stock by way of written notice to such Stockholder (the "Call Notice"), delivered in the manner provided herein. 5. Purchase Price. The purchase price per share with respect to any and all purchases by the Corporation of a Stockholder's Stock hereunder shall be the Stockholder's adjusted cost basis per share of such Stock, as determined by the Corporation in its sole discretion (the "Purchase Price"). 6. Payment of Purchase Price. (a) Closing. The closing (the "Closing") for the purchase of the Stock of a Stockholder disposing of the same under this Agreement shall occur within sixty (60) days after (i) the qualification of such Stockholder's personal representative, in the event of a purchase following a Stockholder's death (but in no event later than one (1) year following the date of death), (ii) the delivery date of a Stockholder's Transfer Notice, in the event of a purchase following the Corporation's denial of or failure to approve a proposed Transfer by such Stockholder, or (iii) the delivery date of a Call Notice, in the event of a Call by the Corporation. -6- (b) Delivery of Promissory Note. At the option of the Corporation, the Purchase Price shall be paid in good funds at the Closing or by the delivery of the Corporation's promissory note in the amount of the Purchase Price for such Stock, payable to the order of the selling Stockholder or his estate, as the case may be (the "Purchase Note"). The Purchase Note shall be due and payable in sixty (60) consecutive, equal, monthly installments, together with interest at the minimum annual rate allowable under the provisions of the Internal Revenue Code then in effect to prevent imputed interest, original issue discount or unstated interest. The first such installment of the Purchase Note shall be due thirty (30) days from the date of Closing and the remaining installments shall be due on the same date of each month thereafter until principal and interest shall be fully paid. The Purchase Note shall be prepayable at any time and from time to time in whole or in part, without penalty or unaccrued interest, at the option of the Corporation. (c) Transfer of Title. Upon receipt of the Purchase Note, the selling Stockholder or his personal representative, as the case may be, shall deliver to the -7- Corporation the certificate(s) for the purchased Stock and such other instruments as are necessary and proper to transfer full and complete title thereto and said selling Stockholder or his estate shall thereafter have no further interest in the Corporation. 7. Assignment of Rights to HLM Design, Inc. The parties acknowledge that it is in the parties' best interests that certain of the Corporation's administrative and managerial functions be performed by an outside managerial entity with established expertise in the Corporation's fields of endeavor, and that toward such end the Corporation has entered into a Management and Services Agreement with HLM Design, Inc., a Delaware corporation ("HLM Design") for the provision of such services. The parties further acknowledge and agree that in order to assure consistency and continuity in the management of the Corporation's business and affairs, that with respect to all matters pertaining to the initiation of Stock Calls or the approval or denial of proposed Stock Transfers, the Corporation shall in all cases act in accordance with the written recommendations of HLM Design. -8- 8. Endorsement on Certificates. Upon the execution of this Agreement, the certificates of Stock subject hereto shall be surrendered to the Corporation and endorsed as follows: "This certificate is transferable only upon compliance with the provisions of a Stockholders' Agreement dated as of the 29th day of May, 1997, between and among the Corporation and certain of its stockholders, a copy of which is on file in the office of the Secretary of the Corporation." After endorsement, the certificates shall be returned to the Stockholders, who shall, subject to the terms of this Agreement, be entitled to exercise all rights of ownership of such Stock. 9. Unity in Voting. The Stockholders each agree that with respect to all matters which are submitted to stockholder vote (and, to the extent that all or any of the three Stockholders serve in the capacity of Directors, then also with respect to all matters which are submitted to Director vote), prior to casting any vote with respect to any such matter, the Stockholders shall first notify one another of their respective voting intentions. No Stockholder shall be permitted to abstain from voting unless required by the provisions of the Corporation's bylaws or applicable law, such as, for example, in the event of a conflict of interest. In the event the Stockholders are not in unanimous -9- agreement with respect to any particular matter to be voted upon, then the vote of two-thirds (2/3) of the Stockholders shall be deemed to be the agreed upon vote of all of the Stockholders, and the Stockholder who is not in agreement with the other two (2) shall nevertheless cast all of his votes in unity therewith. 