-----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, BMud/PnceYEsmzIL72rChfbnjroqfzvqS0bqEXQykGCSBG+v5PTLe7aZ4wpcfAcD 7I1aCgJPDUksazZvSBaUrw== 0000950168-98-000159.txt : 19980123 0000950168-98-000159.hdr.sgml : 19980123 ACCESSION NUMBER: 0000950168-98-000159 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19980121 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HLM DESIGN INC CENTRAL INDEX KEY: 0001049129 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 562018819 STATE OF INCORPORATION: DE FISCAL YEAR END: 0425 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-40617 FILM NUMBER: 98510561 BUSINESS ADDRESS: STREET 1: 121 W TRADE ST STREET 2: STE 2950 CITY: CHARLOTTE STATE: NC ZIP: 28202 BUSINESS PHONE: 7043580779 MAIL ADDRESS: STREET 1: 121 WEST TRADE STREET STREET 2: SUITE 2950 CITY: CHARLOTTE STATE: NC ZIP: 28202 S-1/A 1 HLM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1998 REGISTRATION NO. 333-40617 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 1 TO 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. [ ] ------------------------ 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 , 1998 PROSPECTUS 500,000 SHARES HLM DESIGN, INC. COMMON STOCK ------------------------ All of the 500,000 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 $11.00 and $13.00 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 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ [CAPTION] 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 $500,000. (3) HLM Design has granted to the Underwriters an option, exercisable within 45 days of the date hereof, to purchase up to an aggregate of 75,000 additional shares of Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to HLM Design will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The Shares are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Shares will be made in New York, New York on or about , 1998. BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. WESTPORT RESOURCES INVESTMENT SERVICES, INC. MARION BASS COMPANIES ------------------------ The date of this Prospectus is , 1998. [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 AN 11-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 HLM Design of Northamerica, Inc. (formerly named Hansen Lind Meyer Inc.), an Iowa corporation ("HLMI"), HLM Design of the Southeast, P.C. (formerly named HLM of North Carolina, P.C.) ("HLMNC") and HLM Design of the Northwest, Architecture, Engineering and Planning, P.C. (formerly named HLM of Oregon, Architecture and Planning, P.C.) ("HLMO"). HLMI has been in operation for over thirty years. HLMNC and HLMO were organized in 1996 but have had no operations to date. These three AEP Firms have each entered into a Management and Services Agreement with HLM Design. The Managed Firms operate offices in Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando, Florida, Bethesda, Maryland, Denver, Colorado, Sacramento, California, Philadelphia, Pennsylvania, Portland, Oregon and Charlotte, North Carolina. HLM DESIGN IS NOT ENGAGED IN THE PRACTICE OF ARCHITECTURE, ENGINEERING OR PLANNING. Joseph M. Harris and Vernon B. Brannon, executive officers and principal stockholders of HLM Design, are also the principal stockholders and officers of the Managed Firms, HLMI, HLMNC and HLMO. As officers of the Managed Firms, they caused the Managed Firms to enter into Management and Services Agreements with HLM Design and as stockholders of each of the Managed Firms they entered into Stockholders' Agreements (as described below). See "Certain Transactions -- Relationships with Managed Firms." A full-service AEP Firm provides a spectrum of services in various specialties to customers through a broad range of professionals, including architects, mechanical, electrical, structural and civil engineers, landscape architects, interior designers and construction administration personnel. HLM Design has chosen to focus its effort on the management of full-service AEP Firms because it believes these firms offer a competitive advantage -- the ability to provide a full line of high-quality, cost effective services -- over firms that provide a more narrow range of services. HLM Design believes that its consolidation strategy will assist in attracting new AEP Firms as a result of two major trends: (1) the increasing complexity, cost and competitiveness of the design practice requiring operating and cost efficiencies, and (2) the need for access to a wider pool of geographically dispersed professionals in order to provide solutions for the evolving needs of their clients. As a management company, HLM Design's relationship with the Managed Firms is contractual; it has no ownership interest in the Managed Firms. As a result, stockholders in HLM Design will have no direct or indirect ownership interest in the Managed Firms. HLM Design's strategy is to expand revenues through (1) the development of new long-term Management and Services Agreements with full-service AEP Firms throughout the United States and (2) the expansion of services to existing clients. Currently, HLM Design is not engaged in negotiations with any AEP Firms. HLM Design's principal executive office is located at 121 West Trade Street, Suite 2950, Charlotte, North Carolina and its telephone number is (704) 358-0779. 3 OPERATING STRATEGY The Company provides, primarily through HLMI, a complement of architectural, engineering and planning services to a variety of clients in several industries. These services include, in addition to the provision of architectural and engineering services, all phases of a project starting with assistance in the funding process, development of a master plan at the inception of a project, and oversight of all phases of the construction project. The services also may involve the redesign of a workplace to make it efficient, reliable and easy to maintain. The Company has developed a strength and is recognized as a national leader in the following markets: (Bullet) Healthcare -- In the last five years, HLMI has designed and constructed more than 15 million square feet of healthcare facilities. Clients have ranged from 20-bed hospitals in the rural mid-west to America's most prestigious academic medical centers. Healthcare clients include Duke University Medical Center, University of Chicago Hospitals, University of Iowa Hospitals and Clinics, Rush-Presbyterian-St. Lukes Medical Center, Thomas Jefferson University Hospital and Georgetown University Medical Center. (Bullet) Justice -- HLMI has designed over 10 million square feet of justice facilities in the last ten years. It has designed jail and prison projects valued at over $500 million and has designed emerging court facility projects valued at over $555 million. (Bullet) High-tech Research Facilities -- HLMI has designed research facilities valued at over $500 million. The Company's clients in this market include some of the most prestigious in the country including Johns Hopkins University, the National Institutes of Health, the Mayo Foundation, and Georgetown University. Planning for high-tech research facilities is intended to optimize space utilization and provide flexibility to adapt to changing technology and funding constraints. All of the Company's architecture, engineering and planning services are provided through the Managed Firms, and not by HLM Design. GROWTH STRATEGY HLM Design intends to implement an aggressive, yet disciplined, expansion program by pursuing Management and Services Agreements with (i) large "regional" AEP Firms with established operating histories located in large metropolitan and high-growth suburban geographic markets that the Company does not currently serve and (ii) small firms that provide operational diversity in geographic areas that will complement the services that are either currently provided by the Company in such geographic areas or that are intended to be provided in the future. HLM Design believes its approach will be attractive to these large and small AEP Firms because it will provide these firms with economies of scale and the synergies that result from increased purchasing power, a greater breadth of services, an increased pool of professionals, and geographical diversity. Furthermore, this strategy will give these regional and local AEP Firms, as a part of the Company, the ability to provide services to existing and future clients with national operations that might otherwise have turned to "non-local" firms to service their needs. The goal is for the Company to be the single source provider for large national clients that have geographically diverse operations. HLM Design generally expects that AEP Firms that sign Management and Services Agreements will retain existing high-quality professional employees and continue to operate in an effective and efficient manner with architects, engineers and planning professionals who understand the local market. HLM Design's management team will provide all management and administrative services to the AEP Firms. Additionally, management believes they are positioned to pursue larger, well established AEP Firms as a result of the depth of HLM Design's management team, HLM Design's capital structure and the reputation of the management team in the design industry. Management also believes these goals can be achieved at less cost than that which would be incurred by AEP firms operating on a stand alone basis. CERTAIN RISK FACTORS The Common Stock offered hereby involves a high degree of risk. Prospective purchasers should consider that: (i) 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; (ii) conflicts of interest could arise between HLM Design and Joseph Harris and Vernon Brannon, the President and Chief Financial Officer, respectively, of HLM Design, in connection with the operation and enforcement of the provisions of Stockholders' Agreements and the Management and Services Agreements; (iii) HLM Design's revenues are currently derived from Management and Services Agreements with three firms, only one of which had active operations at October 31, 1997 and all of which are related to each other, and to HLM Design, by common and principal stockholders, Messrs. Harris and Brannon; (iv) HLM Design's operating and growth strategies require substantial capital resources resulting in the incurrence of long-term and short-term indebtedness and may result in the public or 4 private issuance from time to time of additional debt or equity securities, including the issuance of such securities in connection with the execution of new Management and Services Agreements; (v) AEP Firms that have entered into Management and Services Agreements with HLM Design have the right to terminate such agreements upon the filing by HLM Design of a petition of involuntary bankruptcy and assignment for the benefit of creditors, or upon other action taken voluntarily or involuntarily under any federal or state law for the benefit of debtors; (vi) because of the unique structure of the relationship between HLM Design and its Managed Firms, many aspects of these relationships have not been the subject of prior regulatory interpretations and there can be no assurance that a review of the Company's business by applicable regulatory authorities will not result in determinations that may adversely affect the operations of the Company or prevent its continued operations; (vii) the Company's success depends to a significant degree upon the continued contributions of Messrs. Harris and Brannon; and (viii) there is no existing market for the Common Stock and no assurance that one will develop following the Offering can be given. PROSPECTIVE INVESTORS SHOULD ALSO BE AWARE THAT AS OF THE DATE HEREOF, HLM DESIGN HAS ONLY ENTERED INTO MANAGEMENT AND SERVICES AGREEMENTS WITH AFFILIATED ENTITIES AND NO ASSURANCES MAY BE GIVEN THAT HLM DESIGN WILL BE SUCCESSFUL IN ENTERING INTO SUCH AGREEMENTS WITH OTHER AEP FIRMS. See "Risk Factors" beginning on page 7 for a discussion of factors that should be considered by prospective purchasers of the Common Stock offered hereby. THE OFFERING Common Stock offered by HLM Design.................... 500,000 shares (1) Common Stock to be outstanding after the Offering..... 1,106,364 shares (1)(2)(3) Total............................................ 1,106,364 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 75,000 shares that may be sold by HLM Design upon exercise of the over-allotment option granted to the Underwriters. See "Underwriting." (2) Excludes (i) 138,000 shares of Common Stock reserved for future issuance under HLM Design's Stock Option Plan (as defined herein), including an option to purchase 100,000 shares of Common Stock that will be granted immediately before the completion of the Offering, (ii) 50,000 shares of Common Stock reserved for future issuance under HLM Design's ESPP (as defined herein) and (iii) 148,610 shares of Common Stock reserved for future issuance upon exercise of the Warrants (as defined herein). (3) Gives effect to the Stock Split. 5 SUMMARY HISTORICAL FINANCIAL DATA The following summary historical and financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of HLM Design and Affiliates and the Predecessor Company as defined below and the related notes thereto included elsewhere in this Prospectus. The following summary historical financial data for the Predecessor Company for each of the three fiscal years ended April 25, 1997 are derived from audited financial statements, which are included elsewhere in this Prospectus. The summary financial data (Predecessor Company) for the one month ended May 30, 1997, and the six months ended October 25, 1996 are derived from the unaudited financial statements of HLMI, which are included elsewhere in this Prospectus. The selected financial data for the six months ended October 31, 1997 are derived from the unaudited combined financial statements of HLM Design and for the five months ended October 31, 1997 for, HLMI, HLMNC and HLMO, which are included elsewhere in this Prospectus. In the opinion of management, these unaudited financial statements reflect all adjustments necessary for a fair presentation of its results of operations and financial condition. The results of operations for an interim period are not necessarily indicative of results of operations for a full fiscal year or any other interim period. All of the data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes included elsewhere in this Prospectus.
PREDECESSOR COMPANY (1) ----------------------------------------------------------------------- SIX FOR THE YEAR ENDED MONTHS ONE MONTH ----------------------------------------- ENDED ENDED APRIL 30, APRIL 26, APRIL 25, OCTOBER 25, MAY 30, 1995 1996 1997 1996 1997 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA: Revenue........................................ $29,122,557 $28,554,424 $26,754,710 $13,503,623 $2,233,036 ----------- ----------- ----------- ----------- ----------- Costs and Expenses: Direct cost of revenue......................... 15,685,671 14,261,952 13,376,251 7,534,491 898,979 Operating costs................................ 14,098,729 13,104,278 12,414,739 6,074,195 1,163,141 ESOP expenses.................................. 573,837 584,202 408,765 271,652 Amortization on intangible assets.............. 5,952 99,145 107,670 54,702 9,571 ----------- ----------- ----------- ----------- ----------- Total costs and expenses....................... 30,364,189 28,049,577 26,307,425 13,935,040 2,071,691 ----------- ----------- ----------- ----------- ----------- Income (Loss) from Operations.................. (1,241,632) 504,847 447,285 (431,417 ) 161,345 ----------- ----------- ----------- ----------- ----------- Other Income (Expense): Net Interest................................... (142,744) (383,552) (396,007) (192,794 ) (36,951 ) Non-Operating income........................... 428,475 850,273 285,635 ----------- ----------- ----------- ----------- ----------- Total Other Income (Expense)............... 285,731 466,721 (110,372) (192,794 ) (36,951 ) ----------- ----------- ----------- ----------- ----------- Income (Loss) Before Income Taxes.............. (955,901) 971,568 336,913 (624,211 ) 124,394 Income tax expense (benefit)................... (360,080) 435,459 219,799 (192,346 ) 43,000 ----------- ----------- ----------- ----------- ----------- Net Income (Loss) (4).......................... $ (595,821) $ 536,109 $ 117,114 $ (431,865 ) $ 81,394 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA: Working capital(deficiency).................... $(1,029,547) $(1,620,488) $(1,902,363) $(1,717,490) $(2,238,531) Total assets................................... 10,519,859 12,577,992 12,874,503 12,376,973 17,639,673 Long-term debt................................. 840,302 564,577 103,792 453,870 2,476,008 Total liabilities.............................. 10,690,072 11,819,796 11,670,962 11,639,830 16,354,738 Warrants outstanding........................... Stockholders' equity (deficiency) (3).......... (170,213) 758,196 1,203,541 737,143 1,284,935 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 (deficiency) (3).......... 407,848
- --------------- (1) The Predecessor Company is HLMI. (2) Includes information for HLM Design and for the Managed Firms for the five months from May 31, 1997 to October 31, 1997 on a combined basis. HLM Design's operations for the month ended May 30, 1997 reflected herein include no revenues or expenses. (3) The Company has paid no cash dividends from May 1, 1994 to October 31, 1997. (4) Historical net income per share is not presented, as the historical capital structure of the Company prior to the Offering is not comparable with the capital structure that will exist after the Offering. 6 RISK FACTORS PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE PRINCIPAL RISK FACTORS SET FORTH BELOW. INNOVATIVE STRATEGY HLM Design's operating and growth strategies are predicated upon its ability to achieve significant consolidation of AEP Firm operations and to generate profits from those firms. The process of identifying suitable candidates for entering into Management and Services Agreements and proposing, negotiating and implementing economically feasible affiliations with AEP Firms is lengthy and complex. Such strategies require intense management direction in a dynamic marketplace that is increasingly subject to cost containment and other competitive pressures. There can be no assurance that these strategies will be successful or that modifications to the Company's strategies will not be required. CONFLICTS OF INTEREST Joseph Harris and Vernon Brannon, the President and the Chief Financial Officer, respectively, of HLM Design, are also principal stockholders in each of HLMI, HLMNC and HLMO and have entered into stockholders' agreements with respect to those firms that, among other things, permit the management by HLM Design of each of HLMI, HLMNC and HLMO. Conflicts of interest could arise between HLM Design and Messrs. Harris and Brannon in connection with the operation and enforcement of the provisions of these stockholders' agreements and the Management and Services Agreements. See "Certain Transactions." The interests of HLM Design could be materially adversely affected if circumstances arose in which it would be in the interest of Joseph Harris and Vernon Brannon to interfere with the performance by HLMI, HLMNC or HLMO of the Management and Services Agreements. Upon the execution of new Management and Services Agreements with AEP Firms, similar conflicts of interest would arise between HLM Design and stockholders of such firms. BENEFITS OF OFFERING TO INSIDERS Joseph M. Harris and Vernon B. Brannon, stockholders, directors and executive officers of HLM Design, will benefit personally from the Offering in several ways. Both Mr. Harris and Mr. Brannon will be released from personal guaranties in connection with the Pacific/Equitas Loan (as defined below) upon the consummation of the Offering and the repayment of the Pacific/Equitas Loan from the proceeds of the Offering. The Offering will result in increased liquidity for Messrs. Harris and Brannon, as well as all other current stockholders of HLM Design, with respect to the shares of Common Stock each such person currently holds in HLM Design. For a description of restrictions on such person's ability to freely transfer Common Stock outstanding on the date hereof and not sold in the Offering, see "Shares Eligible for Future Sale." Additionally, in connection with the consummation of the Offering, Messrs. Harris and Brannon will enter into Employment Agreements with HLM Design whereby each will receive compensation and other benefits as well as options to purchase 50,000 shares of HLM Design Common Stock. See "Management -- Employment Agreements." MANAGEMENT AND SERVICES AGREEMENTS WITH ONLY THREE FIRMS HLM Design's revenues are derived solely from its contractual relationships with the Managed Firms. Currently, HLM Design has Management and Services Agreements with three firms, only one (HLMI) of which had active operations at October 31, 1997. All three of these firms are related to each other and to HLM Design, by common principal stockholders, Joseph M. Harris and Vernon B. Brannon. There can be no assurance that HLM Design will be able to successfully enter into Management and Services Agreements with additional firms. ADDITIONAL FINANCINGS HLM Design's operating and growth strategies require substantial capital resources. These requirements will result in HLM Design incurring long- and short-term indebtedness and may result in the public or private issuance, from time to time, of additional debt or equity securities, including the issuance of such securities in connection with the execution of Management and Services Agreements. There can be no assurance that any such financing will be obtainable on terms acceptable to HLM Design. Additionally, issuing securities in connection with the execution of Management and Services Agreements will dilute the percentage of Common Stock owned by stockholders prior to such issuance. There is also no assurance that such financings will not cause dilution in the book value per share of the Common Stock. 7 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 could require structural and organizational modifications of HLM Design's form of relationships with its Managed Firms. Consequently, if the Company is unable or unwilling to undertake such modifications, it may be limited in its ability to expand into certain jurisdictions. Although the Company believes its operations are in material compliance with existing applicable law, there can be no assurance that the Company's existing Management and Services Agreements will not be successfully challenged as, for example, constituting the unlicensed practice of architecture, or that the enforceability of the provisions thereof, including non-competition agreements, will not be limited. DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT AND PERSONNEL RESOURCES The Company's success depends to a significant degree upon the continued contributions of its management team (particularly its senior management) and professional personnel. The loss of the services of one or more of these key employees could have a material adverse effect on the Company. The Company carries key employee insurance on each of Joseph M. Harris and Vernon B. Brannon and has employment and/or noncompetition agreements with Messrs. Harris and Brannon as well as with several members of its senior professional staff, but does not have such agreements with all of its most important personnel. There can be no assurance that a court would enforce the noncompetition agreements as currently in effect. A court might, for example, narrow the geographical or client restrictions contained in such agreement, lessen the length of the agreement or, in some cases, refuse to enforce any provision of the agreement. If courts refuse to enforce noncompetition agreements of HLM Design or the Managed Firms, such decisions could have a material adverse effect on HLM Design. In addition, as the Company expands it may need to hire additional personnel and will likely be dependent on the senior professional staff of any firm with which HLM Design enters into a Management and Services Agreement. The market for qualified employees in the industry and in the regions in which the Company operates is competitive and may subject the Company to increased labor costs in periods of low unemployment. The loss of the services of key employees or the inability to attract additional qualified professional staff could have a material adverse effect on the Company. In addition, the lack of qualified professional staff or employees of the Company's potential candidates for Management and Services Agreements may limit the Company's ability to consummate future agreements. See "Business -- Growth Strategy," "Business -- Competition" and "Management." RISKS INHERENT IN PROVISION OF SERVICES The Managed Firms and certain employees of the Managed Firms are involved in the delivery of services to the public and, therefore, are exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in substantial damage awards to the claimants that may exceed the limits of any applicable insurance coverage. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. Although HLM Design is indemnified under its Management and Services Agreements for claims against the Managed Firms and their employees, HLM Design maintains liability insurance for itself and negotiates liability insurance for its Managed Firms the professionals employed by its Managed Firms. Successful malpractice claims asserted against the Managed Firms, their employees or HLM Design could have an adverse effect on the Company's profitability. 8 DEPENDENCE ON MANAGED FIRMS HLM Design's revenues depend on fees and revenues generated by various AEP Firms managed by HLM Design. Any material loss of revenue by such firms, whether as a result of the loss of professionals or otherwise, could have a material adverse effect on HLM Design. HLM Design is not engaged in the practice of architecture, engineering or planning and, as a result, does not control (i) the practice of architecture, engineering or planning by professionals or (ii) the compliance with certain regulatory requirements directly applicable to the Managed Firms. COMPETITION The business of providing architectural, engineering and planning related services is highly competitive. The Company's competition includes many other firms, including large national firms as well as regional or small local firms. Several companies that have established operating histories and significantly greater resources than the Company provide some of the services provided by the Managed Firms. In addition, there are other companies with substantial resources that may in the future decide to engage in activities similar to those in which the Company engages. See "Business -- Competition." CONCENTRATION OF VOTING POWER AND ANTI-TAKEOVER PROVISIONS HLM Design's Certificate of Incorporation authorizes the Board of Directors of HLM Design to issue 1,000,000 shares of preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely effect the voting power or other rights of the holders of HLM Design's Common Stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company has no present intention to issue any shares of preferred stock, there can be no assurance that the Company will not do so in the future. The application of any such provisions or the issuance of preferred stock could prevent stockholders from realizing a premium upon the sale of their shares of Common Stock upon an acquisition of the Company. See "Description of Capital Stock." Certain provisions of the Company's Certificate of Incorporation and Bylaws make it more difficult for stockholders of the Company to effect certain corporate actions. See "Description of Capital Stock -- Delaware Law and Certain Charter and Bylaw Provisions." Under the Company's Stock Option Plan, options outstanding thereunder become immediately exercisable upon a change in control of the Company. See "Management -- Stock Option Plan." Additionally, HLM Design's Bylaws provide: (i) for a Board of Directors divided into three classes serving staggered terms, (ii) that special meetings of stockholders may be called only by the President or by the Company's Secretary or Assistant Secretary at the request in writing of the majority of the Board of Directors and (iii) that any stockholder seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or special meeting of stockholders, must provide timely notice thereof in writing. These provisions will impair the stockholders' ability to influence or control the Company or to effect a change in control of the Company, and may prevent stockholders from realizing a premium on the sale of their shares of Common Stock upon an acquisition of the Company. See "Description of Capital Stock." NO PRIOR PUBLIC MARKET FOR COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock. HLM Design intends to apply for 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, 9 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 $9.11 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 606,364 shares of Common Stock owned beneficially by existing stockholders of HLM Design, the 138,000 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 148,610 shares of Common Stock underlying the Warrants (as defined herein) are "restricted securities" as defined in Rule 144 under the Securities Act, and may in the future be resold in compliance with Rule 144. See "Management -- Stock Option Plan" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." No prediction can be made as to the effect that resale of shares of Common Stock, or the availability of shares of Common Stock for resale, will have on the market price of the Common Stock prevailing from time to time. The resale of substantial amounts of Common Stock, or the perception that such resales may occur, could adversely affect prevailing market prices for the Common Stock and the ability of HLM Design to raise equity capital in the future. HLM Design has agreed, subject to certain exceptions, not to issue, and all executive officers of HLM Design and the Managed Firms have agreed not to resell, any shares of Common Stock or other equity securities of HLM Design for 365 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. See "Shares Eligible for Future Sale" and "Underwriting." USE OF PROCEEDS The net proceeds to HLM Design from the sale of the shares of Common Stock offered hereby are estimated to be approximately $4.9 million ($5.7 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $12.00 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 $3.0 million of the net proceeds to repay certain indebtedness consisting of (i) the $2.0 million due under the Pacific/Equitas Loan (payable June 1, 2002 at an interest rate of 13.5%), (ii) a $0.8 million term loan from Berthel Fisher & Company Leasing, Inc. ("Berthel Leasing"), an affiliate of one of the Underwriters (payable May 1, 1998, with an interest rate of 12% due in monthly installments), and (iii) notes payable in an aggregate principal amount of $0.2 million to employee stockholders (payable at various dates until August 2002 including interest of 6.0%). The $3.0 million of indebtedness currently has an effective weighted interest cost at an annual rate equal to 25%. In connection with the merger agreement between HLMI and BBH Corp. described elsewhere in this Prospectus and the payment of the merger consideration to holders of HLMI's common stock, the Company (i) incurred indebtedness in the aggregate principal amount of $2 million to Pacific Capital, L.P. ("Pacific") and Equitas, L.P. ("Equitas") (the "Pacific/Equitas Loan") and took on the notes payable to employee stockholders, while the Berthel Leasing proceeds were used for working capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." HLM Design intends to use the remaining expected net proceeds of the Offering for working capital and other general corporate purposes, including payments made by HLM Design, for the rights to future cashflows, in connection with the execution of new Management and Services Agreements. Until utilized, the Company will invest the net proceeds in short-term, interest bearing, investment grade instruments. 10 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 0 Common Stock of HLM Design, $.01 par value, 9,000,000 shares authorized; 557,040 shares issued and outstanding, actual; 1,057,040 shares issued and outstanding, as adjusted (2)............ 5,570 10,570 Common Stock of HLMI, $.01 par value; Class A, voting authorized 2,000,000 shares; issued 200; Class B, nonvoting, authorized 1,000,000 shares, no shares outstanding....................... 2 2 Common Stock of HLMNC $.01 par value, 10,000 shares authorized; 300 shares issued and outstanding.................................................................................. 3 3 Common Stock of HLMO $.01 par value, 10,000 shares authorized; 300 shares issued and outstanding.................................................................................. 3 3 Additional Paid-in capital...................................................................... 29,717 6,024,717 Retained earnings............................................................................... 379,115 379,115 Stock Subscription Receivable -- HLM Design, HLMNC, HLMO (3).................................... (6,562) (6,562) ---------- ---------- Total stockholders' equity................................................................... 407,848 6,407,848 ---------- ---------- Total capitalization....................................................................... $5,132,159 $8,969,851 ---------- ---------- ---------- ----------
- --------------- (1) Adjusted to give effect to the Offering and the application of the net proceeds thereof. See "Use of Proceeds" and "Certain Transactions." (2) 500,000 shares if the Underwriters' over-allotment option is exercised in full. See "Underwriting" and "Principal Stockholders." Excludes (i) 138,000 shares of Common Stock reserved for future issuance under HLM Design's Stock Option Plan (including up to 100,000 shares of Common Stock reserved for issuance upon exercise of options to be granted on or before the consummation of the Offering pursuant to the Stock Option Plan), (ii) 50,000 shares of Common Stock reserved for issuance under HLM Design's ESPP, and (iii) 148,610 shares of Common Stock reserved for issuance under the Warrants (as defined herein). See "Management's Discussion of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Management -- Stock Option Plan" and "Management -- Employee Stock Purchase Plan". (3) Common stock had not been funded as of October 31, 1997. 11 DILUTION The net tangible book deficit of the Company (defined as the combined net tangible book value (deficit) of HLM Design, HLMI, HLMNC, and HLMO) as of October 31, 1997 was $1,844,445, or $3.31 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 500,000 shares of Common Stock offered hereby and the receipt of an assumed $4.9 million of net proceeds from the Offering (based on an assumed initial public offering price of $12 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 $2.89 per share. This represents an immediate increase in the net tangible book value of $6.20 per share to existing stockholders and an immediate dilution of $9.11 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...................................................................... $12.00 Net tangible book value per share before giving effect to the Offering............................................. (3.31) Increase in net tangible book value per share attributable to the Offering......................................... 6.20 Pro forma net tangible book value per share after giving effect to the Offering...................................... 2.89 Dilution per share to new investors(1)............................................................................... $ 9.11
- --------------- (1) Dilution is determined by subtracting the net tangible book value per share of Common Stock after the Offering from the public offering price per share. 12 SELECTED FINANCIAL DATA The following selected financial data for the Predecessor Company for each of the three fiscal years ended April 25, 1997 are derived from audited financial statements, which are included elsewhere in this Prospectus. The following selected financial data for the Predecessor Company for each of the two fiscal years ended April 30, 1994 are derived from unaudited financial statements, which are not included in this Prospectus. The selected financial data (Predecessor Company) for the one month ended May 30, 1997, and the six months ended October 25, 1996 are derived from the unaudited financial statements of HLMI, which are included elsewhere in this Prospectus. The selected financial data for the six months ended October 31, 1997 are derived from the unaudited combined financial statements of HLM Design, and for the five months ended October 31, 1997 for HLMI, HLMNC and HLMO, which are included elsewhere in this Prospectus. In the opinion of management, these unaudited financial statements reflect all adjustments necessary for a fair presentation of its results of operations and financial condition. The results of operations for an interim period are not necessarily indicative of results of operations for a full fiscal year or any other interim period. All of the data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and related notes included elsewhere in this Prospectus.
(PREDECESSOR COMPANY) (1) ------------------------------------------------------------------------------------------------- SIX FOR THE YEAR ENDED MONTHS ONE MONTH ------------------------------------------------------------------- ENDED ENDED APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 25, OCTOBER 25, MAY 30, 1993 1994 1995 1996 1997 1996 1997 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Revenue.......................... $33,464,656 $27,841,902 $29,122,557 $28,554,424 $26,754,710 $13,503,623 $ 2,233,036 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Costs and Expenses: Direct cost of revenue........... 18,371,876 15,925,434 15,685,671 14,261,952 13,376,251 7,534,491 898,979 Operating costs.................. 15,376,045 13,516,392 14,098,729 13,104,278 12,414,739 6,074,195 1,163,141 ESOP expenses.................... 474,403 564,918 573,837 584,202 408,765 271,652 Amortization on intangible assets......................... 4,464 5,952 5,952 99,145 107,670 54,702 9,571 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Total costs and expenses......... 34,226,788 30,012,696 30,364,189 28,049,577 26,307,425 13,935,040 2,071,691 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Income (Loss) from Operations.... (762,132 ) (2,170,794 ) (1,241,632) 504,847 447,285 (431,417 ) 161,345 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Other Income (Expense): Net Interest..................... (18,438 ) (43,058 ) (142,744) (383,552) (396,007) (192,794 ) (36,951) Non-Operating income............. -- -- 428,475 850,273 285,635 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Total Other Income (Expense)................... (18,438 ) (43,058 ) 285,731 466,721 (110,372) (192,794 ) (36,951) ----------- ----------- ----------- ----------- ----------- ------------ ------------ Income (Loss) Before Income Taxes.......................... (780,570 ) (2,213,852 ) (955,901) 971,568 336,913 (624,211 ) 124,394 Income tax expense (benefit)..... (260,000 ) (779,000 ) (360,080) 435,459 219,799 (192,346 ) 43,000 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Net Income (Loss) (4)............ $ (520,570 ) $(1,434,852) $ (595,821) $ 536,109 $ 117,114 $ (431,865 ) $ 81,394 ----------- ----------- ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------ ------------ BALANCE SHEET DATA: Working capital(deficiency)...... $2,059,840 $1,229,211 $(1,705,986) $(1,620,488) $(1,902,363) (1,717,490 ) (2,238,531) Total assets..................... 11,586,309 10,147,420 10,519,859 12,577,992 12,874,503 12,376,973 17,639,673 Long-term debt................... 1,598,727 1,050,330 840,302 564,577 103,792 453,870 2,476,008 Total liabilities................ 10,020,182 9,713,789 10,690,072 11,819,796 11,670,962 11,639,830 16,354,738 Warrants outstanding............. Stockholders' equity (deficiency) (3)............................ 1,566,127 433,631 (170,213) 758,196 1,203,541 737,143 1,284,935 HLM DESIGN (COMBINED) SIX MONTHS ENDED OCTOBER 31, 1997 (2) ----------- Revenue.......................... $13,186,803 ----------- Costs and Expenses: Direct cost of revenue........... 5,944,762 Operating costs.................. 5,920,332 ESOP expenses.................... Amortization on intangible assets......................... 71,496 ----------- Total costs and expenses......... 11,936,590 ----------- Income (Loss) from Operations.... 1,250,213 ----------- Other Income (Expense): Net Interest..................... (496,973 ) Non-Operating income............. ----------- Total Other Income (Expense)................... (496,973 ) ----------- Income (Loss) Before Income Taxes.......................... 753,240 Income tax expense (benefit)..... 374,125 ----------- Net Income (Loss) (4)............ $ 379,115 ----------- ----------- BALANCE SHEET DATA: Working capital(deficiency)...... 613,024 Total assets..................... 17,426,156 Long-term debt................... 4,474,234 Total liabilities................ 16,768,230 Warrants outstanding............. 250,078 Stockholders' equity (deficiency) (3)............................ 407,848
- --------------- (1) The Predecessor Company is HLMI. (2) Includes information for HLM Design and for the Managed Firms for the five months from May 31, 1997 to October 31, 1997 on a combined basis. HLM Design's operations for the month ended May 30, 1997 reflected herein include no revenues or expenses. (3) The Company has paid no cash dividends from May 1, 1992 to October 31, 1997. (4) Historical net income per share is not presented, as the historical capital structure of the Company prior to the Offering is not comparable with the capital structure that will exist after the Offering. 13 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)(14)... $ .22 ------------ Weighted average shares outstanding (000s).................................. 1,230 ------------ ------------
(FOOTNOTES ON FOLLOWING PAGE) 14 HLM DESIGN, INC. AND AFFILIATES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
PRO FORMA PRO FORMA FOR THE TWELVE (1) ADJUSTMENTS FOR THE TWELVE MONTHS ENDED PRO FORMA FOR THE MONTHS ENDED APRIL 25, 1997 ADJUSTMENTS OFFERING APRIL 25, 1997 -------------- ----------- ----------- -------------- Revenue.................................................. $ 26,754,710 $ 26,754,710 Costs and Expenses: Direct cost of revenue................................... 13,376,251 13,376,251 Operating costs.......................................... 12,414,739 $(338,000)(3) 12,031,739 (45,000)(7) ESOP expenses............................................ 408,765 (408,765)(10) Amortization of intangible assets........................ 107,670 60,330(2) 168,000 -------------- ----------- ----------- -------------- Total costs and expenses................................. 26,307,425 (731,435) 25,575,990 -------------- ----------- ----------- -------------- Income from Operations................................... 447,285 731,435 1,178,720 -------------- ----------- ----------- -------------- Other Income (Expense) Interest expense......................................... (402,509) 311,000(4) $(240,000)(6) (1,118,509) (425,000)(4) 400,000(6) (580,000)(5) (182,000)(12) Non-Operating income..................................... 292,137 292,137 -------------- ----------- ----------- -------------- Total Other Expense.................................... (110,372) (694,000) (22,000) (826,372) -------------- ----------- ----------- -------------- Income Before Income Taxes............................... 336,913 37,435 (22,000) 352,348 Income tax expense (benefit)............................. 219,799 78,579(9) (8,415)(8) 289,963 -------------- ----------- ----------- -------------- Net Income (loss)........................................ $ 117,114 $ (41,144) $ (13,585) $ 62,385 -------------- ----------- ----------- -------------- -------------- ----------- ----------- -------------- Pro forma net income per share (13)(14).................. $ .05 -------------- Weighted average shares outstanding (000s)............... 1,218.00 -------------- --------------
- --------------- (1) On May 23, 1997 BBH Corp., affiliated with HLM Design through a majority-in-interest of common stockholders, acquired HLMI in a transaction accounted for under the purchase method of accounting. BBH Corp. purchased 50,000 shares in HLMI for $3.2 million, and in connection with this transaction, BBH Corp. was merged into HLMI with HLMI being the surviving entity. Upon the merger, each share of common stock in BBH Corp. outstanding at the time of merger was converted into one share of common stock in HLMI. All Common Stock of HLMI held by BBH Corp. (including HLMI Common Stock contributed to BBH Corp. by Messrs. Harris and Brannon as their initial capital contribution to BBH Corp.) were canceled and retired. As a part of the foregoing, the stockholders of HLMI (other than BBH Corp.), including the HLMI Employee Stock Ownership Plan (the "ESOP"), redeemed their HLMI common stock for $64 a share. As a result, there was a 90% change in voting control. The assets and liabilities of HLMI were restated to fair value as of May 31, 1997. Purchase accounting was effected May 31, 1997 as it was not materially different than May 23, 1997, May 30, 1997 was the normal accounting close for HLMI and a portion of the acquisition funding commitment was not finalized until May 30, 1997. The excess of the purchase cost over the fair value of tangible net assets was recorded as goodwill and will be amortized over fifteen years. (2) Reflects the adjustment necessary for the amortization of goodwill arising from the acquisition of HLMI by BBH Corp. and the merger of BBH Corp. into HLMI. (3) Reflects the adjustment necessary to record the net decrease in depreciation expense as a result of the extended lives of depreciable assets (furniture and fixtures) due to the establishment of remaining lives subsequent to the acquisition by BBH. Management estimated the remaining useful lives of such assets from their date of acquisition or the term of lease if less. (4) Reflects the increase in interest expense resulting from the financing arrangement, which was in the form of a sale-leaseback agreement and which is reduced by the interest costs associated with bank loans that were repaid. Although the transaction was structured in the form of a sale leaseback, the transaction was in substance a financing, and, therefore, no gain or loss resulted. (5) Reflects the adjustment to record interest expense for the debt incurred to effect the acquisition of HLMI by BBH Corp. through the merger of BBH Corp. into HLMI. (6) Reflects the decrease in interest expense resulting from the repayment of certain indebtedness which is offset by an increase in deferred fee expense associated with the pay off of such indebtedness. See "Use of Proceeds". (7) Reflects the adjustment necessary to record decreased depreciation expense due to the reduction to fair value of certain leasehold improvements. 15 (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 1,057,040 shares of Common Stock are outstanding after the Offering. This amount represents 500,000 shares of Common Stock to be issued in the Offering, and 557,040 shares of Common Stock owned by the Company's stockholders prior to the Offering and inclusion of Common Stock equivalents of 184,377 related to Warrants. (12) Reflects the increase in interest expense resulting from warrants attached to certain indebtedness which was repaid with proceeds of the Offering. See "Use of Proceeds". (13) Pro forma net income per share is based upon the assumption that 1,033,500 shares of Common Stock are outstanding after the Offering. This amount represents 500,000 shares of Common Stock to be issued in the Offering and 533,500 shares of Common Stock owned by the Company's stockholders prior to the Offering and inclusion of Common Stock equivalents of 184,377 related to Warrants. (14) Fully diluted earnings per share are not materially different. 16 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............................................................................... (539,794) (590,924) ----------- ----------- Total other expense.......................................................................... (539,794) (590,924) ----------- ----------- Income (loss) before income taxes.............................................................. (564,208) 847,634 Income tax expense (benefit)................................................................... (147,344) 407,486 ----------- ----------- Net Income (loss).............................................................................. $ (416,864) $ 440,148 ----------- ----------- ----------- -----------
Revenues were $15.4 million for the six months ended October 31, 1997 compared to $13.5 million for the six months ended October 25, 1996, which is an increase of 14.2%. The increase in revenues is attributable to management's stronger focus on marketing efforts during the six months ended October 31, 1997. 17 Direct costs primarily include, direct labor, subconsultant costs, and reimbursable expenses. Direct costs were $6.8 million, or 44.4% of revenues, for the six months ended October 31, 1997, as compared to $7.5 million, or 55.8% of revenues for the six months ended October 25, 1996. This decrease as a percent of revenue is principally due to a decrease in direct labor incurred as a percentage of revenues due to improved productivity as a result of management's closer monitoring of each project, as well as, a decrease in subconsultant costs. Operating expenses were $7.0 million, or 45.7% of revenues, for the six months ended October 31, 1997 as compared to $5.9 million, or 43.8% of revenues, for the six months ended October 25, 1996. This increase is principally due to an increase in indirect labor and related costs as a result of aggressive marketing efforts to increase revenues and an increase in rent expense associated with rental of certain computer and software equipment. Amortization of intangible assets were $0.1 million for both the six months ended October 31, 1997 and October 25, 1996. The amortization expense relates to the goodwill arising from the acquisition of HLMI by BBH Corp. through the merger of BBH Corp. into HLMI. See Note 2 to the Notes to Combined Financial Statements. Interest expense was $0.6 million for the six months ended October 31, 1997 as compared to $0.5 million for the six months ended October 25, 1996. Income tax expense for the six months ended October 31, 1997 was $0.4 million as compared to an income tax benefit of $0.1 million for the six months ended October 25, 1996. The effective income tax rate was 48.1% for the six months ended October 31, 1997 as compared to 26.1% for the six months ended October 25, 1996. The effective income tax rate was higher due to non-deductible goodwill amortization and the ratio of non-deductible penalties and meals and entertainment expense to pre-tax income or loss. PREDECESSOR RESULTS OF OPERATIONS The following discussion of analysis and results of operations for the fiscal years ended 1997, 1996 and 1995 relate to the predecessor company HLMI. HLM Design was incorporated on March 6, 1997 had no significant activity as of April 25, 1997. FISCAL 1997 COMPARED WITH FISCAL 1996 Revenues were $26.8 million in fiscal 1997 compared to $28.6 million in fiscal 1996, which was a decline of 6.3%. The decline in revenues was primarily attributable to HLMI's decentralization of architectural personnel from one location to multiple locations, shift in HLMI's mix from large academic education facilities to smaller healthcare and criminal justice projects, and HLMI's efforts to focus on the estimating process and selecting contracts with profitability as the major goal, which resulted in some potential contracts not being pursued. During fiscal 1997 and fiscal 1996, approximately 70% of HLMI's revenues are related to health care projects and approximately 30% are from criminal justice and other projects. Direct costs include, among other things, direct labor, subconsultant costs, and reimbursable expenses. Direct costs were $13.4 million, or 50.0% of revenues, in fiscal 1997 as compared to $14.3 million, or 49.9% of revenues, in fiscal 1996. This increase as a percent of revenue is principally from an increase in the use of subconsultants to meet the requirements of the projects (18.2% and 16.7% of revenue in fiscal 1997 and fiscal 1996, respectively) and an increase in reimbursable expenses incurred (4.4% and 3.3% of revenue in fiscal 1997 and fiscal 1996, respectively). This increase is offset by a decrease in direct labor incurred due to improved productivity as a result of HLMI's focus on cost containment of each project (24.7% and 26.7% of revenue in fiscal 1997 and fiscal 1996, respectively). As a result of these fluctuations and decreased sales, gross profit from revenue (revenue less direct cost of revenue) decreased to $13.4 million in fiscal 1997 from $14.3 million in fiscal 1996. Operating expenses decreased 5.3% to $12.4 million, or 46.4% of revenues, in fiscal 1997 from $13.1 million, or 45.9% of revenues, in fiscal 1996. The decrease of 5.3% is principally due to a reduction in personnel costs resulting from HLMI's efforts to increase utilization of labor. ESOP expenses were $0.4 million in fiscal 1997 as compared to $0.6 million in fiscal 1996. These expenses represent principal and interest payments on the ESOP debt. Amortization of intangible assets was $0.1 million for both the six months ended October 31, 1997 and October 25, 1996. The amortization relates to the goodwill arising from the acquisition of MBP Architects, Inc. in April 1995. See Note 2 to HLMI Financial Statements. Interest expense was $0.4 million for both fiscal 1997 and fiscal 1996. 18 Non-operating income was $0.3 million in fiscal 1997 compared to $0.9 million in fiscal 1996. Non-operating income is principally due to the gain, on a lease termination, as a result of the cumulative excess of lease expense over the lease payments made as of the termination dates. In fiscal 1997 and fiscal 1996, HLMI terminated facility leases resulting in a gain of $0.3 million and $0.8 million, respectively. Income tax expense was $0.2 million in fiscal 1997 compared to $0.4 million in fiscal 1996. The effective income tax rate in fiscal 1997 was 65.2% compared to 44.8% in fiscal 1996. The effective tax rate was higher for fiscal 1997 as compared to fiscal 1996 due principally to nondeductible penalties (17.42% in 1997) and meals and entertainment expenses (9.3% in 1997). The increase in penalty expense is due to HLMI's inability to timely fund payroll taxes. FISCAL 1996 COMPARED WITH FISCAL 1995 Revenues were $28.6 million in fiscal 1996 compared to $29.1 million in fiscal 1995, a decline of 2.0%. The decline in revenues was primarily attributable to HLMI's decentralization of architectural services from one location to multiple locations and its efforts to focus on the estimating process and selecting contracts with profitability as the major goal, which resulted in some potential contracts not being pursued. During fiscal 1996, approximately 70% of HLMI's revenues were related to health care projects and approximately 30% were from criminal justice and other projects as compared to during fiscal 1995, approximately 73% of HLMI's revenues were related to health care projects and approximately 27% were from criminal justice and other projects. Direct costs include, among other things, direct labor, subconsultants costs, and reimbursable expenses. Direct costs were $14.3 million, or 49.9% of revenues, in fiscal 1996 as compared to $15.7 million, or 53.9% of revenues, in fiscal 1995. This decrease as a percent of revenues is principally from a decrease in the use of subconsultants to meet the requirements of the projects (16.7% and 18.4% of revenue in fiscal 1996 and fiscal 1995, respectively), a decrease in direct labor incurred as a result of HLMI's focus on cost containment of each project (26.7% and 27.3% of revenue in fiscal 1996 and fiscal 1995, respectively) and a decrease in reimbursable expenses incurred (3.3% and 5.3% of revenue in fiscal 1996 and fiscal 1995, respectively). As a result of these reductions, gross profit from revenue (revenue less direct cost of revenue) increased to $14.3 million in fiscal 1996 from $13.4 million in fiscal 1995. Operating expenses decreased 7.1% to $13.1 million, or 45.9% of revenues, in fiscal 1996 from $14.1 million, or 48.4% of revenues, in fiscal 1995. The decrease is principally due to a decrease in rent and occupancy costs resulting from management's renegotiation of certain office leases and, to a lesser extent, a decrease in the costs incurred for contingencies related to various disputes and legal actions related to contract operations due to HLMI's focus on prevention and resolution of such matters on an on going basis. This is partially offset by an increase in salary and related costs and reproduction costs. ESOP expenses were $0.6 million for both fiscal 1996 and 1995. The expenses represent principal and interest payments on the ESOP debt. Amortization of intangible assets were $0.1 million in fiscal 1996 and $5,952 in fiscal 1995. This increase relates to the goodwill arising from the acquisition of MBP Architects, Inc. in April 1995. See Note 2 to Notes to HLMI Financial Statements. Interest expense was $0.4 million for fiscal 1996 and $0.2 million for fiscal 1995. This increase is primarily due to increased borrowing for working capital needs in fiscal 1996. Non-operating income was $0.9 million in fiscal 1996 compared to $0.4 million in fiscal 1995. In fiscal 1996, the Company terminated facility leases resulting in a gain of $0.8 million. In fiscal 1995, HLMI sold its airplane which generated a gain on sale of assets of $0.4 million. See Note 4 to Notes to HLMI Financial Statements. Income tax expense was $0.4 million in fiscal 1996 compared to an income tax benefit of $0.4 million in fiscal 1995. The effective income tax rate in fiscal 1996 was 44.8% compared to 37.7% in fiscal 1995. The effective tax rate was higher for fiscal 1996 as compared to fiscal 1995 due to the ratio of non-deductible meals and entertainment expense to pre-tax income or loss. LIQUIDITY AND CAPITAL RESOURCES At April 25, 1997, HLMI's current liabilities of $11.6 million exceeded current assets of $9.7 million, resulting in a working capital deficit of $1.9 million. During fiscal 1997, HLMI generated $0.5 million in cash from operating activities. HLMI used $0.7 million in investing activities, primarily the purchase of equipment. HLMI received proceeds from new debt 19 of $0.5 million and repaid borrowings on notes payable of $0.4 million. These transactions resulted in a net decrease in cash of $8,809 for the fiscal year. At October 31, 1997, the Company's current assets of $11.7 million exceeded current liabilities of $12.3 million resulting in a working capital of $0.6 million. During the six months ended October 31, 1997, the Company used $48,600 in cash from operating activities. The Company used $0.4 million for investing activities, primarily the purchase of equipment. The Company generated $0.5 million for financing activities, primarily from long-term borrowings reduced by the payment of the ESOP buyback. The Company received proceeds, in June 1997, from financing, in the form of a capital lease of $2.8 million (the "Lease Financing") from Berthel Leasing. The proceeds were used to repay a line of credit and a note payable due to Firstar Bank of Iowa, N.A. In connection with the Lease Financing, HLMI granted a security interest in all of its personal property to Berthel Leasing and Joseph Harris, Vernon Brannon and William Blalock, a former director of HLM Design, partially guaranteed the amount due to Berthel Leasing. HLM Design also entered into a term loan, in September 1997, of $0.8 million with Berthel Leasing for working capital purposes. In consideration for this borrowing, HLM Design sold warrants to purchase 3,422 shares of Common Stock (37,642 shares after giving effect to the Stock Split), subject to adjustment in certain circumstances, to Berthel Leasing (the "Berthel Warrants"). See "Certain Transactions -- Berthel Leasing Lease Financing" and "Description of Capital Stock -- Warrants." In December 1997, Berthel Leasing exercised its Warrants and purchased 3,422 shares of Common Stock (37,642 shares after giving effect to the Stock Split) at an exercise price of $.01 per share. In connection with the merger agreement with BBH Corp. and the payment of the merger consideration to holders of HLMI common stock, the Company (i) issued indebtedness in the aggregate principal amount of $2 million to Pacific and Equitas, (ii) obtained financing from First Charter National Bank in the form of a revolving line of credit in an aggregate principal amount of $1 million (the "First Charter Loan") and obtained notes payable to employee stockholders for $0.2 million. The Pacific/Equitas Loan is secured by, among other things, a collateral assignment of HLM Design's interest in its Management and Services Agreements and a security interest in HLM Design's personal property and fixtures. Additionally, HLMI, as well as Joseph Harris and Vernon Brannon has, under certain circumstances, guaranteed the Pacific/Equitas Loan. HLM Design also sold warrants to purchase 14,372 shares of Common Stock (158,092 shares after giving effect to the Stock Split), subject to adjustment in certain circumstances, to Pacific, Equitas, Shannon LeRoy, a representative of Equitas and a member of the Board of HLM Design and Clay R. Caroland, a representative of Pacific and a member of the Board of HLM Design (the "Pacific/Equitas Warrants" and, together with the Berthel Warrants, the "Warrants"). See "Certain Transactions -- Merger Transaction," "Description of Capital Stock -- Warrants" and Note 4 to the Combined Financial Statements. In November 1997, Mr. Caroland exercised his Warrants and purchased 862 shares of Common Stock (9,482 shares after giving effect to the Stock Split) at an exercise price of $.01 per share and Mr. LeRoy transferred his Warrants to purchase 862 shares of Common Stock (9,482 shares after giving effect to the Stock Split) to Equitas. 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. 20 NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Standards No. 128, "Earnings Per Share." This Statement specifies the computation, presentation and disclosure requirements for earnings per share. The Company believes that the adoption of such Statement would not result in earnings per share materially different than pro forma earnings per share presented in the accompanying pro forma statements of income. It will be effective for periods ending after December 15, 1997. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement will be effective for HLMI's fiscal year ending April 24, 1998, and the Company does not intend to adopt this statement prior to the effective date. On November 20, 1997, EITF 97-2, "Application of FASB Statement No. 94, CONSOLIDATION OF ALL MAJORITY-OWNED SUBSIDIARIES, and APB Opinion No. 16, BUSINESS COMBINATIONS, to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements", was issued which reached a consensus that arrangements similar to HLM Design and the Managed Firms should be accounted for on a consolidated basis. The Company intends to reflect this change prospectively in the fiscal year ended April 24, 1998 financial statements. If the change had been effected for the six months ended October 31, 1997, the effect would have been a reduction to Stockholder's Equity by approximately $3,956, an increase in minority interest by approximately $3,956 and a decrease in Net Income of approximately $3,948. 