10. Termination. This Agreement shall terminate upon the occurrence of any of the following events: (a) Cessation of the Corporation's business; (b) Bankruptcy, receivership or dissolution of the Corporation; or (c) The voluntary agreement of all parties who are then bound by the terms hereof. Upon the termination of this Agreement, each Stockholder shall surrender to the Corporation the certificates for his Stock and the Corporation shall issue to such Stockholder, in lieu thereof, new certificates for an equal number of shares without the endorsement set forth in Paragraph 8 hereof. -10- 11. Notices. All notices, offers and acceptances or rejections thereof required to be given hereunder, shall be given by certified mail to the parties hereto at the addresses listed below, or at such other address as may be stated from time to time, and shall be deemed delivered upon deposit in the United States mail, postage prepaid: To the Corporation: HLM of North Carolina, P.C. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon With a Copy to: Shirley J. Linn, Esq. Underwood Kinsey Warren & Tucker, P.A. 2020 Charlotte Plaza 201 S. College Street Charlotte, NC 28244 To Brannon: Vernon B. Brannon 5301 Mirabell Road Charlotte, NC 28226 To Harris: Joseph M. Harris 21120 Blakely Shores Drive Davidson, NC 28031 To Antis: Phillip J. Antis 2074 Cobblestone Lane Reston, VA 22091 12. Binding Effect. This Agreement shall be binding not only upon the parties hereto, but also upon their heirs, -11- executors, personal representatives, successors and/or permitted assigns; and the parties hereby agree for themselves and their heirs, executors, personal representatives, successors and/or permitted assigns, to execute any instruments and to perform any acts which may be necessary or proper to carry out the purposes of this Agreement. This Agreement may be amended or modified only by a unanimous vote of all parties then bound hereunder. -12- 13. Applicable Law. This Agreement shall be governed by the laws of the State of North Carolina and constitutes the entire agreement between the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed and sealed, effective as of the day and year first above written. /s/ Vernon B. Brannon ____________________________(SEAL) VERNON B. BRANNON /s/ Joseph M. Harris (SEAL) ------------------------------ JOSEPH M. HARRIS /s/ Phillip J. Antis (SEAL) ------------------------------ PHILLIP J. ANTIS HLM OF NORTH CAROLINA, P.C. By: /s/ Joseph M. Harris --------------------------- President -13- EX-10 9 EXHIBIT 10.6 Exhibit 10.6 STATE OF NORTH CAROLINA STOCKHOLDERS' AGREEMENT COUNTY OF MECKLENBURG THIS STOCKHOLDERS' AGREEMENT (the "Agreement") is executed effective as of the 29th day of May, 1997, between and among VERNON B. BRANNON, a resident of the State of North Carolina ("Brannon"), JOSEPH M. HARRIS, a resident of the State of North Carolina ("Harris"), VICTOR A. LITUCZY, a resident of the State of Oregon ("Lituczy"), (Brannon, Harris and Lituczy hereinafter sometimes referred to jointly as the "Stockholders" and singularly as "Stockholder"), and HLM OF OREGON, ARCHITECTURE AND PLANNING, P.C., an Oregon professional corporation with its principal office in Portland, Oregon (the "Corporation"). W I T N E S S E T H: WHEREAS, Brannon is a certified public accountant duly licensed by the State of North Carolina, and owns one-third (1/3) of the issued and outstanding common stock of the Corporation (the "Brannon Shares"); and WHEREAS, Harris is an architect duly licensed by the North Carolina Board of Architects, and owns one-third (1/3) of the issued and outstanding common stock of the Corporation (the "Harris Shares"); and WHEREAS, Lituczy is an architect duly licensed by the Oregon Board of Architect Examiners, and owns one-third (1/3) of the issued and outstanding common stock of the Corporation (the "Lituczy Shares"); and WHEREAS, the Brannon Shares, the Harris Shares and the Lituczy Shares collectively constitute all of the currently issued and outstanding common stock of the Corporation (the Brannon Shares, the Harris Shares and the Lituczy Shares being sometimes referred to individually and collectively hereinafter