21 BUSINESS OVERVIEW HLMI was founded in Iowa City, Iowa in 1962 to provide architectural, engineering and planning services. HLMI enjoyed steady growth, expanding geographically and establishing a national presence and is now recognized as a leader in the healthcare arena. In 1987, the original founders of HLMI sold their ownership in the company to the ESOP and a board of directors, consisting of senior principals, took control of HLMI. In 1994, as a result of the poor financial performance of HLMI, Joseph M. Harris was hired as Chief Executive Officer and Vernon B. Brannon was hired as Chief Financial Officer. Messrs. Harris and Brannon instituted significant changes, cutting costs and personnel, with a focus on returning HLMI to profitability. In 1996, HLMO and HLMNC were formed and the headquarters of HLMI was moved from Iowa City, Iowa to Charlotte, North Carolina. HLMI, HLMO and HLMNC currently operate offices in Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando, Florida, Bethesda Maryland, Denver, Colorado, Sacramento, California, Philadelphia Pennsylvania, Portland, Oregon and Charlotte, North Carolina. On May 23, 1997, BBH Corp. merged into HLMI. See "Certain Transactions -- Merger Transaction." Following the merger of BBH Corp. into HLMI, Messrs. Harris and Brannon owned all of the outstanding common stock in HLMI. In March 1997, HLM Design was formed with the intent of managing the nonprofessional operations of AEP Firms through Management and Services Agreements. HLM Design believes it is the first company in the architectural, engineering and planning industry to actively pursue the strategy of consolidating non-professional operations and providing management expertise to AEP Firms. Currently, HLM Design is not engaged in negotiations with any AEP Firms. HLM Design believes its strategy will take advantage of operating efficiencies for AEP Firms and provide diversification, including services and geography, for the AEP Firm's clients. The process of developing and entering into management and services relationships is complex and will likely require several months to complete. In May 1997, HLM Design entered into forty-year Management and Services Agreements with HLMI, HLMNC and HLMO. All three of these firms are related through common principal stockholders and these stockholders have entered into Stockholders' Agreements. See "Certain Transactions." As a management company, HLM Design's relationship with the Managed Firms is contractual; it has no ownership interest in the Managed Firms. As a result, stockholders in HLM Design will have no direct or indirect ownership interest in the Managed Firms. OPERATING STRATEGY The creation of a management relationship between HLM Design and an AEP Firm involves, among other things, the signing of a Management and Services Agreement between HLM Design and the AEP Firm. Under the terms of the Management and Services Agreement, HLM Design is the sole and exclusive manager and administrator of all of the Managed Firm's day-to-day business functions. These functions include financial planning, facilities, equipment and supplies, and management and administrative services. Management and administrative services include bookkeeping and accounts, general administration services, contract negotiation and administration for all non-architectural and non-engineering aspects of all agreements pertaining to the provision of architectural and engineering services by Managed Firms to third parties, personnel, security and maintenance, architectural and engineering recruiting and training, insurance, issuance of debt and additional capital stock, billing and collections. For these services, HLM Design receives all but 1% of the firm's positive cash flow (as determined in accordance with generally accepted accounting principles applied on a consistent basis) following the payment by the AEP Firm of all such firm's expenses. See " -- HLM Design Operations -- Management and Services Agreements." In addition to the Management and Services Agreement, HLM Design will require stockholders of Managed Firms to enter into stockholders' agreements (the "Stockholders' Agreements") which will provide the stockholders of those entities with nominee stockholder status. Generally, the Stockholders' Agreements will provide for the following: (i) the repurchase by the Managed Firm of the stockholder's stock upon such stockholder's death, (ii) restrictions on transferability of the stock, (iii) a "call-right" on the stock by the AEP Firm and (iv) a voting agreement among the stockholders and Managed Firm. See " -- HLM Design Operations -- Stockholders' Agreements." The architects, engineers and planners employed by the Managed Firms offer a broad range of specialty and ancillary services. The Managed Firms offer services in master planning, architectural design, mechanical, electrical, structural and civil engineering, interior design, environmental graphics, landscape architecture, construction services and facility management. Each office varies in the number and types of specialties offered. The Managed Firms provide excellence in design and over the years have designed over a billion square feet of buildings and completed hundreds of planning and feasibility studies. Clients of the firms range from small companies to America's most prestigious corporations. The professionals at the Managed Firms specialize in the design of hospitals, criminal justice buildings and high-tech research facilities. Design experience of professionals employed by the Managed Firms includes corporate headquarters, physician office buildings, investment office buildings, multi-use office complexes and related facilities. The Managed Firms' professionals maintain 22 full control over their architectural and engineering practices, determine which projects to pursue and set their own standards of practice in order to promote high-quality provision of services and retain ownership of all contracts with clients. HLM Design is not engaged in the practice of architecture, engineering or planning. The following more fully describes the services provided by the Managed Firms: FOCUS ON HEALTHCARE. The Managed Firms design healthcare facilities that help their clients improve patient care and reduce operating costs. During the last 33 years, HLMI has designed over one billion square feet of healthcare facilities. Its experience includes more than 325 healthcare clients and over 825 major healthcare engagements including: (Bullet) 201 health facility master plans (Bullet) 118 ambulatory care centers (Bullet) 77 ambulatory surgery centers (Bullet) 119 academic medical centers and teaching facilities (Bullet) 64 cancer centers (Bullet) 69 women's facilities (Bullet) 13 replacement hospitals (Bullet) 44 medical office buildings FOCUS ON JUSTICE. The Managed Firms design justice facilities that help their clients build efficient and effective public facilities in times where financing of construction and operation of these public facilities is continually being scrutinized. Its experience includes: (Bullet) 25 federal and state projects (Bullet) 1.8 million square feet for the federal government (Bullet) 3 million square feet of courthouse renovation By integrating design and planning, the Company's professionals meet project objectives by improving staff efficiency, accelerating the project schedule or even addressing sensitive urban design issues. Teams explore options to optimize the return on construction dollars, for example, by creatively combining renovation and new construction. The Company helps bridge the gap between need and public acceptance through public information campaigns and cost control. The results are buildings -- courts, police, detention or corrections facilities -- that meet stringent cost requirements yet still achieve a high quality of design. FOCUS ON RESEARCH FACILITIES. The Managed Firms design laboratories for clients that focus on optimizing space utilization and provide flexibility to adapt to changing technology or funding constraints. Systems are designed to control operating costs while protecting the demands of the research function and making safety and security the highest priority. Often, the goal is to produce environments that stimulate creativity, promote interaction, enhance the client's ability to recruit the best and brightest and attract funding. The Managed Firms have completed 30 projects totalling over 3 million square feet valued at $540 million in construction. GROWTH STRATEGY HLM Design intends to implement an aggressive, yet disciplined, expansion program by pursuing Management and Services Agreements with (i) large "regional" AEP Firms with established operating histories located in large metropolitan and high-growth suburban geographic markets that the Company does not currently serve and (ii) small firms that provide operational diversity in geographic areas that will complement the services that are either currently provided by the Company in such geographic areas or that are intended to be provided in the future. HLM Design believes its approach will be attractive to these large and small AEP Firms because it will provide these firms with economies of scale and the synergies that result from increased purchasing power, a greater breadth of services, an increased pool of professionals, and geographical diversity. Furthermore, this strategy will give these regional and local AEP Firms, as a part of the Company, the ability to provide services to existing and future clients with national operations that might otherwise have turned to "non-local" firms to service their needs. The goal is for the Company to be the single source provider for large national clients with geographically diverse operations. HLM Design generally expects that AEP Firms that sign Management and Services Agreements will retain existing high-quality professional staff and continue to operate in an effective and efficient manner with personnel who understand the local market. Additionally, management believes they are positioned to pursue larger, well established AEP Firms as a result of the depth of HLM Design's management team, its capital structure and the reputation of the management team in the 23 design industry. Management also believes these goals can be achieved at less cost than that which would be incurred by AEP firms operating on a stand alone basis. HLM DESIGN OPERATIONS Pursuant to its Management and Services Agreements, HLM Design manages all aspects of the Managed Firm other than the provision of professional architectural, engineering and planning services. The provision of these services is controlled by the Managed Firms themselves. HLM Design enhances firm growth by assisting in the recruitment of new professionals and by expanding and adding ancillary services. One of HLM Design's goals is to negotiate national arrangements and provide cost savings to Managed Firms through economies of scale in areas such as malpractice insurance, supplies, equipment and business functions. MANAGEMENT AND SERVICES AGREEMENTS The Management and Services Agreements with the Managed Firms are for a period of forty years. These agreements cannot be terminated by HLM Design or the Managed Firm without a material default or bankruptcy. Under these agreements, HLM Design is appointed as the sole and exclusive manager and administrator of all of the Managed Firms' day-to-day business functions, including financial planning, facilities, equipment and supplies, and management and administrative services (including bookkeeping and accounts, general administration services, contract negotiation and administration for all non-architectural and non-engineering aspects of all agreements pertaining to the provision of architectural and engineering services by Managed Firms to third parties), personnel, security and maintenance, architectural and engineering recruiting and training, insurance, and billing and collections. HLM Design has no authority, directly or indirectly, to perform any function of the Managed Firm's operations pertaining to services which are required to be performed by duly licensed architects and engineers pursuant to any and all applicable laws, rules or regulations adopted by any authority regulating the licensing of architects or engineers. The Managed Firms will retain ownership of all contracts with clients. Additionally, HLM Design has the authority to approve or deny, on behalf of the Managed Firm, any and all proposals by stockholders of such firm to encumber, sell, pledge, give or otherwise transfer the capital stock of the Managed Firm, as well as the authority to approve issuance of common stock or incurrence of indebtedness. As compensation for the provision of its services under the Management and Services Agreement, HLM Design receives all but 1% of each Managed Firm's positive cash flow (as determined in accordance with generally accepted accounting principles applied on a consistent basis) following the payment by the Managed Firm of all such firm's expenses. 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 24 the approval or denial of proposed stock transfers, the Managed Firm will in all cases act in accordance with the written recommendation of HLM Design. The Stockholders' Agreement will provide that they may be terminated upon the occurrence of any of the following events: (i) cessation of the Managed Firm's business, (ii) bankruptcy, receivership or dissolution of the Managed Firm, or (iii) the voluntary agreement of all parties bound by the terms of such Stockholders' Agreement. Each of the stockholders of HLMI, HLMNC, and HLMO have entered into Stockholders' Agreements which provide each stockholder with nominee stockholder status. It is anticipated that stockholders' agreements among stockholders of the AEP Firm with whom HLM Design enters into Management and Services Agreements in the future will have similar terms. PROPERTIES HLM Design's principal executive offices are located at 121 West Trade Street, Suite 2950, Charlotte, North Carolina and its telephone number is (704) 358-0779, where the Company leases 7,254 square feet. The lease is for a term of 5 years and expires in 2000. The Company believes the office facility is adequate for its current uses and anticipated growth. In addition to HLM Design's principal executive offices, the Company leases office space in Sacramento, California, Denver, Colorado, Orlando, Florida, Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Bethesda, Maryland, Portland, Oregon and Philadelphia, Pennsylvania. COMPETITION The business of providing architectural, engineering and planning services is highly competitive. HLM Design, however, is not aware of any other company actively pursuing a strategy of consolidating firms' administrative and management functions. The Company believes, however, that additional companies with similar objectives will be organized in the future. Potential sources of competition include larger, nationally known, multi-specialty professional groups or professional firms and others, a number of which may have significantly greater resources than those of the Company. The Managed Firms are in competition with many other AEP firms, including large, national firms as well as many small, local firms. The Managed Firms compete with these firms on the basis of technical capabilities, qualifications and availability of personnel, experience, reputation, quality performance and, to a lesser extent, price of services. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS Each state has enacted legislation governing the registration of architects and engineers, and, in some cases, landscape architects, fire protection engineers and interior designers. These state laws impose licensing requirements upon individual design professionals and architectural-engineering firms and are implemented by a more detailed set of administrative rules and regulations overseen by a registration board. In general, the state laws define the practice of architecture and engineering, restrict the use of the titles ARCHITECT and ENGINEER to licensed individuals, establish rules for entry into the profession, explain how professionals licensed in other states may become reciprocally registered to practice in the jurisdiction and define and enforce standards of professional conduct and misconduct. The state laws, or the regulations established by a registration board, may also establish requirements for the practice of architecture or engineering by a corporation or partnership. A few states do not permit the practice of architecture or engineering in a corporate form. Some states require design professionals who want to incorporate to do so as a professional 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. 25 EMPLOYEES Prior to January 1, 1998, all employees were employed with HLMI, however, under the Management and Services Agreement and consistent with HLM Design's strategy, all employees were transferred to HLM Design as of January 1, 1998. As of January 1, 1998, HLM Design employed approximately 246 persons of which approximately 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. Mr. Harris' initial term as a director of HLM Design will expire at the annual meeting of stockholders of HLM Design to be held in 1999. VERNON B. BRANNON has been Senior Vice President, Chief Financial Officer, and a Director of HLM Design since its organization in 1997. Along with Mr. Harris, he is a stockholder of HLMI which he joined in 1994 as Chief Financial Officer and was appointed Senior Vice President soon after joining the firm. Prior to joining HLMI, from 1988 to 1994 Mr. Brannon was Chief Operating Officer of UAV Corporation, a video distribution firm, with responsibility for manufacturing, finance, accounting, and all other functions except sales. Mr. Brannon's initial term as a director of HLM Design will expire at the annual meeting of stockholders of HLM Design to be held in 1999. 26 CLAY R. CAROLAND III has been a partner since 1987 in Health Investors, LP and its affiliates. From 1996 to 1997 he also served as President of the General Partner of Pacific Capital, L.P. Health Investors and Pacific are investment firms. In 1989, he, along with Health Investors, organized and capitalized ClinTrials, Inc., which grew to become a leading CRO. In 1981, he co-founded Liberty Street Capital, NY, a Wall Street investment boutique and was Managing Director there until 1987. Mr. Caroland has served on the boards of directors of a number of companies including EquiVision and ClinTrials. Mr. Caroland's initial term as a director of HLM Design will expire at the annual meeting of stockholders of HLM Design to be held in 1998. D. SHANNON LEROY currently serves as President of Tennessee Business Investments, Inc., the general partner of Equitas, L.P., a licensed Small Business Investment Company. From 1988 until 1994, Mr. LeRoy served as a Senior Vice President of First Union National Bank of Tennessee, where he managed commercial banking. Mr. LeRoy is a Director of Power Designs, Inc., a manufacturer of power supply and power line conditional products, and Laure Beverage Company, a consumer beverage company. Mr. LeRoy's initial term as a director of HLM Design will expire at the annual meeting of stockholders of HLM Design to be held in 1998. BRADLEY A. EARL is a Vice President managing the Philadelphia office of HLMI. He joined HLMI in 1996. Prior to that he served in various leadership positions in architectural firms and as an independent architect. He was Director of Architecture at The Klett Organization from 1994 to 1996 and Executive Architect to Children's Hospital of Philadelphia from 1992 to 1994. He is a registered architect with 21 years of experience. VIKTOR A. LITUZAY rejoined HLMI in 1996 as Vice President managing the firm's Portland, Oregon office. Prior to leaving HLMI in 1989. Mr. Lituczy was Corporate Vice President for the Chicago office as well as director of high-tech laboratory projects firmwide. From 1992 until 1996 he had his own architectural practice in Portland and consulted with a number of healthcare clients and architects on projects. From 1989 until 1992 he was an Associate Principal for KMD Architects & Planners in Portland. He is a registered architect with 20 years of experience. ROBERT P. LUDDEN is a Vice President managing the Orlando office of HLMI. He joined HLMI in 1993. Prior to that, from 1986 to 1993, he was a Vice President at Cannon, a large architectural firm that focuses on healthcare architecture. Mr. Ludden's career has focused on the leadership and direction of significant architectural and engineering projects. His work spans a number of markets including justice, healthcare, research and commercial. He is a registered architect. THOMAS G. PINKERTON is a Senior Vice President of the Company. He joined the firm in 1994 as National Director of Justice Architecture. Prior to joining HLMI he was an associate with Hellmuth, Obata & Kassabaum, Inc., one of the largest architectural firms in the country. A registered architect with 33 years of experience, he has devoted his practice exclusively to the design of justice facilities. FRANK E. TALBERT is a registered architect with 17 years experience. He joined HLMI in 1994 and is Vice President managing the Chicago office of the firm. Prior to joining HLMI he was President of FibreCem Corporation from 1992 to 1994 where he led the successful turnaround of that company. His success was achieved with a combination of an intensive, hands-on sales effort, and a reorganization of operations. From 1990 to 1992 he managed the Carolinas office of Kajima International Inc., the world's largest turnkey developer/builder where he established a program for financial enhancements on free standing not leased retail projects. Mr. Talbert is a registered architect. As soon as practicable after the Offering, HLM Design intends to name two individuals not employed by or affiliated with HLM Design to HLM Design's Board of Directors. 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. 27 LIMITATIONS OF DIRECTORS' LIABILITY HLM Design's Certificate of Incorporation includes a provision that effectively eliminates the liability of directors to HLM Design or to HLM Design's stockholders for monetary damages for breach of the fiduciary duties of a director, except for breaches of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, certain actions with respect to unlawful dividends, stock repurchases or redemptions and any transaction from which the director derived an improper personal benefit. This provision does not prevent stockholders from seeking nonmonetary remedies covering any such action, nor does it affect liabilities under the federal securities laws. HLM Design's Bylaws further provide that HLM Design shall indemnify each of its directors and officers, to the fullest extent authorized by Delaware law, with respect to any threatened, pending or completed action, suit or proceeding to which such person may be a party by reason of serving as a director or officer. Delaware law currently authorizes a corporation to indemnify its directors and officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by a third party if such officers or directors acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. Indemnification is permitted in more limited circumstances with respect to derivative actions. HLM Design believes that these provisions of its Certificate of Incorporation and Bylaws are necessary to attract and retain qualified persons to serve as directors and officers. COMMITTEES OF THE BOARD The Board of Directors of HLM Design intends to establish a Compensation Committee and an Audit Committee consisting of independent directors upon the election of at least two independent directors. The Compensation Committee will review and approve compensation for the executive officers, and administer, and determine awards under, the Stock Option Plan and any other incentive compensation plan for employees of the Company. See " -- Stock Option Plan" and " -- Employee Stock Purchase Plan." The Audit Committee will recommend the selection of auditors for the Company and will review the results of the audit and other reports and services provided by the Company's independent auditors. HLM Design has not previously had either of these committees. DIRECTOR COMPENSATION Members of the Board of Directors who are not employees of the Company will be compensated for their services in amounts to be determined. The Company will also reimburse all directors for their expenses incurred in connection with their activities as directors of the Company. Directors who are also employees of the Company receive no compensation for serving on the Board of Directors. 28 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 -0- -0- -0- 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 January 1998. No options were granted to any of the Company's executive officers in the years ended April 1997, 1996 or 1995. (4) The aggregate amount of perquisites and other personal benefits received did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for such executive officer. EMPLOYMENT AGREEMENTS HLM Design has entered into employment agreements with Messrs. Harris and Brannon (the "Employment Agreements"), which provide for an annual base salary and certain other benefits. Pursuant to the Employment Agreements, the base salaries of Messrs. Harris and Brannon will be $300,000 and $250,000, respectively. Messrs. Harris and Brannon will also receive a monthly automobile allowance of $2,500 and such additional compensation as may be determined by the Board of Directors. Each of the Employment Agreements is for a term of three years and will automatically be renewed for successive periods of one year. Additionally, Messrs. Harris and Brannon each will receive options pursuant to the Stock Option Plan, for 50,000 shares of Common Stock, exercisable, in the case of incentive stock options, at 110% of the initial public offering price, and in the case of nonstatutory stock options, at $10 per share. The Employment Agreements contain similar noncompetition provisions. These provisions, during the term of the Employment Agreement, (i) prohibit the disclosure or use of confidential Company information, and (ii) prohibit the solicitation of the Company's clients, the participation or operation in any business or service provided by the Company and, in the case of Mr. Harris, the lending of his name to any business which provides architectural and engineering services to persons who were clients or prospective clients of the Company. The provisions referred to in (ii) above shall also apply for a period of three years following the expiration or termination of an Employment Agreement. STOCK OPTION PLAN In January 1998, the Board of Directors and stockholders of HLM Design adopted the HLM Design, Inc. 1998 Stock Option Plan (the "Stock Option Plan") in order to attract and retain key personnel. The following discussion of the material features of the Stock Option Plan is qualified by reference to the text of such plan filed as an exhibit to the Registration Statement of which this Prospectus is a part. Under the Stock Option Plan, options to purchase up to an aggregate of 138,000 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"). 29 The Compensation Committee of the Board of Directors of HLM Design will administer the Stock Option Plan and will determine, among other things, the persons who are to receive options, the number of shares to be subject to each option, and the vesting schedule of options; provided, that the Board of Directors of HLM Design will make such determinations with respect to the initial grants made under the Stock Option Plan. Members of the Board of Directors who serve on the Compensation Committee must qualify as "non-employee directors," as that term is defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. The Board of Directors of HLM Design will determine the terms and conditions upon which HLM Design may make loans to enable an optionee to pay the exercise price of an option. In selecting individuals for options and determining the terms thereof, the Compensation Committee may consider any factors it considers relevant, including present and potential contributions to the success of the Company. Options granted under the Stock Option Plan must be exercised within a period fixed by the Compensation Committee, which period may not exceed ten years from the date of the grant of the option or, in the case of ISOs granted to any holder on the date of the grant of more than ten percent of the total combined voting power of all classes of stock of HLM Design and its affiliated firms, five years from the date of grant of the option. Options may be made exercisable in whole or in installments, as determined by the Compensation Committee. Options generally may not be transferred other than by will or the laws of descent and distribution and during the lifetime of an optionee may be exercised only by the optionee. Notwithstanding the foregoing, the Compensation Committee, in its absolute discretion, may grant transferable options if such options are not ISOs. The exercise price of options that are not ISOs will be determined at the discretion of the Compensation Committee. The exercise price of ISOs may not be less than the market value of the Common Stock on the date of the grant of the option. In the case of ISOs granted to any holder on the date of grant of more than ten percent of the total combined voting power of all classes of stock of HLM Design and its affiliated firms, the exercise price may not be less than 110% of the market value of the Common Stock on the date of the grant of the ISOs. The exercise price may be paid in cash, in shares of Common Stock owned by the optionee, in options granted under the Stock Option Plan (except that the exercise price of an ISO may not be paid in NSOs) or in any combination of cash, shares and NSOs. Options granted under the Stock Option Plan may include the right to acquire a "reload" option. In such case, if an optionee pays all or part of the exercise price of an option with shares of Common Stock held by the optionee for at least six months, then, upon exercise of the option, the optionee is granted a second option to purchase, at the fair market value as of the date of exercise of the original option, the number of whole shares used by the optionee in payment of the exercise price of the original option. A reload option is not exercisable until one year after the grant date of such reload option or the expiration date of the original option. If the exercise price of a reload option is paid for with shares of Common Stock that have been held by the Optionee for more than six (6) months, then another reload option will be issued. Shares of Common Stock covered by a reload option will not reduce the number of shares of Common Stock available under the Stock Option Plan. The Stock Option Plan provides that, in the event of changes in the corporate structure of the Company or certain events affecting the Common Stock, adjustments will automatically be made in the number and kind of shares available for issuance and in the number and kind of shares covered by outstanding options. It further provides that, in connection with any merger or consolidation in which HLM Design is not the surviving corporation and which results in the holders of the Common Stock owning less than a majority of the surviving corporation or any sale or transfer by HLM Design of all or substantially all its assets or any tender offer or exchange offer for or the acquisition, directly or indirectly, by any person or group of all or a majority of the then-outstanding voting securities of HLM Design, all outstanding options under the Stock Option Plan will become exercisable in full on and after (i) the 15th day prior to the effective date of such merger, consolidation, sale, transfer or acquisition or (ii) the date of commencement of such tender offer or exchange offer, as the case may be. The Board of Directors of HLM Design on or before the consummation of the Offering intends to grant NSOs to purchase 25,000 shares of Common Stock and ISOs to purchase 25,000 shares of Common Stock to each of Joseph Harris and Vernon Brannon. No other grants of ISOs or NSOs will be made on or before the consummation of the Offering. The issuance and exercise of ISOs have no federal income tax consequences to the Company. While the issuance and exercise of ISOs generally have no ordinary income tax consequences to the holder, upon the exercise of an ISO, the holder will treat the excess of the Common Stock's fair market value on the date of exercise over the exercise price as an item of tax adjustment for alternative minimum tax purposes. If the holder of Common Stock acquired upon the exercise of an ISO holds such stock until a date that is more than two years following the grant of the ISO and one year following the exercise of the ISO, the disposition of such Common Stock will ordinarily result in capital gain or loss to the holder for federal income tax purposes equal to the difference between the amount realized on disposition