as the "Stock"); and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation to provide for the purchase by the Corporation of a Stockholder's Stock upon his death; and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation to restrict the transferability of the Stock as provided in this Agreement; and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation that the Corporation have the ability to call the Stock of the Stockholders as provided in this Agreement; and WHEREAS, the Stockholders believe it to be for their best interests and for the best interests of the Corporation that the -2- Stockholders act with unity with respect to all matters of the Corporation which are submitted to the Stockholders for approval, both in their capacity as stockholders and as Directors of the Corporation. NOW, THEREFORE, in consideration of the premises and the mutual promises of the parties hereto and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Stock Transfer Restrictions. The Stockholders agree that no shares of the Stock shall be transferred except pursuant to and in compliance with the provisions of this Agreement. Transfers made in contravention hereof shall be void and shall not be recognized by the Corporation. No Stockholder may pledge or encumber all or any portion of the Stock without the prior written approval of the Corporation. 2. Obligatory Purchase Upon Death. Upon the death of a Stockholder, the Corporation shall purchase, and the personal representative of the decedent's estate shall sell to the Corporation, all of the Stock owned by the deceased Stockholder at the time of his death, at such price as is determined in accordance with the provisions of Paragraph 5 and upon the terms and conditions of Paragraph 6 hereof. In the alternative, the deceased Stockholder's personal representative may propose a sale of the decedent's Stock to one (1) or more third parties, subject -3- to the Corporation's approval thereof as provided in Paragraph 3 hereof. 3. Third Party Transfers. (a) Notice of Intent to Transfer. No Stockholder may sell, pledge, give, or otherwise transfer (collectively, "Transfer") any or all of his Stock to any third party, whether voluntarily or involuntarily, without first obtaining the Corporation's written approval of such transfer. In the event a Stockholder desires to Transfer any or all of his Stock to a third party, he shall first provide the Corporation with written notice of such proposed Transfer, delivered in the manner provided herein (the "Transfer Notice"), naming the proposed third party transferee and all transfer terms, including, without way of limitation, any proposed purchase price and terms. (b) Approval or Denial of Proposed Transfer. The Corporation shall have the absolute discretion to approve or deny all or any part of any proposed Transfer (a "Stock Transfer"). The Corporation's approval or denial of a proposed Transfer shall be communicated in writing to the Stockholder proposing such Transfer within thirty (30) days following the Corporation's receipt of the Transfer Notice. -4- (c) Purchase by Corporation. In the event the Corporation denies or fails to approve as provided above a proposed Transfer to a third party of all or any portion of a Stockholder's Stock, then the Corporation shall purchase such Stock at such price as is determined in accordance with the provisions of Paragraph 5 and upon the terms and conditions of Paragraph 6 hereof. 4. Corporation's Right to Call. The Corporation shall have the right at any time to purchase ("Call") all, but not less than all, of the Stock then owned by any or all of the Stockholders, at such purchase price as is determined in accordance with the provisions of Paragraph 5 and upon the terms and conditions of Paragraph 6 hereof. The Corporation shall exercise its right to Call (a "Stock Call") a Stockholder's Stock by way of written notice to such Stockholder (the "Call Notice"), delivered in the manner provided herein. 