of the Common Stock and the option exercise price. If the holding period requirements described above are not met, the holder will recognize ordinary income for federal income tax purposes upon disposition of the Common Stock in an amount equal to the lesser of (i) the excess of the Common Stock's fair market value on the date of exercise over the option exercise price, and (ii) the excess of the amount realized on disposition of the Common Stock over the option exercise price. Any additional gain upon the disposition will be taxed as 30 capital gains. The Company will be entitled to a compensation expense deduction for the Company's taxable year in which the disposition occurs equal to the amount of ordinary income recognized by the holder. Any capital gain will be subject to reduced rates of tax if such shares were held more than twelve months, and will be subject to further reduced rates if such shares were held more than eighteen months. The issuance of NSOs has no federal income tax consequences to the Company or the holder. Upon the exercise of an NSO, NSO holders will recognize ordinary income for federal income tax purposes at the time of option exercise equal to the amount by which the fair market value of the underlying shares on the date of exercise exceeds the exercise price. The Company generally will be allowed a federal income tax deduction in the same amount. In the event of the disposition of shares acquired by exercise of a NSO, any appreciation or depreciation after the exercise date generally will be taxed as capital gain or loss; provided, that any gain will be subject to reduced rates of tax if such shares were held for more than twelve months and will be subject to further reduced rates if such shares were held for more than eighteen months. HLM Design intends to register the shares underlying the Stock Option Plan as required by the federal securities laws. If such registration is not required, such shares may be issued upon option exercise in reliance upon the private offering exemption codified in Section 4(2) of the Securities Act. Resale of such shares may be permitted subject to the limitations of Rule 144. EMPLOYEE STOCK PURCHASE PLAN In January 1998, the Board of Directors and stockholders of HLM Design adopted the HLM Design, Inc. Employee Stock Purchase Plan (the "ESPP"). The ESPP is intended to promote the interests of the Company by providing employees of the Company the opportunity to acquire a proprietary interest in the Company through the purchase of Common Stock. The following discussion of the material features of the ESPP is qualified by reference to the text of such Plan filed in an exhibit to the Registration Statement of which this Prospectus is a part. The ESPP is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. The ESPP is administered by the Compensation Committee, which, subject to the terms of the ESPP, has plenary authority in its discretion to interpret and construe the ESPP. The Compensation Committee will construe the provisions of the ESPP so as to extend and limit participation in a manner consistent with the requirements of Section 423 of the Code. A total of 50,000 shares of Common Stock have been reserved for purchase under the ESPP. On January 1 of each year during the term of the ESPP (and also on the effective date of the ESPP) (the "Grant Date"), all eligible employees electing to participate in the ESPP ("Participating Employees") will be granted options to purchase shares of Common Stock. As of each Grant Date, each Participating Employee will be deemed to have been granted an option to purchase that number of shares of Common Stock that equals: (i) the Participating Employee's base pay (as defined in the ESPP) as of the Grant Date divided by 1000, with fractional amounts of .50 or more rounded up to the next dollar and fractional amounts of less than .50 disregarded, multiplied by (ii) two. No Participating Employee may be granted an option which would permit such employee to purchase stock under the ESPP and all other employee stock purchase plans of HLM Design at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. A Participating Employee may elect to designate a limited percentage of such employee's base pay (as defined in the ESPP) to be deferred by payroll deduction as a contribution to the ESPP. To the extent a Participating Employee has accumulated enough funds, his or her contributions to the ESPP will be used to exercise the option granted under the ESPP through purchases of Common Stock on the last business day of January, April, July and October, on which the principal trading market for the Common Stock is open for trading and on any other interim dates during the year which the Compensation Committee designates for such purpose (the "Exercise Date"). Contributions which are not enough to purchase a whole share of Common Stock will be carried forward and applied on the next Exercise Date in that calendar year. The purchase price at which Common Stock will be purchased through the ESPP shall be eighty-five percent of the lesser of (i) the fair market value of the Common Stock on the applicable Grant Date, and (ii) the fair market value of the Common Stock on the applicable Exercise Date. Any option granted to a Participating Employee will be exercised automatically on each Exercise Date during the calendar year of the option's Grant Date in whole or in part such that the Participating Employee's accumulated contributions as of such Exercise Date will be applied to the purchase of the maximum number of whole shares of Common Stock that such contribution will permit at the applicable option price limited to the number of shares available for purchase under the option. Any option granted to a Participating Employee will expire on the last Exercise Date of the calendar year in which granted. However, if a Participating Employee withdraws from the ESPP or terminates employment prior to such Exercise Date, the option may expire earlier. 31 Upon termination of a Participating Employee's employment for any reason other than cause, death or leave of absence in excess of ninety days, such employee may, at his or her election, request the return of contributions not yet used to purchase Common Stock or continue participation in the ESPP until the Exercise Date next following the date of termination of employment such that any unexpired option held will be exercised automatically on such Exercise Date. If a Participating Employee dies while employed by the Company or prior to the Exercise Date next following the date of termination of employment, such employee's estate will have the right to elect to withdraw all contributions not yet used to purchase Common Stock or to exercise the Participating Employee's option for the purchase of Common Stock on the Exercise Date next following the date of such employee's death. The Board of Directors of HLM Design may at any time amend, suspend or terminate the ESPP; provided, however, that the ESPP may not be amended to increase the maximum number of shares of Common Stock for which options may be granted under the ESPP, other than in connection with a change in capitalization, without obtaining the approval of HLM Design stockholders. No federal taxable income will be recognized by Participating Employees upon the grant of an option to purchase Common Stock under the ESPP. In addition, a Participating Employee will not recognize federal taxable income on the exercise of an option granted under the ESPP. If the Participating Employee holds shares of Common Stock acquired upon the exercise of an option granted under the ESPP until a date that is more than two years from the Grant Date of the relevant option and one year from the date of option exercise (or dies while owning such shares), the employee must report as ordinary income in the year of disposition of the shares (or at death) the lesser of (a) the excess of the fair market value of the shares at the time of disposition (or death) over the option exercise price and (b) the excess of the fair market value of the shares on the date the relevant option was granted over the option exercise price. For this purpose, the option exercise price is 85% of the fair market value of the shares on the date the relevant option was granted (assuming the shares are offered at a 15% discount). Any additional income is treated as long-term capital gain. If these holding period requirements are met, the Company is not entitled to any deduction for income tax purposes. If the Participating Employee does not meet the holding period requirements, the employee recognizes at the time of disposition of the shares ordinary income equal to the difference between the option exercise price for the shares and the fair market value of the shares on the date of exercise, irrespective of the price at which the employee disposes of the shares, and an amount equal to such ordinary income is generally deductible by the Company. Any gain or loss realized on the disposition of the shares will generally be capital gain or loss; provided that any gain will be subject to reduced rates of tax if the shares were held for more than twelve months and will be subject to further reduced rates if the shares were held for more than eighteen months. Because the ESPP is based on voluntary participation, benefits thereunder are not determinable. The Company intends to register the shares underlying the ESPP as required by the federal securities laws. If such registration is not required, such shares may be issued upon option exercise in reliance upon the private offering exemption codified in Section 4(2) of the Securities Act. Resale of such shares may be permitted subject to the limitations of Rule 144. 32 CERTAIN TRANSACTIONS RELATIONSHIPS WITH MANAGED FIRMS Joseph Harris and Vernon Brannon, executive officers and principal stockholders of HLM Design, are also the principal stockholders and officers of the Managed Firms, HLMI, HLMNC and HLMO. As officers of the Managed Firms, they caused the Managed Firms to enter into Management and Services Agreements with HLM Design and as stockholders of each of the Managed Firms they entered into Stockholders' Agreements. The primary purpose of the Stockholders' Agreement is to restrict the ability of stockholders to exercise the rights commonly associated with ownership of common stock and to effectively provide stockholders of the Managed Firms with nominee stockholder status in order to facilitate the execution and operation of the Management and Services Agreements. VOTING AGREEMENT Joseph Harris, Vernon Brannon and William Blalock, as stockholders in HLM Design, are all parties to a Voting Agreement. Pursuant to the Voting Agreement, Messrs. Harris, Brannon and Blalock agree to cast all of their votes in unity with respect to all matters of "Fundamental Significance" (as defined below) which are submitted to them in their capacity as stockholders. Matters of Fundamental Significance are defined to be (i) the issuance, exercise, purchase or redemption by HLM Design of any capital stock, stock warrant, stock option or debenture of HLM Design, (ii) the formation, acquisition or divestiture by HLM Design of any business entity, whether in the form of a division, subsidiary or other affiliated or non-affiliated entity, (iii) the incurring of indebtedness, directly or indirectly (including, without way of limitation, the guaranty of debt of any other person or entity) by HLM Design, or the modification of any such existing indebtedness or instrument, or (iv) the merger, share exchange, or dissolution of HLM Design, or any sale of HLM Design's assets other than in the ordinary course of business. The Voting Agreement will be terminated upon the cessation of HLM Design's business, the bankruptcy, receivership or dissolution of HLM Design, or the voluntary agreement of Messrs. Harris, Brannon and Blalock. MERGER TRANSACTION In April 1997, HLMI and BBH Corp., a Delaware corporation controlled by Joseph Harris and Vernon Brannon, entered into a Merger Agreement (the "Merger Agreement") whereby HLMI and BBH Corp. would merge, with HLMI being the surviving corporation. Upon consummation of the transactions contemplated by the Merger Agreement each share of HLMI common stock (excluding shares of HLMI common stock held by BBH Corp., which were (i) contributed to BBH Corp. by Messrs. Harris and Brannon as their initial capital contribution to BBH Corp. and (ii) purchased from HLM with a $3.2 million loan from HLM Design) would be converted into the right to receive $64.00 in cash (the "Merger Consideration") and each share of BBH Corp. then outstanding would be converted into one share of HLMI common stock. Following the consummation of the transactions contemplated by the Merger Agreement, Joseph Harris and Vernon Brannon owned all of the outstanding common stock of HLMI. The payment of the Merger Consideration was financed indirectly by the Pacific/Equitas Loan and the First Charter Loan through the purchase of additional HLMI capital stock by BBH Corp., effective simultaneously with the Merger. In connection with the Pacific/Equitas Loan, HLM Design issued the Pacific/Equitas Warrants to Pacific, Equitas and Messrs. Caroland and LeRoy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company intends to repay the principal of and interest on the Pacific/Equitas Loan from the proceeds of the Offering. Once such loan is repaid, Messrs. Harris and Brannon will be released from their personal guarantees of the Pacific/Equitas Loan. BERTHEL LEASING LEASE FINANCING Berthel Leasing, an affiliate of Berthel Fisher & Company Financial Services, Inc., one of the Underwriters in the Offering, has entered into the Lease Financing with HLMI and has provided HLM Design with an $0.8 million term loan for working capital purposes. In addition, Berthel Leasing received the Berthel Warrants and received certain registration rights which begin in September 2000, with respect to the Common Stock which underlies the Berthel Warrants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." A portion of the proceeds of the Offering will be used to repay the $0.8 million term loan. 33 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 January 15, 1998 by (i) each stockholder who is known by HLM Design to own beneficially more than five percent of the outstanding Common Stock, (ii) each director of HLM Design, (iii) each executive officer of HLM Design, and (iv) all directors and executive officers of HLM Design as a group, and as adjusted to reflect the sale by HLM Design of the shares of Common Stock in this Offering.
PERCENTAGE OF ALL OUTSTANDING COMMON STOCK NUMBER OF SHARES ----------------------- OF COMMON STOCK BEFORE AFTER NAME (1) OWNED(2) OFFERINGP OFFERING(3) - ------------------------------------------------------------------------------------- ---------------- -------- ----------- Joseph M. Harris(4)(5) 225,500 29.9% 18.0% Vernon B. Brannon(4)(5) 225,500 29.9% 18.0% Clay R. Caroland(4) 9,482 1.0% * Shannon LeRoy(4) -- * * Berthel Leasing(6) 37,642 5.0% 3.0% Pacific(7)(8) 85,371 11.3% 6.8% Equitas(7)(9) 63,239 8.4% 5.0% William Blalock(10) 82,500 10.9% 6.6% All directors and executive officers as a group (4 persons) 460,482 61.0% 36.7%
- --------------- * Less than one percent. (1) Unless otherwise noted, each person has sole voting and investment power over the shares listed opposite his name subject to community property laws where applicable. Messr. Harris, Brannon and Blalock are parties to a Voting Agreement. See "Certain Transactions -- Voting Agreement." (2) After giving effect to the Stock Split. (3) If the Underwriters' over-allotment option is exercised in full, then after the Offering the percentages of shares outstanding would be as follows: Joseph Harris, 16.8%; Vernon Brannon, 16.8%; William Blalock, 6.2%; Clay Caroland, less than 1%; Shannon LeRoy, less than 1%; Berthel Leasing, 2.8%; Pacific, 6.4%; Equitas, 4.8% and all directors and executive officers as a group, 34.6%. (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. (6) The address of such person is 100 Second Street Southeast, Cedar Rapids, Iowa 52407. (7) Includes shares of Common Stock which underlie currently exercisable Warrants held by such person. (8) The address of such person is Suite 1070, 3100 West End Avenue, Nashville, Tennessee 37203. (9) The address of such person is Suite 100, 2000 Glen Echo Road, Nashville, Tennessee 37215. (10) The address of such person is 133 Laurens Street, S.W., Aiken, South Carolina 29801. 34 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 1,106,364 outstanding shares of Common Stock (giving effect to the Stock Split and not including Common Stock which underlies the Warrants) and no shares of preferred stock. The following summary description of HLM Design's capital stock does not purport to be complete and is qualified in its entirety by reference to HLM Design's Certificate of Incorporation, which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, and the Delaware General Corporation Law (the "DGCL"). Reference is made to such exhibit and the DGCL for a detailed description of the provisions thereof summarized below. COMMON STOCK The holders of validly issued and outstanding shares of Common Stock are entitled to one vote per share of record on all matters to be voted upon by stockholders. At a meeting of stockholders at which a quorum is present, a majority of the votes cast decides all questions, unless the matter is one upon which a different vote is required by express provision of law or HLM Design's Certificate of Incorporation or Bylaws. There is no cumulative voting with respect to the election of directors (or any other matter), but HLM Design's Board of Directors is classified. The holders of a majority of the shares at a meeting at which a quorum is present can, therefore, elect all of the directors of the class then to be elected if they choose to do so, and, in such event, the holders of the remaining shares would not be able to elect any directors of that class. The holders of Common Stock have no preemptive rights and have no rights to convert their Common Stock into any other securities. Subject to the rights of holders of Preferred Stock, if any, in the event of a liquidation, dissolution or winding up of HLM Design, holders of Common Stock are entitled to participate equally, share for share, in all assets remaining after payment of liabilities. The holders of Common Stock are entitled to receive ratably such dividends as the Board of Directors may declare out of funds legally available therefor, when and if so declared. The payment by HLM Design of dividends, if any, rests within the discretion of its Board of Directors and will depend upon HLM Design's results of operations, financial condition and capital expenditure plans, as well as other factors considered relevant by the Board of Directors. See "Dividends." TRANSFER AGENT AND REGISTRAR HLM Design has appointed First Union National Bank as the transfer agent and registrar for the Common Stock. WARRANTS In May 1997, September 1997 and December 1997, HLM Design issued Warrants to purchase an aggregate of 185,757 shares of Common Stock at an exercise price of $.01 per share to Pacific, Equitas and Berthel Leasing and two representatives of Pacific and Equitas in connection with financing arrangements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." By their terms, the Pacific/Equitas Warrants will expire in July 2002 and the Berthel Warrants will expire in September of that year; however, for a period of 30 days prior to expiration the holder of any or all of the Warrants has the right and option to sell to HLM Design any or all of the Warrants at a purchase price equal to the Fair Market Value (as defined therein) of the shares of Common Stock issuable to the holder upon exercise of the Warrant less the exercise price. The kind of securities purchasable upon the exercise of the Warrants and the number of shares of Common Stock purchasable upon exercise of the Warrants is subject to adjustment upon the occurrence of certain events such as reclassification of securities, consolidation or merger of HLM Design, subdivision or combination of Common Stock or stock dividends. Additionally, if the indebtedness pursuant to which the Warrants were issued is not repaid in full on or before May 30, 1999, the number of shares of Common Stock each Warrant holder is able to purchase will increase and will further increase on each May 30 thereafter until such indebtedness is repaid in full. The Common Stock underlying the Berthel Warrants and the Warrants issued to Pacific and Equitas are subject to certain registration rights which begin in September 2000. Pursuant to the applicable registration rights agreement, upon the request of holders of at least 25% of Registrable Securities (as defined therein) HLM Design will, within 90 days, effect registration under the Securities Act. Additionally, such agreements provide Berthel Leasing, Pacific and Equitas with certain piggyback registration rights that permit them to have their shares of Common Stock, as selling security holders, included in any registration statements pertaining to the registration of Common Stock for issuance by the Company or for resale by other selling security holders. These registration rights will be limited or restricted to the extent an underwriter of an offering, if an underwritten offering, determines that marketing factors require a limitation of the number of shares to be underwritten. 35 PREFERRED STOCK No shares of Preferred Stock are outstanding. HLM Design's Certificate of Incorporation authorizes the Board of Directors to issue up to 1,000,000 shares of Preferred Stock in one or more series and to establish such designations and such relative voting, dividend, liquidation, conversion and other rights, preferences and limitations as the Board of Directors may determine without further approval of the stockholders of HLM Design. The issuance of Preferred Stock by the Board of Directors could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a person or group to gain control of HLM Design. The issuance of any series of Preferred Stock, and the relative designations, rights, preferences and limitations of such series, if and when established, will depend upon, among other things, the future capital needs of the Company, the then-existing market conditions and other factors that, in the judgment of the Board of Directors, might warrant the issuance of Preferred Stock. As of the date of this Prospectus, there are no plans, agreements or understandings for the issuance of any shares of Preferred Stock. DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS Certain provisions of the DGCL and of HLM Design's Certificate of Incorporation and Bylaws, summarized in the following paragraphs, may be considered to have an antitakeover effect and may delay, deter or prevent a tender offer, proxy contest or other takeover attempt that a stockholder might consider to be in such stockholder's best interest, including such an attempt as might result in payment of a premium over the market price for shares held by stockholders. DELAWARE ANTITAKEOVER LAW. HLM Design, a Delaware corporation, is subject to the provisions of the DGCL, including Section 203. In general, Section 203 prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which such person became an interested stockholder unless: (i) prior to such date, the Board of Directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; or (ii) upon becoming an interested stockholder, the stockholder then owned at least 85% of the voting stock, as defined in Section 203; or (iii) subsequent to such date, the business combination is approved by both the Board of Directors and by holders of at least 66 2/3% of the corporation's outstanding voting stock, excluding shares owned by the interested stockholder. For these purposes, the term "business combination" includes mergers, asset sales and other similar transactions with an "interested stockholder." An "interested stockholder" is a person who, together with affiliates and associates, owns (or, within the prior three years, did own) 15% or more of the corporation's voting stock. Although Section 203 permits a corporation to elect not to be governed by its provisions, HLM Design to date has not made this election. SPECIAL MEETINGS OF STOCKHOLDERS. HLM Design's Bylaws provide that special meetings of stockholders may be called only by the President or by the Secretary or any Assistant Secretary at the request in writing of a majority of the Board of Directors of HLM Design. This provision may make it more difficult for stockholders to take action opposed by the Board of Directors. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. HLM Design's Bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual or a special meeting of stockholders, must provide timely notice thereof in writing. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive office of the Company, (i) in the case of an annual meeting that is called for a date that is within 30 days before or after the anniversary date of the immediately preceding annual meeting of stockholders, not less than 60 days nor more than 90 days prior to such anniversary date, and, (ii) in the case of an annual meeting that is called for a date that is not within 30 days before or after the anniversary date of the immediately preceding annual meeting, or in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. The Bylaws also specify certain requirements for a stockholder's notice to be in proper written form. These provisions may preclude some stockholders from bringing matters before the stockholders at an annual meeting or from making nominations for directors at an annual or special meeting. CLASSIFIED BOARD OF DIRECTORS. HLM Design's Bylaws provide for the Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, approximately one-third of the Board of Directors will be elected each year. Classification of the Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage a takeover bid for HLM Design. Moreover, under Delaware Law, in the case of a corporation having a classified board of directors, the stockholders may remove a director only for cause. This provision, when coupled with the provision of the Bylaws authorizing only the board of directors to fill vacant directorships, will preclude stockholders of HLM Design from removing incumbent directors without cause, simultaneously gaining control of the Board of Directors by filing the vacancies with their own nominees. 36 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, HLM Design will have outstanding 1,106,364 shares of Common Stock (excluding shares of Common Stock which underlie currently exercisable Warrants, options granted under the Stock Option Plan and assuming no exercise of the Underwriters' over-allotment option). Of such amount, the 500,000 Shares sold in this Offering will be freely transferable and may be resold without further registration under the Securities Act, except for any shares purchased by an "affiliate" of HLM Design (as defined below), which shares will be subject to the resale limitations of Rule 144 under the Securities Act ("Rule 144"). The 580,624 shares (the "Restricted Shares") of Common Stock held by affiliates of the Company are "restricted securities" within the meaning of Rule 144. The 148,610 shares of Common Stock, which (i) are held by non-affiliates of the company or (ii) which underlie (x) options to be granted on or before the consummation of Offering under the Company's Stock Option Plan, and (y) the Warrants, may be resold only pursuant to a registration statement under the Securities Act or applicable exemption from registration thereunder, such as an exemption provided by Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned "restricted securities" for at least one year may, under certain circumstances, resell within any three-month period, such number of shares as does not exceed the greater of one percent of the then-outstanding shares of Common Stock or the average weekly trading volume of Common Stock during the four calendar weeks prior to such resale. Rule 144 also permits, under certain circumstances, the resale of shares without any quantity limitation by a person who has satisfied a two-year holding period and who is not, and has not been for the preceding three months, an affiliate of HLM Design. In addition, holding periods of successive non-affiliate owners are aggregated for purposes of determining compliance with these one-and two-year holding period requirements. Upon completion of this Offering, none of the 606,364 shares of Common Stock outstanding on the date of this Prospectus and not sold in the Offering will have been held for at least one year. Since all such shares are restricted securities, none of them may be resold pursuant to Rule 144 upon completion of this Offering. The Restricted Shares will not be eligible for sale under Rule 144 until the expiration of the one-year holding period from the date such Restricted Shares were acquired. The availability of shares for sale or actual sales under Rule 144 and the perception that such shares may be sold may have an adverse effect on the market price of the Common Stock. Sales under Rule 144 also could impair the Company's ability to market additional equity securities. HLM Design and all directors and executive officers of HLM Design have agreed not to offer, sell, contract to sell, or otherwise dispose of, any shares of Common Stock or securities convertible into or exchangeable for Common Stock for 365 days from the date of this Prospectus without the prior written consent of the representatives of the Underwriters. 37 UNDERWRITING Each of the underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names below. The nature of the obligations of the Underwriters is such that if any of such shares are purchased, all must be purchased.
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------ --------- Berthel Fisher & Company Financial Services, Inc.......................................... Westport Resources Investment Services, Inc............................................... Marion Bass Companies..................................................................... --------- 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 75,000 additional shares of Common Stock at the initial price to the public, less the underwriting discount, set forth on the cover page of this Prospectus. The Underwriters may exercise the option only for the purpose of covering over-allotments. To the extent that the Underwriters exercise such option, each Underwriter will be committed, subject to certain conditions, to purchase from HLM Design on a pro rata basis that number of additional shares of Common Stock which is proportionate to such Underwriters' initial commitment. HLM Design, certain shareholders and certain executive officers have agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell, grant any option to purchase or otherwise transfer or dispose of any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock, or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or part, the economic consequence of ownership of the Common Stock, without the prior written consent of Berthel Fisher, for a period of 365 days after the date of this Prospectus. At the request of HLM Design, the Underwriters have reserved up to 8,000 shares of the Common Stock for sale at the initial public offering price, and otherwise on the same terms as sales pursuant to the Offering, to persons designated by HLM Design. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. Prior to this Offering, there has been no market for the Common Stock and there can be no assurance that a regular trading market will develop upon the completion of this Offering. The initial public offering price was determined by negotiations between the Company and the Underwriters. The primary factors considered in determining such offering price included the history of and prospects for the Company's business and the industry in which the Company competes, market valuation of comparable companies, market conditions for public offerings, the prospects for future earnings of the Company, an assessment of the Company's management, the general condition of the securities markets, the demand for similar securities of comparable companies and other relevant factors. HLM Design has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the Underwriter may be required to make in respect thereof. Generally, such indemnification or contribution rights relate to losses, claims, damages or liabilities resulting from (i) untrue statements of material fact contained in the Registration Statement or any application or other document filed to qualify the Common Stock under "blue sky" or securities laws of any state, or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. 38 The Underwriters have advised HLM Design that they do not intend to confirm sales of Common Stock offered hereby to any accounts over which they exercise discretionary authority. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriter and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Offering, I.E., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Underwriters may reduce that short position by purchasing Common Stock in the open market. The Underwriters may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Underwriters may also impose a penalty bid on certain members of the underwriting group and selling group members. This means that if an Underwriter purchases shares of Common Stock in the open market to reduce the Underwriter's short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriter and selling group members who sold those shares as part of the Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither HLM Design nor the Underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither HLM Design nor any of the Underwriters make any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. HLM Design has agreed to pay to the Underwriters a nonaccountable expense allowance of 3% of the gross proceeds derived from the sale of the shares of Common Stock underwritten (including the sale of any shares of Common Stock subject to the Underwriters' overallotment option), none of which has been paid as of the date of this Prospectus. HLM Design has also agreed to pay all expenses in connection with qualifying the Common Stock offered hereby for sale under the laws of such states as the Underwriters may designate, including filing fees and fees and expenses of counsel retained for such purposes by the Underwriters, and registering the Offering with the NASD. In connection with this Offering, HLM Design has agreed to sell to the Underwriters, for a price of $.01 per warrant, warrants (the "Underwriters' Warrants") to purchase shares of Common Stock equal to 10% of the total number of shares of Common Stock sold pursuant to this Offering, excluding shares subject to the over-allotment option. The Underwriters' Warrants are exercisable at a price equal to 120% of the initial public offering price ($13.20 assuming an initial public offering price of $11.00 per share (the low point of the range set forth on the cover of this prospectus)) for a period of four years commencing one year from the date of this Prospectus (the "Exercise Period"). The Underwriters' Warrants grant to the holders thereof, with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the Underwriters' Warrants, one demand registration right during the Exercise Period, as well as piggyback registration rights at any time. HLM Design has agreed with the Underwriters to use its best efforts to cause a designee of Berthel Fisher & Co. Financial Services, Inc. who is reasonably satisfactory to HLM Design to be elected as a full voting member of its Board of Directors. As of the date of this Prospectus, Berthel Fisher & Co. Financial Services Inc. has not named a designee for election to board membership. See "Certain Transactions." Berthel Leasing, an affiliate of Berthel Fisher & Company Financial Services, Inc., provided lease financing to HLMI in an aggregate principal amount of $2.8 million under the Lease Financing and provided HLM Design with a $0.8 million term loan for working capital purposes. More than 10% of the net proceeds of the Offering will be received by Berthel Leasing, by reason of the use of such proceeds to repay a portion of such borrowings. Accordingly, the Offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8), which requires that the public offering price of the Common Stock be no higher than the price recommended by a Qualified Independent Underwriter which has participated in the preparation of the Registration Statement and performed its usual standard of due diligence with respect thereto. Westport Resources Investment Services, Inc. will act as the Qualified Independent Underwriter for the Offering, and the public offering price will not be higher than the price recommended by Westport Resources Investment Services, Inc. 39 LEGAL MATTERS Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina, counsel to the Company, will render an opinion that the Shares offered hereby, when issued and paid for in accordance with the terms of the Underwriting Agreement, will be duly authorized, validly issued, fully paid and nonassessable. Bradley & Riley, P.C., Cedar Rapids, Iowa, has served as counsel to the Underwriters in connection with this Offering. EXPERTS The audited financial statements of HLMI (Predecessor) as of April 25, 1997 and for each of the years in the three-year period ended April 25, 1997, and the audited financial statements of HLM Design, Inc. as of April 25, 1997 and from inception, March 6, 1997, to the period ended April 25, 1997, included in this Prospectus and elsewhere in the Registration Statement of which this Prospectus is a part, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and have been so included in reliance upon the reports of such firm given upon the authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form S-1 under the Securities Act with respect to the Shares offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Shares offered hereby, reference is made to the Registration Statement, including the exhibits and schedules filed as part thereof. Statements contained in this Prospectus as to the contents of any contract or any other documents are not necessarily complete, and, in each such instance, reference is made to the copy of the contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference thereto. The Registration Statement, together with its exhibits and schedules, may be inspected at the Public Reference Section of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of such materials may be obtained from any such office upon payment of the fees prescribed by the SEC. Such information may also be inspected and copied at the office of 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. 40 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 The accompanying financial statements reflect a decrease in the par value to $.005 and an 11 for 1 split of common stock which is to be effected prior to the effective date of the Offering. The following opinion is in the form which will be signed by Deloitte & Touche upon consummation of the above events, which are described in Note 1 of Notes to Financial Statements, and assuming that, from November 11, 1997 to the date of such event, no other events have occurred which would affect the accompanying financial statements and notes thereto. INDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS HLM DESIGN, INC. Charlotte, North Carolina We have audited the accompanying balance sheet of HLM Design, Inc. (the "Company") as of April 25, 1997, and the related statements of stockholders' equity, for the period from inception March 6, 1997 to April 25, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 25, 1997, and the changes in stockholders equity for the period from inception March 6, 1997 to April 25, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP November 11, 1997 (January , 1998 as to Note 1) 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, $.005 par value, voting, authorized 9,000,000 shares; issued 533,500 and 557,040, respectively.................................................................................. 2,668 2,786 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........................................................................ 332 32,501 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 ----------- ---------- ----------- ----------- ---------- ----------- PRO FORMA NET INCOME PER SHARE (NOTE 1).......................................... $ .52 ----------- ----------- PRO FORMA NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (NOTE 1)............... 729,647 ----------- -----------
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.......... 533,500 2,668 332 (3,000) -------- ------ --------------- ------------ BALANCE, APRIL 25, 1997........................ 533,500 2,668 332 (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)...... 23,540 118 31,575 (2,962) 28,731 Net Income -- Combined (unaudited)........... 379,115 379,115 -------- ------ --------------- -------- ------------ ------------- BALANCE OCTOBER 31, 1997 -- COMBINED (UNAUDITED).................................. 557,840 $2,794 $32,501 $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. The Company believes that the adoption of such statement would not result in earnings materially different than pro forma earnings per share presented in accompanying statements of income. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This Standard establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement will be effective for the Company's fiscal year ending April 24, 1998, and the Company does not intend to adopt this Statement prior to the effective date. On November 20, 1997, EITF 97-2, "Application of FASB Statement No. 94, CONSOLIDATION OF ALL MAJORITY-OWNED SUBSIDIARIES, and APB Opinion No. 16, BUSINESS COMBINATIONS, to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements", was issued which reached a consensus that arrangements similar to HLM Design and the Managed Firms should be accounted for on a consolidated basis. The Company intends to reflect this change prospectively in the fiscal year ended April 24, 1998 financial statements. If the change had been effected for the six months ended October 31, 1997, the effect would have been a reduction to Stockholder's Equity by approximately $3,956, an increase in minority interest by approximately $3,956 and a decrease in Net Income of approximately $3,948. INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial information for the six months ended October 25, 1996 (Predecessor) and October 31, 1997 (Combined) has been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. STOCK SPLIT AND PRO FORMA NET INCOME PER SHARE -- All share and per share amounts included in the accompanying financial statements for all periods presented have been adjusted to reflect an 11 for 1 stock split of the HLM Design Common Stock effective as of January , 1998 and the decrease in Common Stock par value to $.005. Pro forma net income per share in the accompanying financial statements has been prepared based upon the shares outstanding without giving effect to the issuance of common stock related to the offering. F-9 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 2. BUSINESS ACQUISITION Effective May 23, 1997, HLMI sold 50,000 newly issued shares to BBH Corp., a Delaware corporation, for approximately $3.2 million. On May 23, 1997, BBH Corp. merged into HLMI and each BBH Corp. share outstanding at the time of merger was converted into one share of HLMI's stock. All HLMI shares held by BBH Corp. were canceled and retired. Effective as of May 31, 1997, HLMI repurchased all 46,858 shares from the ESOP for $64 per share as part of a merger agreement with BBH Corp. As a result of this transaction, the ESOP will effectively cease once the proceeds of the sale have been distributed by the Trustee to the ESOP's participants following IRS approval of the ESOP's termination. The total purchase price as well as acquisition costs has been allocated to the assets and liabilities acquired at their estimated fair market value at acquisition date as follows: 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).......................................... $ (416,864) $ 440,148 ----------- ----------- ----------- -----------
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 ----------- -----------
F-10 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 4. FINANCING ARRANGEMENTS A summary of notes payable at October 31, 1997 is as follows: In September 1996, the Company entered into a financing facility with First Charter National Bank which provides a line of credit of up to $500,000. Interest is charged at the bank's prime rate plus 1.5% and principal payments are to be made at the Company's discretion. The loan has an annual maturity date which is subject to review. In May 1997, the Company entered into a financing facility with First Charter National Bank which provides a line of credit of up to $1,000,000. Interest is charged at the bank's prime rate plus 1.5% and principal payments are to be made at the Company's discretion. The loan has maturity date of May 1998. In September 1997, the Company entered into debt agreements with Berthel Fisher, a planned Underwriter of the Offering, of $250,000 and $500,000. Interest is charged at 12%, and monthly interest payments are due through May 1, 1998. The final payment for all accrued interest and principal is due on May 1, 1998. A summary of long-term debt at October 31, 1997 is as follows:
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 including interest of 13.5% due in monthly payments...................................................................................................... 1,980,000 Notes payable to shareholders at 6% with final payment due at various dates to August 2002...................... 182,308 Lease financing with Berthel Fisher, due in monthly payments of $64,501, including interest at 14.07%, with final lease and interest payments made on 4/30/2002........................................................... 2,637,926 ---------- Total long-term debt............................................................................................ 5,202,245 ---------- Less current maturities (based on refinanced terms)............................................................. 728,011 ---------- Long-term portion............................................................................................... $4,474,234 ---------- ----------
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 ---------- ----------
F-11 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 4. FINANCING ARRANGEMENTS -- Continued In May 1997, warrants to purchase 14,372 shares of common stock 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. 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: 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 ----------- ----------- 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:
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. 10. HLM DESIGN FINANCIAL INFORMATION (UNAUDITED) HLM Design's balance sheet and income statement for the six months ended October 31, 1997 are as follows: BALANCE SHEET Current assets........................................................................... 402,017 --------- Non-current assets....................................................................... 3,446,128 --------- Total assets............................................................................. 3,848,145 --------- --------- Current liabilities...................................................................... 1,163,169 --------- Non-current liabilities.................................................................. 2,162,307 ---------
F-13 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 10. HLM DESIGN FINANCIAL INFORMATION (UNAUDITED) -- Continued Total liabilities........................................................................ 3,325,476 --------- --------- Total stockholders equity................................................................ 522,669 --------- Total liabilities & S/E.................................................................. 3,848,145 --------- --------- INCOME STATEMENT Revenues................................................................................. 390,830 Net interest, tax and other expense...................................................... 146,971 --------- Net income............................................................................... 243,859 --------- ---------
F-14 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-15 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-16 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-17 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-18 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-19 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-20 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-21 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-22 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-23 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-24 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-25 HLMI NOTES TO FINANCIAL STATEMENTS -- CONTINUED 10. CONTINGENCIES HLMI is involved in various disputes and legal actions related to contract operations. In the opinion of HLMI management, the ultimate resolution of these actions will not have a material effect on HLMI's financial position or future results of operations. 11. RELATED PARTY TRANSACTIONS During the years ended April 26, 1996 and April 25, 1997, HLMI incurred $254,137 and $257,017, respectively, in financing advisory fees related to debt financings, for services provided by a director. 12. OTHER MATTERS On May 29, 1997, HLMI executed a Management and Services Agreement with HLM Design Inc ("HLM, Design"). The majority shareholders of Design are officers of HLMI and own 100% of the common stock of HLMI. Under the Management and Services Agreement, Design will manage all functions of HLMI except for architectural services regulated by the various states in which HLMI operates. As compensation for such management services, Design will be entitled to substantially all the net cash flow generated by HLMI. In addition, HLM, Design and the shareholders of HLMI have entered into agreements that provide HLM Design with the right of first refusal, by selection of qualified individuals, for any purchase or sale of shares of HLMI's stock. Effective May 23, 1997, HLMI sold 50,000 newly issued shares to BBH Corp., a Delaware corporation, purchased 50,000 shares in HLMI for $3.2 million. On May 23, 1997, BBH Corp. merged into HLMI and each BBH Corp. share outstanding at the time of merger was converted into one share of HLMI's stock. All of HLMI's shares held by BBH Corp. were canceled and retired. Effective as of May 31, 1997, HLMI repurchased all 46,858 shares from the ESOP for $64 per share as part of a merger agreement with BBH Corp. As a result of this transaction, the ESOP will effectively cease once the proceeds of the sale have been distributed by the Trustee to the ESOP's participants following IRS approval of the ESOP's termination. F-26 - ------------------------------------------------------------ - ------------------------------------------------------------ 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......................................... 7 Use of Proceeds...................................... 10 Dividend Policy...................................... 11 Capitalization....................................... 11 Dilution............................................. 12 Selected Financial Data.............................. 13 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 17 Business............................................. 22 Management........................................... 26 Certain Transactions................................. 33 Principal Stockholders............................... 34 Description of Capital Stock......................... 35 Shares Eligible for Future Sale...................... 37 Underwriting......................................... 38 Legal Matters........................................ 40 Experts.............................................. 40 Additional Information............................... 40 Index to Financial Statements........................ F-1
------------------ UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 500,000 SHARES HLM DESIGN, INC. COMMON STOCK ---------------- PROSPECTUS ---------------- BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. WESTPORT RESOURCES INVESTMENT SERVICES, INC. MARION BASS COMPANIES , 1998 - ------------------------------------------------------------ - ------------------------------------------------------------ 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................................................................... $ 2,121.22 NASD filing fee........................................................................ 1,200 AMEX fees.............................................................................. 10,000 Transfer agent and registrar fees...................................................... 15,000 Accounting fees and expenses........................................................... 235,000 Legal fees and expenses................................................................ 120,000 "Blue Sky" fees and expenses (including legal fees).................................... 5,000 Costs of printing and engraving........................................................ 90,000 Miscellaneous.......................................................................... 21,678.78 ----------- Total............................................................................. $500,000.00 ----------- -----------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Registrant's Bylaws effectively provide that the Registrant shall, to the full extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 145"), indemnify all persons whom it may indemnify pursuant thereto. In addition, the Registrant's Certificate of Incorporation eliminates personal liability of its directors to the full extent permitted by Section 102(b)(7) of the General Corporation Law of the State of Delaware, as amended from time to time ("Section 102(b)(7)"). Section 145 permits a corporation to indemnify its directors and officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by a third party if such directors or officers acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, indemnification may be made only for expenses actually and reasonably incurred by directors and officers in connection with the defense or settlement of an action or suit and only with respect to matters as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interest of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant officers or directors are reasonably entitled to indemnification for such expenses despite such adjudication of liability. Section 102(b)(7) provides that a corporation may eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for willful or negligent conduct in paying dividends or repurchasing stock out of other than lawfully available funds or (iv) for any transaction from which the director derived an improper personal benefit. No such provisions shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. The Company intends to obtain, prior to the effective date of the Registration Statement, insurance against liabilities under the Securities Act of 1933 for the benefit of its officers and directors. Section 6.01 of the Underwriting Agreement (filed as Exhibit 1.1 to this Registration Statement) provides that the Underwriters severally and not jointly will indemnify and hold harmless the Registrant and each director, officer or controlling person of the Registrant from and against any liability caused by any statement or omission in the Registration Statement or Prospectus based upon information furnished to the Registrant by the Underwriters for use therein. II-1 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 7, 1997, July 8, 1997, July 14, 1997, August 22, 1997 and November 1, 1997 the Registrant issued an aggregate of 2,340 shares of Common Stock to senior level employees of the Company in exchange for $14.81 per share. As of May 30, 1997, September 10, 1997 and December 24, 1997, the Registrant issued warrants to purchase 17,794 shares of Common Stock for an aggregate of $23,500 in connection with financing arrangements. On November 10, 1997, Clay R. Caroland exercised his Warrant and purchased 862 shares of Common Stock at an excercise price of $.01 per share. On December 26, 1997 Berthel Leasing exercised its Warrants and purchased 3,422 shares of Common Stock at an exercise price of $.01 per share. In each of the foregoing transactions, the securities were not registered under the Securities Act, in reliance upon the exemption from registration provided by Section 4(2) of said Act in view of the sophistication of the foregoing purchasers, their access to material information, the disclosures actually made to them by the Registrant and the absence of any general solicitation or advertising. On or before the consummation of the Offering, the Registrant will issue to two of its officers and employees, pursuant to the Registrant's Stock Option Plan, options to purchase 100,000 shares of Common Stock in the aggregate. Such securities will not be registered under the Securities Act because such grants will be without consideration to the Registrant and, consequently, will not constitute offers or sales within Section 5 of the Securities Act. ITEM 16. EXHIBITS.