5. Purchase Price. The purchase price per share with respect to any and all purchases by the Corporation of a Stockholder's Stock hereunder shall be the Stockholder's adjusted cost basis per share of such Stock, as determined by the Corporation in its sole discretion (the "Purchase Price"). -5- 6. Payment of Purchase Price. (a) Closing. The closing (the "Closing") for the purchase of the Stock of a Stockholder disposing of the same under this Agreement shall occur within sixty (60) days after (i) the qualification of such Stockholder's personal representative, in the event of a purchase following a Stockholder's death (but in no event later than one (1) year following the date of death), (ii) the delivery date of a Stockholder's Transfer Notice, in the event of a purchase following the Corporation's denial of or failure to approve a proposed Transfer by such Stockholder, or (iii) the delivery date of a Call Notice, in the event of a Call by the Corporation. (b) Delivery of Promissory Note. At the option of the Corporation, the Purchase Price shall be paid in good funds at the Closing or by the delivery of the Corporation's promissory note in the amount of the Purchase Price for such Stock, payable to the order of the selling Stockholder or his estate, as the case may be (the "Purchase Note"). The Purchase Note shall be due and payable in sixty (60) consecutive, equal, monthly installments, together with interest at the minimum annual rate allowable under the provisions of the Internal Revenue Code then in effect to prevent imputed interest, original issue discount or unstated interest. The first such installment of the -6- Purchase Note shall be due thirty (30) days from the date of Closing and the remaining installments shall be due on the same date of each month thereafter until principal and interest shall be fully paid. The Purchase Note shall be prepayable at any time and from time to time in whole or in part, without penalty or unaccrued interest, at the option of the Corporation. (c) Transfer of Title. Upon receipt of the Purchase Note, the selling Stockholder or his personal representative, as the case may be, shall deliver to the Corporation the certificate(s) for the purchased Stock and such other instruments as are necessary and proper to transfer full and complete title thereto and said selling Stockholder or his estate shall thereafter have no further interest in the Corporation. 7. Assignment of Rights to HLM Design, Inc. The parties acknowledge that it is in the parties' best interests that certain of the Corporation's administrative and managerial functions be performed by an outside managerial entity with established expertise in the Corporation's fields of endeavor, and that toward such end the Corporation has entered into a Management and Services Agreement with HLM Design, Inc., a Delaware corporation ("HLM Design") for the provision of such services. The parties further acknowledge and agree that in order to assure consistency and continuity in the management of the Corporation's business and -7- affairs, that with respect to all matters pertaining to the initiation of Stock Calls or the approval or denial of proposed Stock Transfers, the Corporation shall in all cases act in accordance with the written recommendations of HLM Design. 8. Endorsement on Certificates. Upon the execution of this Agreement, the certificates of Stock subject hereto shall be surrendered to the Corporation and endorsed as follows: "This certificate is transferable only upon compliance with the provisions of a Stockholders' Agreement dated as of the 29th day of May, 1997, between and among the Corporation and certain of its stockholders, a copy of which is on file in the office of the Secretary of the Corporation." After endorsement, the certificates shall be returned to the Stockholders, who shall, subject to the terms of this Agreement, be entitled to exercise all rights of ownership of such Stock. 9. Unity in Voting. The Stockholders each agree that with respect to all matters which are submitted to stockholder vote (and, to the extent that all or any of the three Stockholders serve in the capacity of Directors, then also with respect to all matters which are submitted to Director vote), prior to casting any vote with respect to any such matter, the Stockholders shall first notify one another of their respective voting intentions. No Stockholder shall be permitted to abstain from voting unless required by the provisions of the Corporation's bylaws or -8- applicable law, such as, for example, in the event of a conflict of interest. In the event the Stockholders are not in unanimous agreement with respect to any particular matter to be voted upon, then the vote of two-thirds (2/3) of the Stockholders shall be deemed to be the agreed upon vote of all of the Stockholders, and the Stockholder who is not in agreement with the other two (2) shall nevertheless cast all of his votes in unity therewith. 10. Termination. This Agreement shall terminate upon the occurrence of any of the following events: (a) Cessation of the Corporation's business; (b) Bankruptcy, receivership or dissolution of the Corporation; or (c) The voluntary agreement of all parties who are then bound by the terms hereof. Upon the termination of this Agreement, each Stockholder shall surrender to the Corporation the certificates for his Stock and the Corporation shall issue to such Stockholder, in lieu thereof, new certificates for an equal number of shares without the endorsement set forth in Paragraph 8 hereof. 11. Notices. All notices, offers and acceptances or rejections thereof required to be given hereunder, shall be given -9- by certified mail to the parties hereto at the addresses listed below, or at such other address as may be stated from time to time, and shall be deemed delivered upon deposit in the United States mail, postage prepaid: To the Corporation: HLM of Oregon, Architecture and Planning, P.C. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon With a Copy to: Shirley J. Linn, Esq. Underwood Kinsey Warren & Tucker, P.A. 2020 Charlotte Plaza 201 S. College Street Charlotte, NC 28244 To Brannon: Vernon B. Brannon 5301 Mirabell Road Charlotte, NC 28226 To Harris: Joseph M. Harris 21120 Blakely Shores Drive Davidson, NC 28031 To Lituczy: Victor A. Lituczy 2461 Summit Drive Lake Oswego, OR 97034 12. Binding Effect. This Agreement shall be binding not only upon the parties hereto, but also upon their heirs, executors, personal representatives, successors and/or permitted assigns; and the parties hereby agree for themselves and their heirs, executors, personal representatives, successors and/or permitted assigns, to execute any instruments and to perform any acts which may be necessary or proper to carry out the purposes -10- of this Agreement. This Agreement may be amended or modified only by a unanimous vote of all parties then bound hereunder. 13. Applicable Law. This Agreement shall be governed by the laws of the State of North Carolina and constitutes the entire agreement between the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed and sealed, effective as of the day and year first above written. ____________________________(SEAL) VERNON B. BRANNON (SEAL) ------------------------------ JOSEPH M. HARRIS (SEAL) ------------------------------- VICTOR A. LITUCZY HLM OF OREGON, ARCHITECTURE AND PLANNING, P.C. By: ---------------------------------- President -11- EX-10 10 EXHIBIT 10.7 EXHIBIT 10.7 STOCKHOLDERS' VOTING AGREEMENT THIS STOCKHOLDERS' VOTING AGREEMENT (the "Agreement") is made and entered into effective as of the 29th day of May, 1997, between and among JOSEPH M. HARRIS ("Harris"), VERNON B. BRANNON ("Brannon") and WILLIAM J. BLALOCK ("Blalock") (Harris, Brannon and Blalock hereinafter referred to singularly as "Stockholder" and collectively as the "Stockholders"). R E C I T A L S: The Stockholders are the owners and holders of certain shares of the outstanding capital stock of HLM Design, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"). The Stockholders are entering into this Agreement to avoid a potential division among the Stockholders and for the purpose of assuring stability of management and continuity of business policies during the term hereof. NOW, THEREFORE, in consideration of the premises and the mutual promises of the parties hereto and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Stockholders agree as follows: 1. Unity of Voting. The Stockholders agree to cast all of their votes in unity with respect to all matters of "Fundamental Significance" (as defined in Paragraph 3 below) which are submitted to the Stockholders for vote in their capacity as stockholders of the Corporation and, to the extent that all three (3) Stockholders serve in the capacity of directors of the Corporation, then also with respect to all matters of Fundamental Significance which are submitted to the Stockholders for vote in their capacity as directors. 2. Manner of Determining Unity. Prior to casting any vote with respect to any matter of Fundamental Significance, the Stockholders shall first notify one another of their respective voting intentions. No Stockholder shall be permitted to abstain from voting unless required by the provisions of the Corporation's bylaws or applicable law such as, for example, in the event of a conflict of interest. In the event the Stockholders are not in unanimous agreement with respect to any particular matter to be voted upon, then the vote of two-thirds (2/3) of the Stockholders shall be deemed to be the agreed upon vote of all of the Stockholders, and the Stockholder who is not in agreement with the other two (2) shall nevertheless cast all of his votes in unity therewith. -2- 3. Matters of Fundamental Significance. For the purposes of this Agreement, matters of "Fundamental Significance" shall mean and include any and all matters