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.
II-2
EXHIBIT NO. DESCRIPTION - ------- ------------------------------------------------------------------------------------------------------------- 10 .14 Collateral Assignment of Promissory Note dated as of May 30, 1997 by and between HLM Design, Inc. and Pacific Capital, L.P. and Equitas, L.P. 10 .15 Unconditional Guaranty dated as of May 30, 1997 by and between Hansen Lind Meyer Inc. and BBH Corp. in favor of Pacific Capital, L.P. and Equitas, L.P. 10 .16 Guaranty dated as of May 30, 1997 by Joe Harris in favor of Pacific Capital, L.P. and Equitas, L.P. 10 .17 Guaranty dated as of May 30, 1997 by Vernon Brannon in favor of Pacific Capital, L.P. and Equitas, L.P. 10 .18 Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc. and Joseph M. Harris. 10 .19 Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc. and Vernon B. Brannon. 10 20** Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and Hansen Lind Meyer Inc. 10 21** Security Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and Hansen Lind Meyer Inc. 10 22** Guaranty (Limited in Amount) dated as of May 30, 1997 by and among Vernon B. Brannon, William J. Blalock and Joseph M. Harris. 10 .23 Form of HLM Design, Inc. Stock Option Plan. 10 .24 Form of HLM Design, Inc. Employee Stock Purchase Plan. 10 .25 Form of Employment Agreement between HLM Design, Inc. and Joseph M. Harris. 10 .26 Form of Employment Agreement between HLM Design, Inc. and Vernon B. Brannon. 10 .27 Financial Advisory Agreement dated as of February 17, 1995 by and between Blalock and Company and HLMI. 10 .28 Promissory Note dated as of May 30, 1997 issued by HLM Design, Inc. in favor of First Charter National Bank. 21 .1** Subsidiaries of the Registrant 23 .1 Consent of Deloitte & Touche LLP 23 .2* Form of Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration Statement) 24 .1* Power of Attorney (contained on the signature page to the Registration Statement)
- --------------- * Filed previously ** To be furnished by Amendment. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing or closings specified in the Underwriting Agreement, certificates in such denominations and registered in such names as may be required by the Underwriters in order to permit prompt delivery to each purchaser. The undersigned Registrant hereby further undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Charlotte, North Carolina on January 21, 1998. HLM DESIGN, INC. By: /s/_______VERNON B. BRANNON________ VERNON B. BRANNON SENIOR VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER POWER OF ATTORNEY Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 Registration Statement has been signed by the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE - ------------------------------------------------------ ---------------------------------------------- ----------------- /s/* President, Chief Executive Officer (principal January 21, 1998 JOSEPH M. HARRIS executive officer) and Chairman /s/VERNON B. BRANNON Senior Vice President, Treasurer, Chief January 21, 1998 VERNON B. BRANNON Financial Officer (principal financial and accounting officer) and Director /s/* Director January 21, 1998 CLAY R. CAROLAND III /s/* Director January 21, 1998 SHANNON LEROY
*By: /s/_____VERNON B. BRANNON______ VERNON B. BRANNON (ATTORNEY-IN-FACT FOR EACH OF THE PERSONS INDICATED) 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. 10.28 Promissory Note dated as of May 30, 1997 issued by HLM Design, Inc. in favor of First Charter National Bank. 21.1** Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche LLP 23.2* Form of Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration Statement) 24.1* Power of Attorney (contained on the signature page to the Registration Statement)
- ----------------------------------------------------------- * Filed previously ** To be furnished by Amendment. The accompanying financial statements reflect a decrease in the par value to $.005 and an 11 for 1 split of common stock which is to be effected prior to the effective date of the Offering. The following consent is in the form which will be signed by Deloitte & Touche upon consummation of the above events, which are described in Note 1 of Notes to Financial Statements, and assuming that, from November 11, 1997 to the date of such event, no other events have occurred which would affect the accompanying financial statements and notes thereto. EX-3.(I) 2 EXHIBIT 3.1 STATE OF DELAWARE PAGE 1 OFFICE OF THE SECRETARY OF STATE I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF "HLM DESIGN, INC.", FILED IN THIS OFFICE ON THE NINETEENTH OF NOVEMBER, A.D. 1997, AT 12:30 O'CLOCK P.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING. [STATE SEAL] /s/ Edward J. Freel ----------------------------------- Edward J. Freel, Secretary of State 2725383 8100 AUTHENTICATION: 8766272 971394844 DATE: 11-19-97 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF HLM DESIGN, INC. --------------------------------------------------------- Under Sections 242 and 245 of the General Corporation Law of the State of Delaware --------------------------------------------------------- HLM DESIGN, INC., a corporation organized and existing under and by virtue of the laws of the Sate of Delaware (the "Corporation"), DOES HEREBY CERTIFY THAT: FIRST: The present name of the Corporation is "HLM Design, Inc." The Corporation was originally incorporated under the name "HLM Design, Inc.," and the date of filing of its original Certificate of Incorporation with the Secretary of State was March 6, 1997. SECOND: The entire Certificate of Incorporation of the Corporation, as amended, is hereby further amended and/or deleted in their entirety and, as amended, the Certificate of Incorporation is hereby restated, so that, as amended and restated, it shall read in its entirety as set forth in Exhibit A attached hereto and by this reference made a part hereof. THIRD: The aforesaid amendments and this Amended and Restated Certificate of Incorporation were duly adopted by the Board of Directors and stockholders of the Corporation in accordance with the applicable provisions of Sections 141, 228, 242 and 245 of the General Corporation Law of the State of Delaware. FOURTH: This Amended and Restated Certificate of Incorporation shall be effective on filing with the Secretary of State of the State of Delaware. IN WITNESS WHEREOF, HLM Design, Inc. has caused its corporate seal to be hereunto affixed and this Amended and Restated Certificate of Incorporation to be signed by Joseph M. Harris, its President, and attested by Karen A. Kaplan, its Assistant Secretary, this 13th day of November, 1997. HLM DESIGN, INC. [CORPORATE SEAL] By: /s/ Joseph M. Harris ---------------------------- Joseph M. Harris, President ATTEST: By: /s/ Karen A. Kaplan ------------------------------------ Karen A. Kaplan, Assistant Secretary EX-4 3 EXHIBIT 4.3 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") made as of this 30th day of May, 1997 by and among HLM DESIGN, INC., a Delaware corporation (the "Company") and EQUITAS, L.P., a Delaware limited partnership ("Equitas") and PACIFIC CAPITAL, L.P., a Delaware limited partnership ("Pacific") (collectively, the "Purchasers"). W I T N E S S E T H: WHEREAS, simultaneously with the execution and delivery of this Agreement, the Purchasers have purchased from the Company Common Stock Purchase Warrants, of even date herewith (the "Warrants"); and WHEREAS, the parties hereto wish to provide for certain registration rights with respect to securities of the Company that may be acquired by the Purchasers upon exercise of the Warrants. NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged herein contained, the parties hereto agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any other Federal agency at the time administering the Securities Act. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Holder" shall mean the holder of the Registrable Securities (including the Initiating Holders and the Non-Initiating Holders), either individually or jointly, as the case may be. "Initiating Holders" shall mean (i) for purposes of Section 3 hereof, Holders of more than fifty percent (50%) of the shares of the Registrable Securities then outstanding who initiate a request for registration pursuant to Section 3(a) hereof, and (ii) for purposes of Section 5 hereof, Holders of more than twenty percent (20%) of the shares of the Registrable Securities then outstanding who initiate a request for registration pursuant to Section 5(a) hereof. "Non-Initiating Holders" shall mean, with respect to any request for registration pursuant to Sections 3 or 5 hereof, the Holders not party to such request for registration. 1 The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. "Registrable Securities" shall mean, at any time, shares of the Company's securities described in Section 2 hereof which are required to bear the restrictive legend set forth in such Section. "Registration Expenses" shall mean all expenses incurred by the Company in compliance with Sections 3, 4 and 5 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, the fees and expenses of one counsel for all the selling Holders and other security holders and the expense of any special audits incident to or required by any such registration (but excluding the Selling Expenses and the compensation of regular employees of the Company, which shall in any event be paid by the Company). "Securities Act" shall mean the Securities Act of 1933, as amended. "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel, if any, separately retained by any Holder (not including the fees and disbursements of one such counsel included in Registration Expenses). 2. Restrictive Legend. Each certificate representing shares of common stock issued upon exercise of the Warrant shall (unless otherwise permitted or unless the securities evidenced by such certificate shall have been registered under the Securities Act) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. Upon request of a holder of such a certificate, the Company shall remove the foregoing legend from the certificate or issue to such holder a new certificate therefor free of any transfer legend, if, (x) with such request, the Company shall have received either an opinion of counsel satisfactory to the Company to the effect that any transfer by such holder of the securities evidenced by such certificate will not violate the Securities Act and applicable state securities laws or (y) in accordance with paragraph (k) of Rule 144, such holder is not and has not during the last three months been an affiliate of the Company and such holder has held the securities represented by 2 such certificate for a period of at least one year. The Company will use its best efforts to assist any holder in complying with the provisions of this Section 2 for removal of the legend set forth above. 3. Requested Registration. (a) Request for Registration. If at any time after three (3) years from the date of this Agreement, the Company shall receive from Initiating Holders a written request that the Company effect any registration with respect to all, or, if not all, at least 25%, of the Registrable Securities held by the Initiating Holders, the Company shall do the following: (i) within ten (10) days of receipt of such request from the Initiating Holders, give written notice of the proposed registration to the Non-Initiating Holders; and (ii) as soon as practicable, but in any event no later than ninety (90) days after receipt of such request from the Initiating Holders, effect such registration and appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act as may be so requested and as would permit or facilitate the sale and distribution of all Registrable Securities as are specified in such request, together with all Registrable Securities of any Non-Initiating Holder(s) joining in such request as are specified in a written request by the Non-Initiating Holders (subject to limitation in accordance with Section 3(b) below) within thirty (30) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 3 after the Company has effected two (2) registrations pursuant to this Section 3 and each such registration has been declared or ordered effective by the Commission and the sale of such Registrable Securities has closed or been effected. (b) Underwriting. (i) Any request for registration pursuant to Section 3(a) hereof may involve a registered underwritten public offering of the Registrable Securities to be included in the registration. In such event, the Company shall include any information that it shall have received as to the nature of the underwriting in the written notice of the Company referred to in Section 3(a)(i) above, including the name of the underwriter or representative thereof selected for such underwriting. The right of any Non-Initiating Holder to registration pursuant to this Section 3 shall be conditioned upon such Non-Initiating Holder participating in such underwriting and the inclusion of such Non-Initiating Holder's Registrable Securities in such underwriting to the extent provided herein. (ii) In the event of an underwritten requested registration, the Company shall (together with all Holders proposing to distribute their Registrable Securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or representative thereof selected for such underwriting. Notwithstanding any other provision of this Section 3, if the underwriter or representative thereof advises the Initiating Holders in writing that, in its opinion, marketing factors require a limitation on the number of shares to be underwritten, the Initiating Holders shall so advise all Holders whose Registrable Securities would otherwise be 3 underwritten pursuant hereto, and the number of shares of Registrable Securities that are entitled to be included in the registration and underwriting shall be allocated in the following manner: (A) first, the securities of any stockholder joining in the request for registration who is not a Holder shall be excluded from such registration; in the event that less than all of such stockholders' securities are required to be excluded, the remaining number of shares shall be allocated as among such stockholders in such proportion, as nearly as practicable, to the relative amount of securities then held by each such stockholder; (B) then, if a limitation on the number of shares is still required, the Registrable Securities held by the Non-Initiating Holders joining in the request for registration shall be excluded from such registration to the extent required by such limitation; in the event that less than all of such Non-Initiating Holders' Registrable Securities are required to be excluded, the remaining number of shares shall be allocated as among such Non-Initiating Holders in proportion, as nearly as practicable, to the relative amount of Registrable Securities then held by each such Non-Initiating Holder; (C) then, if a limitation on the number of shares is still required, the Registrable Securities held by the Initiating Holders joining in the request for registration shall be excluded from such registration to the extent required by such limitation; in the event that less than all of such Initiating Holders' Registrable Securities are required to be excluded, the remaining number of shares shall be allocated as among such Initiating Holders in proportion, as nearly as practicable, to the relative amount of Registrable Securities then held by each such Initiating Holder. (iii) In the event that the number of shares of Registrable Securities of any Holder included in any registration is reduced below 75% of the shares requested to be included in such registration as a result of allocations pursuant to this Section 3(b), then such registration shall not be deemed a registration for purposes of Section 3 and shall not diminish the number of registrations to which the Holders are entitled pursuant to this Section 3. (iv) If any Holder who has requested inclusion in such registration as provided above disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The securities so withdrawn shall also be withdrawn from registration. 4. "Piggyback" Registration. 4 (a) Company Registration. If at any time the Company shall determine to register any of its securities either for its own account or the account of security holder(s) exercising its or their respective demand registration rights other than pursuant to Section 3 above on any registration form suitable for inclusion of the Registrable Securities, the Company shall do the following: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable "blue sky" or other state securities laws); and (ii) include in such registration, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder within thirty (30) days after receipt of the written notice from the Company described in clause (i) above, except as limited by the provisions of Section 4(b)(ii) below. Such Holder's written request may specify all or a part of a Holder's Registrable Securities. There shall be no limitation on the number of registrations which may be requested and obtained under this Section 4. (b) Underwriting. (i) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as part of the written notice given pursuant to Section 4(a)(i). In such event, the right of any Holder to registration pursuant to Section 4 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. (ii) The Company shall (together with all Holders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or representative thereof selected by the Company. Notwithstanding any other provision of this Section 4, if the Underwriter or representative thereof advises the Company in writing that, in its opinion, marketing factors require a limitation on the number of shares to be underwritten, the underwriter or representative thereof may (subject to the allocation priority set forth below), (A) if the registration of which the Company gives notice is for the first registered public offering of securities of the Company, exclude all of the Holders' Registrable Securities provided that no other selling shareholders' shares are included in the offering, or (B) in any other event, limit the number of the Holders' Registrable Securities and securities being registered by any other selling shareholders to be included in the registration and underwriting to an amount not less than thirty percent (30%) of the total number of shares being registered in such registration and underwriting. If such limitation is required, the Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for its own account, and then in the following manner: the Registrable Securities of the Holders joining in the request for registration and the securities to be sold by other selling shareholders participating in the registration shall be excluded from such registration in the ratio of eighty (80) to twenty (20) so that 80% of the shares included 5 in the registration (other than Company shares) are Registrable Securities of the Holders and 20% are shares owned by other shareholders joining in the registration. (iii) If any Holder of Registrable Securities or any other stockholder disapproves of the terms of any such underwriting, such stockholder may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 5. Registration on Form S-3. (a) The Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form. To that end the Company shall register (whether or not required by law to do so) the Common Stock under the Exchange Act in accordance with the provisions of the Exchange Act following the effective date of the first registration of any securities of the Company on Form S-1 or any comparable or successor form or forms. (b) After the Company has qualified for the use of Form S-3, in addition to the rights contained in the foregoing provisions of this Agreement, the Holders shall have the right to request from time to time registrations on Form S-3. Such requests shall be initiated by the Initiating Holders, shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holders. Whenever the Company is required by this Section 5 to effect the registration of the Registrable Securities, each of the procedures and requirements of Section 3 (including, without limitation, the requirement that the Company notify the Non-Initiating Holders in order to provide them with the opportunity to participate in the offering) shall apply to such registration; provided, however, that there shall be no limitation on the number of registrations on Form S-3 which may be requested and obtained under this Section 5, other than a limit of two (2) such registrations in any calendar year. 6. Expenses of Registration. The Company shall bear all Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to this Agreement. All Selling Expenses shall be borne by the holders, including the Company, of the securities so registered pro rata on the basis of the number of their shares so registered. 7. Registration Procedures. In the case of each registration effected by the Company pursuant to Sections 3, 4 or 5, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will do the following: (a) Keep such registration effective for a period of three months or until the Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs, but in any event not longer than six (6) months; provided, however, that in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold; 6 (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of securities covered by such registration statement; (c) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchaser of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing; (e) If at the time of any request to register Registrable Securities, the Company is engaged or has fixed plans to engage within 60 days of the time of the request in a registered public offering as to which the Holders may include Registrable Securities hereunder or is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of ninety (90) days from the effective date of such offering or the date of commencement of such other material activity, as the case may be, such right to delay a request to be exercised by the Company not more than once in any twelve (12) month period. (f) Cause all such Registrable Securities to be listed on each securities exchange or trading market on which similar securities issued by the Company are then listed or traded; (g) Provide a transfer agent and registrar for all Registrable Securities and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; (h) Make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement, and any attorney or accountant retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers and directors to supply all information reasonably requested by any such seller, underwriter, attorney or accountant in connection with such registration statement; provided, however, that such seller, underwriter, attorney or accountant shall agree to hold in confidence and trust all information so provided; 7 (i) Furnish to each selling Holder a signed counterpart, addressed to the selling Holder, of (i) an opinion of counsel for the Company, dated the effective date of the registration statement in usual and customary form for registered public offerings, and (ii) "comfort" letters signed by the Company's independent public accountants who have examined and reported on the Company's financial statements included in the registration statement, to the extent permitted by the standards of the AICPA or other relevant authorities, covering substantially the same matters with respect to the registration statement (and the prospectus included therein) and (in the case of the accountants' "comfort" letters) with respect to events subsequent to the date of the financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' "comfort" letters delivered to the underwriters in underwritten public offerings of securities; (j) Furnish to each selling Holder a copy of all documents filed with and all correspondence from or to the Commission in connection with any such offering other than non- substantive cover letters and the like; (k) Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (l) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 3 hereof, the Company shall enter into any underwriting agreement reasonably necessary to effect the offer and sale of the Registrable Securities, provided such underwriting agreement shall contain customary underwriting provisions. 8. Indemnification. (a) The Company shall indemnify each Holder, each of its officers, directors and partners, and each person controlling such Holder, with respect to which registration, qualification or compliance has been effected pursuant to Sections 3, 4 or 5 and each underwriter, if any, and each person who controls any underwriter, against all claims, losses, damages and liabilities (or actions, proceedings or settlements in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse 8 each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses as they are reasonably incurred in connection with investigating and defending any such claim, loss, damages, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter. (b) Each Holder shall, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Securities Act and the rules and regulations thereunder, each other Holder and each of their officers, directors and partners, and each person controlling such Holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete, and will reimburse the Company and such Holders, directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder for the purpose of being included in such registration statement, prospectus, offering circular or other document; provided, however, that the obligations of such Holders hereunder shall be limited to an amount equal to the net proceeds (after Selling Expenses) to each such Holder of securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 8 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 8. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. 9 (d) If the indemnification provided for in this Section 8 is unavailable to an Indemnified Party in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and all shareholders offering securities in the offering (the "Selling Shareholders") on the other, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Selling Shareholders on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Selling Shareholders on the other hand shall be the net proceeds from the offering (before deducting expenses) received by the Company on the one hand and the Selling Shareholders on the other. The relative fault of the Company on the one hand and the Selling Shareholders on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Selling Shareholders and the parties' relevant intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Selling Shareholders agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were based solely upon the number of entities from whom contribution was requested or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim, subject to the provisions of Section 8(d) hereof. Notwithstanding the provisions of this Section 8(d), no Selling Shareholder shall be required to contribute any amount or make any other payments under this Agreement which in the aggregate exceed the net proceeds (after Selling Expenses) received by such Selling Shareholder. No person guilty of fraudulent misrepresentation (within the meaning of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 9. Information by Holder. Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in Sections 3, 4 or 5. 10. "Stand-Off" Agreement. Each Holder, if requested by the Company and the Managing Underwriter of an offering by the Company of Common Stock or other securities of the Company pursuant to a Registration Statement, shall agree not to sell publicly or otherwise transfer or dispose of any Registrable Securities or other securities of the Company held by such Holder for a specified period of time (not to exceed 180 days) following the effective date of such Registration Statement; provided, that: 10 (a) such agreement shall only apply to the first Registration Statement covering Common Stock to be sold on its behalf to the public in an underwritten offering; and (b) all Holders holding not less than the number of shares of Common Stock held by such Holder (including shares of Common Stock issuable upon the conversion of Shares, or other convertible securities, or upon the exercise of options, warrants or rights) and all officers and directors of the Company enter into similar agreements. 11. Limitations on Registration of Issues of Securities. From and after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder a right to require the Company to initiate any registration of any securities of the Company or to require the Company, upon any registration of any of its securities, to include, among the securities which the Company is then registering, securities owned by such Holder which is on a parity with or superior to the rights given to the Holders hereunder unless waived as provided in Section 15 below. 12. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to: (a) Use its best efforts to make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; and (c) So long as the Holders own any Registrable Securities, furnish to the Holders forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as the Holders may reasonably request in availing itself of any rule or regulation of the Commission allowing the Holder to sell any such securities without registration. 13. Transfer or Assignment of Registration Rights. The rights to cause the Company to register securities granted to the Holders by the Company under Sections 3, 4 and 5 may be transferred or assigned by the Purchaser, provided that the Company is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the Registrable Securities with respect to which such 11 registration rights are being transferred or assigned, and provided further that the transferee or assignee of such rights assumes the obligations of the Holders under this Agreement. 14. Termination. The provisions of this Section 3, 4 and 5 of this Agreement shall terminate when there shall no longer be any Registrable Securities. 15. Entire Agreement; Amendment; Waiver. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof. No amendment, alteration or modification of this Agreement shall be valid unless in each instance such amendment, alteration or modification is expressed in a written instrument executed by the parties hereto. No waiver of any provision of this Agreement shall be valid unless it is expressed in a written instrument duly executed by the party or parties making such waiver. The failure of any party to insist, in any one or more instances, on performance of any of the terms and conditions of this Agreement shall not be construed as a waiver or relinquishment of any rights granted hereunder or of the future performance of any such term, covenant or condition but the obligation of any party with respect thereto shall continue in full force and effect. 16. Specific Performance. The parties hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto by reason of a failure to perform any of the obligations under this Agreement. Therefore, all parties hereto shall have the right to specific performance of the obligations of the other parties under this Agreement, and if any party hereto shall institute an action or proceeding to enforce the provisions hereof, any person (including the Company) against whom such action or proceeding is brought hereby waives the claim or defense therein that such party has an adequate remedy at law, and such person shall not urge in any such action or proceeding the claim or defense that such remedy at law exists. 17. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be mailed first class registered with postage prepaid as follows: (a) If to a Purchaser, to the following: Equitas, L.P. Suite 100 2000 Glen Echo Road Nashville, TN 37215 Attention: Shannon LeRoy FAX: 615-383-8693 Pacific Capital, L.P. Suite 1070 3100 West End Avenue Nashville, TN 37203 Attention: Clay R. Caroland III FAX: 615-292-8803 12 With a copy to: John W. Titus Boult, Cummings, Conners & Berry, PLC Suite 1600 414 Union Street P.O. Box 198062 Nashville, TN 37219 FAX: 615-252-6341 (b) If to the Company, to the following: HLM Design, Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 FAX: 704-358-0229 with a copy to: Shirley J. Linn Underwood Kinsey Warren & Tucker, P.A. 2020 Charlotte Plaza 201 South College Street Charlotte, N.C. 28244-2020 FAX: 704-377-9630 Alternatively, to such other address as a party hereto supplies to each other party in writing. 18. Successors and Assigns. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective transferees, successors and assigns of the parties hereto, whether so expressed or not. 19. Governing Law. This Agreement is to be governed by and interpreted under the laws of the State of Tennessee without giving effect to the principles of conflicts of laws thereof. 20. Titles and Subtitles. The titles of the sections of this Agreement are for the convenience of reference only and are not to be considered in construing this Agreement. 21. Severability. The invalidity or unenforceability of any provisions of this Agreement shall not be deemed to affect the validity or enforceability of any other provision of this Agreement. 13 22. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 14 IN WITNESS WHEREOF, the parties hereto have executed this Registration Rights Agreement as of the date first above written. HLM DESIGN, INC. By: /s/ Vernon B. Brannon Name: Vernon B. Brannon Title: Vice President EQUITAS, L.P. By: Tennessee Business Investments, Inc. By: /s/ Shannon LeRoy Name: Shannon LeRoy Title: President PACIFIC CAPITAL, L.P. By: Pacific Capital Corporation By: /s/ J. Larry Williams Name: J. Larry Williams Title: Secretary-Treasurer 15 EX-10 4 EXHIBIT 10.8 HLM DESIGN, INC. NOTE PURCHASE AGREEMENT This Note Purchase Agreement ("Agreement") is entered into as of the 30th day of May, 1997, by and between HLM DESIGN, INC. ("Seller"), a Delaware corporation; and HANSEN LIND MEYER INC. ("Hansen Lind"), an Iowa corporation, and BBH Corp. ("BBH"), a Delaware corporation (Hansen Lind and BBH being collectively referred to herein as "Guarantor"); and PACIFIC CAPITAL, L.P. ("Pacific"), a Delaware limited partnership, and EQUITAS, L.P. ("Equitas"), a Delaware limited partnership (Pacific and Equitas being sometimes referred to herein, each as "Purchaser," and collectively as "Purchasers"). W I T N E S E T H: WHEREAS, Seller has agreed to sell to Purchasers, and Purchasers have agreed to purchase from Seller, certain Promissory Notes of even date herewith evidencing indebtedness owed by Seller to the Purchasers in the aggregate amount of $2,000,000.00, on certain terms and conditions as set forth in this Note Purchase Agreement; WHEREAS, concurrently with the purchase of the Notes, Seller shall extend credit to BBH in the amount of $3,200,000.00 to fund BBH's obligations pursuant to the Merger Transaction (as defined herein) whereby BBH will merge with and into Hansen Lind, with Hansen Lind being the surviving entity; WHEREAS, one condition to each Purchaser's agreement to purchase the respective Notes from Seller is that Purchasers, Seller and Guarantor must enter into a comprehensive agreement setting forth the terms and conditions of such purchase; and WHEREAS, another condition to each Purchaser's agreement to purchase the respective Notes from Seller is that Guarantor, which will directly benefit from Purchasers' extension of credit to Seller, execute a guaranty in favor of Purchasers. NOW, THEREFORE, as an inducement to cause Purchasers to purchase the Notes from Seller, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: I. NOTE PURCHASE 1.1. Sale and Purchase of Note. The Seller hereby transfers and sells to each Purchaser, and each Purchaser hereby accepts and purchases from the Seller, the respective promissory notes at the respective purchase prices set forth below: (A) Promissory Note of even date herewith in the original principal amount of $1,200,000 made payable to Pacific, in the form attached hereto as Exhibit A- 1 (together with any amendments, modifications, extensions or renewals thereof, the "Pacific Note") to be purchased for a purchase price of $1,188,000; and (B) Promissory Note of even date herewith in the original principal amount of $800,000 made payable to Equitas, in the form attached hereto as Exhibit A-2 (together with any amendments, modifications, extensions or renewals thereof, the "Equitas Note") to be purchased for a purchase price of $792,000; (the Pacific Note and the Equitas Note being collectively referred to herein as the "Notes"). 1.2. Prepayment. Prepayment of principal or accrued interest under the Notes may be made, in whole or in part, at any time without penalty. Any such prepayments shall be made concurrently to each Purchaser in proportion to each Purchaser's pro rata share of the original principal amount advanced to Seller hereunder. 1.3. Use of Proceeds. The proceeds of the sale of the Notes shall be used by Seller for funding Seller's loan to BBH in the approximate principal amount of $3,200,000 pursuant to a promissory note made by BBH payable to the order of Seller in form and substance satisfactory to Purchasers (the "Affiliate Note"), which proceeds shall be used by BBH to fund its payment obligations pursuant to that certain Merger Agreement dated as of April 3, 1997 by and between BBH and Hansen Lind (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, BBH shall merge with and into Hansen Lind, with Hansen Lind being the surviving entity (the "Merger Transaction"). Purchasers will conduct a review of Seller's business records and operations within 30 days after closing to verify the appropriate use of the proceeds of the sale of the Notes and may require Seller to provide certifications or such other assurances with respect thereto as Purchasers may determine in their discretion. 1.4. Definition of Secured Indebtedness. As used herein, "Secured Indebtedness" shall mean all present and future debts and other obligations of Seller to Purchasers under this Agreement and the indebtedness and obligations evidenced by the Notes, and all modifications, extensions and renewals thereof. II. CONDITIONS TO CLOSING 2.1. Documents. Concurrently with the execution hereof, in connection with the sale of the Notes, Seller shall deliver to Purchasers the following documents (the "Transaction Documents"), in form and substance acceptable to Purchasers: (a) This Agreement; (b) The Notes, each executed by Seller; - 2 - (c) Security Agreement executed by Seller covering all of Seller's personal property and fixtures; (d) Collateral Assignment of Promissory Note executed by Seller, together with original Affiliate Note made by BBH payable to the order of Seller, which promissory note shall be duly endorsed by Seller to Purchasers for collateral security; (e) Collateral Assignment of Contract Rights executed by Seller (with respect to the management agreements), together with copies of the management agreements; (f) Guaranty executed by Guarantor; (g) Collateral Assignment of Life Insurance on Vernon Brannon in the amount of $1,000,000.00 and, within 30 days after Closing, a Collateral Assignment of Life Insurance on Joe Harris in the amount of $2,000,000.00; (h) Noncompetition Agreements executed by each of Joe Harris and Vernon Brannon (referred to herein, respectively, as the "Harris Noncompete" and the "Brannon Noncompete"); (i) Personal Guaranty executed by Joe Harris (the "Harris Guaranty"); (j) Personal Guaranty executed by Vernon Brannon (the "Brannon Guaranty"); (k) The Warrants as described in Section 3.1 hereof; (l) Registration Rights Agreement; (m) Form of shareholders' agreement to be agreed to by shareholders of HLM Design, Inc., Purchasers, Clay Caroland and Shannon LeRoy, within 45 days following Closing, and subject to further amendment and modification to the satisfaction of Purchasers, Clay Caroland and Shannon LeRoy following Closing as provided herein; (n) UCC-1 Financing Statements/Negative Pledge Agreements to be filed in such jurisdictions as Purchasers may require; (o) Small Business Administration Forms 1031 Portfolio Financing Report Form, 480 Size Status Declaration and 652-D Assurance of Compliance; and (p) Legal Opinion delivered by counsel for Seller in form and substance acceptable to Purchasers. - 3 - 2.2. Other Closing Items. Concurrently with, or prior to, the execution hereof, Seller shall also provide Purchasers with the following documents and items, in form and substance acceptable to Purchasers: (a) UCC-11, Judgment and Tax Lien Searches for Seller and for Guarantor. (b) If requested by Purchasers, Certificates of Insurance insuring Seller's assets naming Purchasers as Loss Payee/Insured Mortgagee accompanied by a detailed listing of and copies of all insurance policies on Seller's assets and facilities. (c) Certified copy of Seller's Articles of Incorporation issued by the Secretary of State of Delaware. (d) Certificate of Seller's Good Standing and Qualification to do Business under Delaware law issued by the Secretary of State of Delaware, and in all other states in which Seller does business. (e) Copy of Seller's current By-laws, certified by Seller's corporate secretary. (f) Certified copy of Resolutions of Seller's Board of Directors authorizing a named officer of Seller to enter into this Agreement and to execute all related documents on Seller's behalf. (g) Certified copy of Hansen Lind and BBH's Articles of Incorporation/Charter. (h) Certificate of Hansen Lind's and BBH's Good Standing and Qualification to do Business under the law in which it was incorporated , and in all other states in which Guarantor does business. (i) Copy of Hansen Lind's and BBH's current By-laws, certified by Guarantor's corporate secretary. (j) Certified copy of Resolutions of Hansen Lind's and Guarantor's Board of Directors authorizing a named officer of Guarantor to enter into the Agreement and to execute all related documents on Guarantor's behalf. (k) Merger documentation and diligence with respect to the Merger Transaction, including a copy of merger agreement, articles of merger and evidence that the merger agreement was duly authorized and approved, and consummation of the transactions contemplated thereby, are not in conflict with, or in contravention with or violation of any law, regulation or agreement binding upon the parties thereto, in such form and substance satisfactory to Purchasers; - 4 - (l) Payoff instructions and amounts with respect to the BBH's funding obligations pursuant to the Merger Agreement; (m) Processing Fee in the amount of $40,000.00 plus attorneys' fees for Boult, Cumming, Conners, & Berry, PLC and related expenses; (n) A pro forma balance sheet of the Seller and Guarantor reflecting all of the transactions contemplated above, including the Merger, issuance of the Affiliate Note and the purchase of the Notes; and (o) Closing Statement listing disbursements for all closing expenses; (p) Such other and further documentation as Purchaser may require. 2.3. Completion of Due Diligence. As a condition to closing the transactions referenced herein, including the purchase of the Notes, Purchasers must have completed their due diligence review of Seller and Guarantor with the results of such review being satisfactory to Purchasers in their sole discretion. 2.4. Additional Conditions to Closing. Concurrently with the execution hereof, the following additional conditions must be satisfied, in form and substance acceptable to Purchasers: (a) Purchasers shall have approved the management agreements to be in force as of Closing between (i) Seller and Hansen Lind, and (ii) Seller and HLM of North Carolina, P.C. (collectively, the "Related Party Management Agreements"), subject to further amendment and modification to the satisfaction of Purchasers following Closing as provided herein; (b) Purchasers shall have approved and executed Intercreditor Agreement among themselves; (c) Payoff of any and all indebtedness of Guarantor to Firstar Bank of Iowa, N.A. ("Firstar") together with applicable release documentation and UCC termination statements, including releases of any liens, security interests or encumbrances by Firstar against the assets of Guarantor; (d) All necessary consents and approvals shall have been obtained, including any necessary consents or requirements by Berthel Fisher & Company Leasing, Inc. ("Berthel Leasing") with respect to the sale-leaseback arrangement between Berthel Leasing and Guarantor; (e) All Purchasers shall have approved the aforementioned sale-leaseback arrangement between Berthel Leasing and Guarantor, and the documentation thereof, and said transaction shall be consummated as of Closing; (f) All Purchasers shall have approved the extension of credit by First Charter Bank to Seller in an amount not to exceed $1,000,000, and the guarantee of such indebtedness by Guarantor secured by the accounts of Guarantor, and the documentation thereof, and said transaction shall be consummated as of Closing; (g) The Merger Transaction shall be consummated according to the terms and conditions of the Merger Agreement. III. EQUITY PARTICIPATION 3.1. Stock Purchase Warrant. For a total purchase price of $20,000.00, Seller shall issue to Purchasers and their designees, concurrently with the Closing, common stock purchase warrants (the "Stock Purchase Warrants" or "Warrants") in substantially the same form of the Stock Purchase Warrant attached hereto as Exhibit B, with respect to a total of initially 14,372 shares of common capital stock of the Seller. Pursuant to applicable state law and the applicable provisions of Title 13, Code of Federal Regulations, the value of the Stock Purchase Warrants shall be deemed an equity participation and shall not be characterized as interest, loan charges, commitment fees or brokerage commissions. IV. WARRANTIES AND COVENANTS Seller and Guarantor hereby jointly and severally represent, warrant and covenant to Purchasers as follows: 4.1. Capacity. Seller warrants that it is and shall remain a duly organized Delaware corporation in good standing under the laws of Delaware, and that Seller is and shall remain duly qualified to do business in each other state in which qualification is necessary, except where failure to so qualify would not have a material adverse effect on Seller's business or financial condition. Hansen Lind warrants that it is and shall remain a duly organized Iowa corporation in good standing under the laws of Iowa, and that Hansen Lind is and shall remain duly qualified to do business in Iowa, and the states of California, Colorado, Virginia, Pennsylvania, Illinois and Florida, and each other state in which qualification is necessary, except where failure to so qualify would not have a material adverse effect on Hansen Lind's business or financial condition. BBH warrants that it is a duly organized Delaware corporation in good standing under the laws of Delaware, and that BBH is duly qualified to do business in each state in which qualification is necessary, except where failure to so qualify would not have a material adverse effect on BBH's business or financial condition. Seller and Guarantor further warrants that each of its subsidiaries, if any, are in good standing and qualified to do business in their respective states of incorporation and states in which they do business. Seller and Guarantor each have all requisite power and authority to own and operate their respective properties and assets and to carry on their respective businesses as presently conducted and as proposed to be conducted. Seller and Guarantor warrant that their execution, delivery and performance under this Agreement and all related documents are permitted under and will not violate any provision of Seller's or Guarantor's Charter or By-Laws. Seller and Guarantor further warrant that the execution of all necessary resolutions and other prerequisites of corporate action have been - 6 - duly performed so that the individual(s) executing this Agreement and related documents on behalf of Seller and Guarantor is duly authorized to bind Seller and Guarantor by his or her respective signature. 4.2. Small Business Concern. Seller and Guarantor, together with their "affiliates" (as that term is defined in Title 13, United States Code of Federal Regulations ss. 121.401), if any, is a "small business concern" within the meaning of ss. 121.802 of Title 13 of the United States Code of Federal Regulations. The information set forth in the Small Business Administration Form 480 and Form 652-D regarding the Seller and Guarantor is true, accurate and complete. 4.3. Capitalization. The authorized capital stock of the Seller is 100,000 shares of Common Stock par value $0.01 per share, of which 50,300 shares are or will be issued and outstanding immediately following Closing. The Seller has reserved sufficient shares of Common Stock for issuance upon exercise of the Warrants. All outstanding securities of the Seller were issued in compliance with applicable federal and state securities laws. Except as described above, there are no options, warrants, convertible securities, reserved shares or other rights to purchase any of the Seller's authorized and unissued capital stock. 4.4. Name. Seller and Guarantor warrant that neither Seller nor Guarantor has been known under or done business under any name other than the name used by Seller and Guarantor, respectively, in executing this Agreement and related documents, except that Guarantor has done business under the name "HLM of North Carolina, P.C." in the state of North Carolina and under the name "HLM of Oregon, Architecture and Planning, P.C." in the state of Oregon. Seller and Guarantor agree to give Purchasers at least fifteen (15) days prior written notice before Seller or Guarantor begin using any name other than those used in executing this Agreement and related documents. 4.5. Chief Executive Office. Seller warrants that Seller's chief executive office is located at Suite 2950, 121 West Trade Street, Charlotte, North Carolina 28202. Guarantor warrants that Guarantor's chief executive office is located at Suite 2950, 121 West Trade Street, Charlotte, North Carolina 28202. Neither Seller nor Guarantor shall move their chief executive offices from their respective addresses without providing Purchasers with at least 30 days prior written notice. 4.6. No Subsidiaries. Seller and Guarantor warrant that neither Seller nor Guarantor presently has any subsidiaries or owns or controls, directly or indirectly, any other equity interests in any corporation, association, partnership or other business entity, except for HLM of North Carolina, P.C., a North Carolina corporation, and HLM of Oregon, Architecture and Planning, P.C., an Oregon corporation, which are affiliates of the Seller due to management and service agreements that have been, or are anticipated to be, entered into between the Seller and such corporations. 4.7. Corporate Records. Seller and Guarantor covenant to maintain corporate minute books and stock ledgers current and complete in all material respects and agree (a) to allow Purchasers to inspect the same at any time; and (b) to make their representatives available to - 7 - Purchasers to discuss such records and any other matters regarding Seller's or Guarantor's business or financial condition as Purchasers may request. 4.8. Board of Directors' Designee. So long as the Secured Indebtedness is outstanding two (2) designees of Purchasers shall be elected to the Board of Directors of Seller, which Board of Directors shall consist of no more than five (5) members without the prior approval of such two (2) designees, and, in addition, a representative of the Purchasers shall be entitled to attend all board of directors and shareholders meetings of Guarantor. Through May, 1999, and so long as the Secured Indebtedness is outstanding, the Board of Directors of Seller shall schedule and hold monthly telephonic board meetings, provided that, at least once every quarter, the Board of Directors shall schedule and hold a duly-convened board meeting at which all directors of Seller shall be invited to attend in person, which meeting shall be held at the principal office of Seller or such other location as approved by the Purchasers. The corporate documents of Seller and Guarantor shall be amended as necessary to assure compliance with the foregoing sentence. Seller and Guarantor shall provide Purchasers with notice of any such meetings at the same time and in the same manner as given to shareholders and statutory directors, and shall provide such designees and representative of Purchasers with all documents and reports associated therewith. Purchasers, Seller and Guarantor agree that a breach by Seller or Guarantor of any of the provisions of this paragraph will cause irreparable damage to Purchasers incapable of precise valuation. Therefore, in the event of such breach, Purchasers, in addition to any other remedy available to it at law or in equity, shall be entitled to a specific performance order by a court of competent jurisdiction ordering Guarantor or Seller, as the case may be, to specifically perform in accordance with the provisions of this paragraph. The existence of any claim or cause of action asserted by Guarantor or Seller against Purchasers, whether arising from this Agreement or otherwise, shall not constitute a defense to the enforcement of this Agreement by Purchasers, nor of any Purchaser's right to obtain an injunction against Seller or Guarantor, as the case may be, for the violation of this covenant. In the event Seller or Guarantor breaches this paragraph and Purchasers must enforce any of the rights herein granted through an attorney, then Seller and Guarantor shall be liable for any and all reasonable attorneys' fees, expenses and court costs incurred in connection with the enforcement of each Purchaser's rights with respect to this paragraph. 4.9. ERISA. Seller and Guarantor have not incurred and shall not incur a material accumulated funding deficiency within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and have not incurred any material liability to the Pension Benefit Guaranty Corporation established under ERISA (or any successor thereto under ERISA) in connection with any retirement plan, and no reportable event has occurred and is continuing or shall occur with respect to any such plans. 4.10. Books and Records. Seller and Guarantor covenant to maintain financial books and records in accordance with generally accepted accounting principles, consistently applied ("GAAP"), and to allow Purchasers to inspect such records and to discuss such records with representatives of Seller or Guarantor at any reasonable time. 4.11. Tax Matters. Each of Seller and Guarantor: (i) has timely filed all tax returns that are required to have been or to be filed by them with all appropriate federal, state, county and - 8 - local governmental agencies, and will continue to do so throughout the term of this Agreement; (ii) has timely paid all taxes owed by them, including those for which they are obligated to withhold amounts owing to any employee (including without limitation social security taxes), creditor or third party except such taxes as are being contested in good faith and by proper proceedings, as to which adequate reserves are maintained on the books of Seller or Guarantor, as appropriate, in accordance with GAAP, and will continue to do so throughout the term of this Agreement, and (iii) has not waived any statute of limitations with respect to taxes or agreed to any extension of time with respect to a tax assessment or deficiency. The assessment of any additional taxes for periods for which returns have been filed is not expected to exceed the recorded liability therefor, and, to the best of the Seller's and Guarantor's knowledge, there are no material unresolved questions or claims concerning the Seller's or Guarantor's tax liability. Seller's and Guarantor's tax returns have not been reviewed or audited by any federal, state, local or county taxing authority. There is no pending dispute with any taxing authority relating to any of said returns which, if determined adversely to Seller or Guarantor, as applicable, would result in the assertion by any taxing authority of any valid deficiency in any material amount for taxes. 4.12. Disclosure of Litigation. Except as disclosed in Schedule 4.12 hereto, Seller and Guarantor warrant that neither the Seller nor Guarantor is presently a party to any pending litigation, arbitration or administrative proceeding involving any relief, or to their knowledge the subject of any investigation; that there is no litigation, arbitration or administrative proceeding or investigation either threatened or, to their knowledge likely to be instituted, in which Seller or Guarantor or any of their property or assets will be a party; that neither Seller nor Guarantor is subject to any outstanding court or administrative order; and that, to the best of Seller's and Guarantor's knowledge, information and belief, no facts exist which give rise to claims by third parties against Seller or Guarantor which have not yet been asserted. Seller and Guarantor covenant to give Purchasers prompt written notice of any litigation, arbitration, administrative proceeding or investigation that may hereafter be instituted or threatened in which Seller or Guarantor would be a party, whether or not Seller's or Guarantor's liability under such proceeding would be covered by insurance. 4.13. Assistance in Litigation. Seller and Guarantor covenant, upon request, to cooperate with Purchasers in any proceeding in which Seller or Guarantor is not an adverse party to Purchasers and which concerns Purchasers' rights regarding the Secured Indebtedness or any collateral securing its payment. 4.14. Ownership of Patents, Licenses, Etc. Seller and Guarantor warrant that they own or have the right to use all licenses, permits, franchises, registrations, patents, copyrights, trademarks, tradenames or service marks, or the rights to use the foregoing, that are necessary for the continued operation of Seller's or Guarantor's businesses, respectively, without infringing upon or otherwise acting adversely to the right of any other person with respect thereto. 4.15. No Untrue or Misleading Representations. Seller and Guarantor warrant that no written information, exhibit or report furnished to Purchasers nor any written statement or representation made by Seller or Guarantor to Purchasers in connection with the Secured - 9 - Indebtedness contains any untrue statement of material fact or omits to state a material fact necessary to make the foregoing not misleading. 4.16. No Defaults Under Other Agreements. Seller and Guarantor warrant that, neither Seller nor Guarantor, nor, to the best of Seller's or Guarantor's knowledge, information, and belief, any other party thereto, is presently in default under or in breach of any contract or agreement which might be material to the financial condition or prospects of Seller or Guarantor, and no condition presently exists which, with the giving of notice, the passing of time, or both, would cause such a default or breach. 4.17. No Burdensome Agreements. Seller and Guarantor warrant that neither Seller nor Guarantor is a party to any contract or agreement or is subject to any contingent liability that does or may impair Seller's or Guarantor's ability to perform in all material respects under the terms of this Agreement and related documents. Guarantor further warrants that the execution and performance of this Agreement will not cause a default, acceleration or other event under any other contract or agreement to which Seller or Guarantor or any property of Seller or Guarantor is subject and will not result in the imposition of any charge, penalty, lien or other encumbrance against any of Seller's or Guarantor's property except in favor of Purchasers. 4.18. Legal and Binding Agreement. Seller and Guarantor warrant that the execution, delivery and performance of this Agreement and any other document necessary to effectuate this transaction will not violate any judicial or administrative order or governmental law or regulation, and that this Agreement is valid, binding and enforceable in every respect according to its terms, except as enforcement may be limited by bankruptcy laws and other laws affecting the rights of creditors generally and by principles of equity, whether asserted in a proceeding at law or in equity. 