pertaining to one (1) or more of the following: (a) The issuance, exercise, purchase or redemption by the Corporation of any capital stock, stock warrant, stock option or debenture of the Corporation; (b) The formation, acquisition or divestiture by the Corporation of any business entity, whether in the form of a division, subsidiary or other affiliated or non-affiliated entity; (c) The incurring of indebtedness, directly or indirectly (including, without way of limitation, the guaranty of debt of any other person or entity) by the Corporation, or the modification of any such existing indebtedness or instrument; or (d) The merger, share exchange, or dissolution of the Corporation, or any sale of the Corporation's assets other than in the ordinary course of business. -3- 4. Legend. So long as this Agreement remains in effect, there shall be noted conspicuously upon each certificate representing shares of Common Stock owned by the Stockholders the following statement: "THE VOTING OF THIS SECURITY IS SUBJECT TO RESTRICTIONS CONTAINED IN A STOCKHOLDERS' VOTING AGREEMENT DATED AS OF THE 29TH DAY OF MAY, 1997, AS THE SAME MAY BE AMENDED FRO TIME TO TIME, TO WHICH THE HOLDER OF THIS SECURITY IS A PARTY, AND THIS SECURITY SHALL NOT BE VOTED EXCEPT IN COMPLIANCE WITH SAID AGREEMENT, A COPY OF SAID AGREEMENT IS ON FILE WITH THE COMPANY." 5. Termination. This Agreement shall terminate upon the occurrence of any of the following events: (a) Cessation of the Corporation's business; (b) Bankruptcy, receivership or dissolution of the Corporation; or (c) The voluntary agreement of all parties who are then bound by the terms hereof. Upon the termination of this Agreement, each Stockholder shall surrender to the Corporation the certificates for all of his -4- capital stock and the Corporation shall issue to such Stockholder, in lieu thereof, new certificates for an equal number of shares of capital stock without the legend provided in Paragraph 4 above. 6. Notices. All notices required to be given hereunder shall be given by hand delivery or certified mail to the parties hereto at the addresses listed below, or at such other address as may be stated from time to time, and shall be deemed delivered upon receipt, in the event of hand delivery, or upon deposit in the United States mail, postage prepaid: To the Corporation: HLM Design, Inc. 121 West Trade Street, Suite 2950 Charlotte, NC 28202 ATTN: Vernon B. Brannon With a Copy to: Shirley J. Linn, Esq. Underwood Kinsey Warren & Tucker, P.A. 2020 Charlotte Plaza 201 S. College Street Charlotte, NC 28244-2020 To Harris: Joseph M. Harris 21120 Blakely Shores Drive Davidson, NC 28031 To Brannon: Vernon B. Brannon 5301 Mirabell Road Charlotte, NC 28226 To Blalock: William J. Blalock 133 Laurens Street S.W. Aiken, SC 29801 -5- 7. Binding Effect. This Agreement shall be binding not only upon the parties hereto, but also upon their heirs, executors, agents, powers of attorney, personal representatives, successors, transferees and/or permitted assigns; and the parties hereby agree for themselves and their heirs, executors, agents, powers of attorney, personal representatives, successors, transferees and/or permitted assigns, to execute any instruments and to perform any acts which may be necessary or proper to carry out the purposes of this Agreement. This Agreement may be amended or modified only by a unanimous vote of all parties then bound hereunder. 8. Applicable Law. This Agreement shall be governed by the laws of the State of North Carolina and constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed and sealed, effective as of the day and year first above written. -6- /s/ Joseph M. Harris (SEAL) -------------------------------- JOSEPH M. HARRIS /s/ Vernon B. Brannon (SEAL) --------------------------------- VERNON B. BRANNON /s/ William J. Blalock (SEAL) -------------------------------- WILLIAM J. BLALOCK -7- EX-23 11 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders We consent to the use in this Registration Statement relating to the shares of Common Stock of HLM Design, Inc. on Form S-1 of our report dated (i) November 11, 1997 on the financial statements of HLM Design, Inc. as of April 25, 1997 and for the period ended April 25, 1997, (ii) our report dated October 31, 1997 on the financial statements of Hansen Lind Meyer, Inc. as of April 26, 1996 and April 25, 1997 and for each of the three years in the period ended April 25, 1997 appearing in the Prospectus, which is a part of this Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Charlotte, North Carolina November 19, 1997 -----END PRIVACY-ENHANCED MESSAGE-----