4.19. No Consent Required. Seller and Guarantor warrant that Seller's and Guarantor's execution, delivery and performance of this Agreement does not require the consent of or the giving of notice to any third party including, but not limited to, any other lender, governmental body or regulatory authority, except such consents as have been received as of the date of this Agreement. 4.20. Compliance with Law. Seller and Guarantor warrant that Seller's and Guarantor's business activities are conducted in compliance with all applicable laws and regulations, including environmental laws and regulations, and Seller and Guarantor covenant that such activities shall continue to be so conducted. In the event a governmental regulatory agency notifies Seller or Guarantor of any violation by Seller or Guarantor of any laws or regulations, Seller and Guarantor covenant to give prompt written notification of such violation to Purchasers. Seller and Guarantor represent and warrant that Seller's and Guarantor's operations are in compliance with all architectural and engineering licensing laws and regulations in each of the states in which they conduct business, and that Seller and Guarantor and their respective employees have the necessary licenses to conduct business as currently being conducted. 4.21. Financial Statements. - 10 - A. Warranties. Seller and Guarantor warrant that all financial statements delivered to Purchasers in connection with the Secured Indebtedness have been prepared in accordance with GAAP, consistently applied, and are true, accurate and complete in every material respect. Without limiting the foregoing, Seller and Guarantor warrant that such financial statements disclose all known contingent liabilities as well as direct liabilities, to the extent required by GAAP. Seller and Guarantor acknowledge that Purchasers have advanced (or shall advance) the Secured Indebtedness in reliance upon such financial statements, and Seller and Guarantor warrant that no material adverse change has occurred in the financial condition of Seller or Guarantor as set forth in such financial statements. Seller and Guarantor further warrant that Seller and Guarantor have good and absolute title to the assets disclosed on Seller's and Guarantor's respective balance sheets disclosed to Purchasers, subject only to liens, security interests and other encumbrances securing liabilities listed thereon. B. Absence of Changes. Since March 21, 1997: (a) Seller and Guarantor have not entered into any transaction which was not in the ordinary course of business, (b) there has been no materially adverse change in the condition (financial or otherwise) or the business, property, assets or liabilities of Seller or the Guarantor other than changes in the ordinary course of business, none of which, individually or in the aggregate, has been materially adverse, (c) there has been no damage to, destruction of or loss of physical property (whether or not covered by insurance) materially adversely affecting the business or operations of Seller or Guarantor, (d) neither Seller nor Guarantor has declared or paid any dividend or made any distribution on its stock, or redeemed, purchased or otherwise acquired any of its stock, (e) neither Seller nor Guarantor has increased the compensation of any of its officers, or the rate of pay of its employees as a group, except as part of regular compensation increases in the ordinary course of business, (f) there has been no resignation or termination of employment of any key officer or employee of Seller or Guarantor, (g) there has not been any change, except in the ordinary course of business, in the contingent obligations of Seller and Guarantor, by way of guaranty, endorsement, indemnity, warranty or otherwise, (h) to the best knowledge of Seller and Guarantor, there has been no other event or condition of any character pertaining to and materially adversely affecting the assets, business or property of Seller or Guarantor, except for such corporate filings and disbursements as may have been necessary to complete the Merger. - 11 - C. Reporting Requirements. Seller and Guarantor covenant to furnish to Purchasers the following: (1) As soon as practicable after the end of each fiscal year, and in any event within 90 days thereafter, balance sheets of Seller and Guarantor as of the end of such fiscal year, and the related statements of income and statements of cash flows for such year, prepared in accordance with GAAP, all in reasonable detail and, if requested by Purchasers, audited by an independent public accounting firm approved by Purchasers. Concurrently with the delivery of such financial statements, Seller and Guarantor shall provide a certificate of compliance by the chief financial officer of Seller and Guarantor, certifying that Seller and Guarantor are not in default under this Agreement or any of the loan documents relating to the transactions described herein, or any other agreement for borrowed money to which Seller or Guarantor may be a party, and that Seller and Guarantor are in compliance with all representations, warranties and covenants contained herein and in any of the related loan documents. (2) Not less than 30 days prior to the beginning of each fiscal year, an annual business plan for the upcoming year with a monthly budget and a three-year strategic plan. Seller and Guarantor represent and warrant that the assumptions on which the projections will be prepared will be reasonably based on the facts known to Seller and Guarantor at the time the projections are prepared. (3) As soon as available, and in any event not more than 30 days following the end of each fiscal month, unaudited financial statements of Seller and Guarantor, including balance sheet as of the end of such month and statement of income and statement of cash flows for such month and year-to-date. 4.22. Estoppel Letters. Seller and Guarantor covenant to provide Purchasers, within ten (10) business days after request, an estoppel letter stating (i) the balance of the Secured Indebtedness, (ii) to the best of Seller's and/or Guarantor's knowledge, whether Seller or Guarantor has any defenses to payment of the Secured Indebtedness, and (iii) the nature of any defenses to payment of the Secured Indebtedness. Such balance as presented for confirmation and the nonexistence of defenses shall be presumed if Seller and/or Guarantor fails to respond to such a request within the required period. 4.23. Default Certificates. Seller and Guarantor shall immediately notify Purchasers in the event of a default under this Agreement or any other credit agreement to which either of them is a party or in the event any governmental regulatory agency has notified Seller, Guarantor or any of their subsidiaries of any material violation of any laws or regulations. 4.24. Securities Filings. Seller and Guarantor shall provide Purchasers with copies of any reports filed by Seller or Guarantor with any governmental securities agency and copies of any communications with shareholders. - 12 - 4.25. Management Contracts. Seller and Guarantor will provide Purchasers copies of all management contracts, consulting agreements and other similar agreements to which Seller or Guarantor is or hereafter becomes a party, together with any and all modifications or amendments thereof. 4.26. Employment and Consulting Contracts. Seller and Guarantor will provide Purchasers copies of all employment contracts, agreements with third parties who provide consulting services to Seller or Guarantor (other than third party consulting agreements with respect to architectural or engineering services provided for clients of Seller or Guarantor) and other similar agreements to which Seller or Guarantor is or hereafter becomes a party, in which the aggregate annual compensation payable to the subject employee or person is greater than $100,000. 4.27. Notice of Changes in Financial Condition and Defaults. Seller and Guarantor covenant to give Purchasers prompt written notice when it becomes aware of (i) the creation or discovery of any material additional contingent liability or the occurrence of any other material adverse change in the financial condition of Seller or Guarantor or, to their knowledge, any other person or entity presently or hereafter liable for payment of all or part of the Secured Indebtedness, and (ii) the occurrence of any event, or presence of any condition, which constitutes a default hereunder or which with the giving of notice, the passing of time, or both, would constitute a default. Seller and Guarantor represents that their respective fiscal years for financial reporting purposes ends on the last Friday in the month of April each year, and Seller and Guarantor covenant that they will not change their fiscal years without obtaining the prior written consent of Purchasers, which will not be unreasonably withheld. 4.28. Further Assurances. Seller and Guarantor acknowledge that each Purchaser is a Small Business Investment Company, licensed by the Small Business Administration under 13 CFR 107. Throughout the term of this Agreement, Seller and Guarantor covenant to execute such other assignments, security agreements, financing statements, and other documents that Purchasers may reasonably deem necessary in the ordinary course of business to further evidence the obligations provided for herein or to perfect, extend, or clarify Purchasers' rights in any property securing or intended to secure the Secured Indebtedness and to amend, modify or add to any provisions of this Agreement or any of the other Transaction Documents as may be necessary in order to comply with rules and regulations of the Small Business Administration applicable to Small Business Investment Companies. 4.29. Merger Transaction. Seller and Guarantor represent, warrant and covenant that (i) the Merger Transaction will be completed in compliance with all federal and state laws and regulations, (ii) no misrepresentations were made and there were no omissions to state any material fact or facts in soliciting the necessary shareholder votes for approval of the Merger Transaction according to the terms set forth in the Merger Agreement, and (iii) the approval of the Merger Transaction by the Hansen Lind ESOP and respective shareholders was conducted in compliance with all federal and state laws and regulations including ERISA. 4.30. Solvency. Seller and Guarantor represent that neither Seller nor Guarantor is insolvent and that Seller's and Guarantor's execution hereof and the Transaction Documents does - 13 - not render Seller or Guarantor insolvent, either before or after the consummation of the Merger, for the purpose of state or federal fraudulent transfer laws, other avoidance laws, laws regarding corporate distributions or any other law. 4.31. Negative Covenants. Without Purchasers' prior written consent, neither Seller nor Guarantor shall do any of the following: A. Other Debt. Incur, create, assume or permit to exist any indebtedness for borrowed money except: (i) Indebtedness to Purchasers pursuant to the Pacific Note and the Equitas Note. (ii) Seller's indebtedness to First Charter Bank which shall not exceed $1,000,000.00 at any time, which indebtedness is guaranteed by Guarantor, which guarantee is secured by the accounts of Guarantor. (iii) Debts existing as of the execution hereof and disclosed in the financial statements delivered to Purchasers, provided that (a) Guarantor's indebtedness to First Charter Bank shall not exceed $500,000, and (b) any and all of Guarantor's indebtedness to Firstar shall be paid in full at Closing and refinanced pursuant to a sale-leaseback arrangement between Berthel Leasing and Guarantor, which lease obligations to Berthel Leasing shall not exceed $2,800,000 and shall reduce according to the terms of said Lease Agreement between Guarantor and Berthel Leasing dated May 29, 1997 (the "Berthel Lease Agreement") with an applicable monthly lease payment of no more than $65,000 per month for a period of no more than five (5) years. (iv) Indebtedness of Guarantor to Seller pursuant to Affiliate Note. (v) Unsecured debts on open account incurred in the ordinary course of business. (v) Normal and recurring management fees due and payable between the Guarantor and the Seller pursuant to management and service agreements which have been collaterally assigned to the Purchasers. B. Reorganization; Acquisition. Enter into any agreement to merge, consolidate, liquidate, dissolve or otherwise reorganize or recapitalize, or become the subject of any change of control. - 14 - C. Affiliate Contracts and Transactions. Enter into or permit to exist any management, consulting or other contract with any director, shareholder, or officer of Seller or Guarantor, or any affiliate thereof, or engage in any transaction with any affiliate or related party. D. Compensation. Increase (except for cost of living adjustments made in the ordinary course of business) the compensation payable to Joe Harris or Vernon Brannon. E. Disposition of Assets. Sell, lease, or otherwise transfer any of its assets other than in the ordinary course of business. F. Distributions. Declare or pay a distribution or dividend (of cash or other property) with respect to Seller's or Guarantor's capital stock. G. Encumbrances. Incur, create or permit to exist any encumbrance on any of Seller's or Guarantor's assets, except for Permitted Encumbrances. As used herein, "Permitted Encumbrances" shall mean liens arising by operation of law evidencing accounts not past due, including ad valorem tax liens and artisan liens, and purchase money security interests, and with respect to the Seller and Guarantor the lien in favor of Purchasers created pursuant to this Agreement and the Transaction Documents and with respect to Guarantor, (i) that certain security interest in the personal property of Guarantor granted to Berthel Leasing pursuant to the sale-leaseback arrangement between Guarantor and Berthel Leasing pursuant to the Berthel Lease Agreement and (ii) that certain security interest in the accounts of Guarantor granted to First Charter Bank securing Guarantor's guarantee of the $1,000,000 of indebtedness of Seller to First Charter Bank and securing Guarantor's $500,000 of permitted direct indebtedness to First Charter Bank, which liens and security interests, as applicable, shall be released following the termination of said lease and loan facilities, respectively. H. Stock Transactions. Issue, redeem or agree to redeem any stock, warrants or debt securities convertible into stock except as contemplated herein. I. Change of Business. Engage in any business other than that in which it is presently engaged. J. Corporate Amendments. Amend its corporate Articles of Incorporation/Charter or By-Laws except for amendments which could not have an adverse effect on Purchasers. K. Guaranties. Guarantee any obligations of any other business or individual, including any subsidiary, except through the endorsement of items tendered to Seller or Guarantor as payment in the ordinary course of business, provided that, Guarantor shall be permitted to guarantee the obligations of Seller to First Charter Bank in amount not to exceed $1,000,000, which guarantee shall be secured by the accounts of Guarantor. L. Loans; Letters of Credit. Make any loan or provide for the issuance of letter of credit to any party, except for the granting of unsecured trade credit, employee advances - 15 - (not to exceed $7,500 per employee) and the issuance of letters of credit to suppliers, all in the ordinary course of Seller's or Guarantor's business, as the case may be. M. Action Outside Ordinary Course. Take any other action outside the ordinary course of its business. N. Rental Commitments. Incur any rental commitment, if after such incurrence, the total minimum required rental commitments (including equipment leases, real property leases and any and all other forms of rental expense) of Seller and Guarantor on a consolidated basis for the twelve (12) month period after such incurrence would be in excess of $3,100,000. 4.32. Access to Records, Premises. Purchasers shall have the right to inspect, during normal business hours, Seller's and Guarantor's books and accounts and premises and to discuss the business of Seller and Guarantor with its respective officers, employees and accountants at any reasonable time. 4.33. Change in Management. At the option of the Purchasers, the Secured Indebtedness shall become immediately due and payable if Vernon Brannon or Joe Harris shall cease to remain active on a full-time basis in the management of the Seller and Guarantor and if the Seller and Guarantor fail to locate a replacement reasonably suitable to the Purchasers within ninety (90) days thereafter. 4.34. Debt Service Coverage. Seller and Guarantor shall attain and maintain on a consolidated basis and determined in accordance with GAAP, as measured as of the end of each fiscal quarter, a Debt Service Coverage Ratio greater than 1.50 to 1.00. For purposes hereof, "Debt Service Coverage Ratio" means, as of the date of determination, that ratio calculated by dividing (i) the sum of EBITDA plus capital lease expenses, all computed for the immediately preceding twelve (12) fiscal month period, by (ii) the sum of interest, current maturities of debt, capital lease expenses, all computed for the immediately preceding six (6) month period and scheduled for the immediately following six (6) month period. "EBITDA" means, at the date of determination, net revenue less all operating expenses, excluding depreciation, amortization, interest income, interest expenses, lease payments of Guarantor under the Berthel Lease Agreement, and income taxes, all computed for the immediately preceding twelve (12) fiscal month period. The term "capital lease expenses" as used herein does not include lease payments of Guarantor under the Berthel Lease Agreement. Within thirty (30) days following each fiscal quarter, Seller and Guarantor shall deliver a certificate to each Purchaser certifying as to Seller's and Guarantor's compliance with the Debt Service Coverage Ratio set forth herein and providing a detailed calculation of the same, which certificate shall be executed by the President or Chief Financial Officer of both Seller and Guarantor. 4.35. Personal Guaranties. Upon the occurrence of an event of default pursuant to Subsection 5.1(M) herein, the Harris Guaranty and Brannon Guaranty, which were delivered at Closing, shall automatically and immediately take full force and effect and be fully enforceable by Purchasers against either or both Harris and Brannon, jointly and severally, until the Secured Indebtedness is paid in full. - 16 - 4.36. Insurance. Seller and Guarantor shall maintain insurance, in form, amounts, and with companies in all respects satisfactory to Purchasers, and in accordance with customary practices in Seller's and Guarantor's field of enterprise. Purchasers shall be designated as additional insureds under the terms of the policies evidencing such insurance. Seller and Guarantor each agree to provide and maintain commercially available policies of professional liability insurance, satisfactory to Purchasers, as shall be necessary to insure Seller and Guarantor and their employees against damages or claims for damages which may arise from the rendering, or failure to render, professional services, by any employee of Seller or Guarantor, or by any other person for whose acts or omissions Seller or Guarantor are responsible.. The amounts and extent of such professional liability insurance coverage shall be in such form and such amounts as are satisfactory to Purchasers and in no event less than $2,000,000 per occurrence and $2,000,000 in the aggregate, with a deductible or retention of no more than $200,000 per year. Seller and Guarantor shall, upon the request of Purchasers, provide evidence of such insurance coverage meeting the foregoing minimum requirements and naming Purchasers as additional insureds (if permitted under such policy), and shall notify Purchasers in writing, at least thirty (30) days in advance of any material adverse change to, or cancellation of, such coverage, and direct such insurance companies to do the same. 4.37. Expenses. Upon demand, Seller will advance to Purchasers or, at Purchasers' option, reimburse Purchasers for, the following expenses: A. Taxes. All taxes that Purchasers may be required to pay because of the Secured Indebtedness or because of Purchasers' interest in any property securing the payment of the Secured Indebtedness (except federal or state taxes payable on Purchasers' income); B. Administration. All expenses that Purchasers may reasonably incur in connection with the preparation, execution, administration or enforcement of this Agreement or of any other document pertaining to the Secured Indebtedness; C. Protection of Collateral. All reasonable costs of preserving, insuring, preparing for sale (whether by improvement, repair or otherwise) or selling any collateral securing the Secured Indebtedness. D. Other Expenses. All reasonable costs of preparing for closing, and closing this transaction, whether or not this transaction is actually closed, and all reasonable travel and out-of-pocket expenses necessary for Purchasers' visits to Seller's or Guarantor's facilities in the event Seller or Guarantor is in default or Purchasers reasonably expects or anticipates Seller or Guarantor to be in default under this Agreement or any other agreement between Seller and Purchasers, and all reasonable out-of-pocket expenses, including travel, lodging and food expenses, incurred by Purchasers or its designees or representative for attending Directors' and Shareholders' meetings. E. Costs of Collection. All court costs and other reasonable costs of collecting any debt or other obligation included in the Secured Indebtedness; - 17 - F. Litigation. All reasonable costs arising from any litigation, investigation, or administrative proceeding (whether or not any Purchaser is a party thereto) that any Purchaser may incur as a result of the Secured Indebtedness or as a result of any Purchaser's association with Seller or Guarantor including, but not limited to, expenses incurred by any Purchaser in connection with a case or proceeding involving Seller or Guarantor under any chapter of the Bankruptcy Code or any successor statute thereto; G. Attorneys' Fees. Reasonable attorneys' fees and expenses incurred in connection with any of the foregoing, including search and recording fees. If any Purchaser pays any of the foregoing expenses, they shall become a part of the Secured Indebtedness and shall bear interest at the highest rate applicable to the Secured Indebtedness from time to time. This Section shall remain in full effect regardless of the full payment of the Secured Indebtedness, the purported termination of this Agreement, the delivery of the executed original of this Agreement to Seller, or the content or accuracy of any representation made by Seller or Guarantor to Purchasers; provided, however, Purchasers may terminate this Section by executing and delivering to Seller a written instrument of termination specifically referring to this Section. 4.38. Recitals. Seller and Guarantor warrant and agree that the recitals set forth at the beginning of this Agreement are true. 4.39. No Default. Seller and Guarantor warrants that, as of the execution of this Agreement, no default exists hereunder and no condition exists which, with the giving of notice, the passing of time, or both, would constitute such a default. 4.40. Post Closing Items. Within forty-five (45) days following Closing, (i) Seller and Guarantor agree to take such actions, and execute such documents, as are requested by Purchasers to amend and modify the Related Company Management Agreements and to enter into a similar management agreement with HLM of Oregon, Architecture and Planning, P.C., which are in form and substance satisfactory to Purchasers, and (ii) Seller agrees to enter into, and to cause Bill Blalock, Vernon Brannon and Joe Harris to enter into, and to encourage such other existing shareholders of Seller to enter into, a shareholders' agreement by, between and with, Seller, Purchasers, Shannon LeRoy, Clay Caroland, Bill Blalock, Vernon Brannon and Joe Harris (or their respective permitted successors and assigns), which is in form and substance satisfactory to Purchasers and which provides customary minority interest protections and rights to the holders of the Warrants immediately upon the exercise thereof as referenced in said Warrants. Any and all amendments or modifications proposed by Seller or Guarantor with respect to any of the documents specified in the foregoing sentence shall be subject to Purchaser's prior written approval. V. DEFAULT - 18 - 5.1. Default Defined. The occurrence of any one or more of the following events shall constitute a default under this Agreement: A. Monetary Default. The failure of Seller to timely pay any amount due Purchasers under the Secured Indebtedness, provided that such failure is not cured within five (5) days after the due dates of any such payments. B. Breach of Covenant. The failure of Seller, Guarantor or any other party to perform or observe any obligation or covenant made with respect to the Secured Indebtedness. C. Breach of Warranty. Purchasers' discovery that any representation or warranty in connection with this Agreement or the Secured Indebtedness is materially false. D. Default Under Other Document. The occurrence of a default under the terms of any document evidencing, securing, or otherwise pertaining to the Secured Indebtedness, including the Transaction Documents. E. Voluntary Bankruptcy. The institution of proceedings by Seller, Guarantor or any other person primarily or secondarily liable with respect to the Secured Indebtedness under any state insolvency law or under any federal bankruptcy law. F. Involuntary Bankruptcy. The institution of involuntary proceedings against Seller, Guarantor or any other person primarily or secondarily liable with respect to the Secured Indebtedness under any state insolvency law or under any federal bankruptcy law, provided that Seller or Guarantor shall have sixty (60) days from the date proceedings are instituted against Seller or Guarantor, as the case may be, in which to cure said default. G. Failure to Pay Debts. Seller or Guarantor becoming insolvent or generally failing to pay its debts as they become due. H. Misrepresentation. The existence of a material misrepresentation of financial condition in any oral or written statement made to Purchasers by Seller, Guarantor or any other person or entity primarily or secondarily liable with respect to the Secured Indebtedness. I. Criminal Proceedings. The instigation of legal proceedings against Seller or Guarantor for the violation of a criminal statute that could have a material adverse effect on the Seller or Guarantor. J. Attachment. The issuance of an attachment against property of Seller or Guarantor unless removed, by bond or otherwise, within ten (10) days. K. Liquidation. Seller's or Guarantor's liquidation or cessation of business. L. Financial Deterioration. A material adverse change shall occur in Seller's or Guarantor's financial condition as determined by Purchasers in their own discretion. - 19 - M. Default under Harris Noncompete or Brannon Noncompete. The occurrence of an event of default under either the Harris Noncompete or the Brannon Noncompete. With respect to any default described above that is capable of being cured and that does not already provide its own cure procedure or period (a "Curable Default"), the occurrence of such Curable Default shall not constitute an event of default hereunder if such Curable Default is fully cured and/or corrected within thirty (30) days (ten (10) days if such Curable Default may be cured by payment of a sum of money) after written notice thereof to Seller and Guarantor given in accordance with the provisions hereof; provided, however, that this provision shall not require notice (written or otherwise) to Seller and Guarantor and an opportunity to cure any Curable Default of which an officer of Seller or Guarantor had actual knowledge for the requisite number of days set forth above. 5.2. Cross Default. If the holder of any other indebtedness or lease obligation in excess of $50,000 owed by Seller or Guarantor declares a default related to such other indebtedness or lease obligation, or if an event of default occurs with respect to any indebtedness or lease obligation of Seller or Guarantor to either Berthel Leasing, First Charter or their permitted successors or assigns, whether or not such indebtedness or lease obligation is accelerated, such default shall immediately constitute a default under this Agreement. 5.3. Remedies Upon Default. Upon default, Purchasers may exercise any right that they may have under any document evidencing or securing the Secured Indebtedness or otherwise available to Purchasers at law or equity. 5.4. Attorney-in-Fact. Seller and Guarantor hereby irrevocably appoints each Purchaser as Seller's and Guarantor's attorney-in-fact to take any action to facilitate Purchaser's exercise of its remedies hereunder following the occurrence of a default and the lapse of any applicable cure period. 5.5. Application of Proceeds. All amounts received by Purchasers for Seller's account by exercise of its remedies hereunder shall be applied as follows: First, to the payment of all expenses incurred by Purchasers in exercising its rights hereunder, including attorney's fees, and any other expenses due Purchasers from Seller; Second, to the payment of all interest included in the Secured Indebtedness, in such order as Purchasers may elect; Third, to the payment of all principal included in the Secured Indebtedness, in such order as Purchasers may elect; and Fourth, surplus to Seller or other party entitled thereto. VI. GENERAL PROVISIONS 6.1. Consent to Jurisdiction. Seller and Guarantor hereby irrevocably consent to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which any Purchaser may be a party and which concerns this Agreement or the Secured Indebtedness. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Purchasers agree to the contrary in writing. - 20 - 6.2. Not Partners; No Third Party Beneficiaries. Nothing contained herein or in any related document shall be deemed to render any Purchaser a partner or venturer of Seller or Guarantor for any purpose. This Agreement has been executed for the sole benefit of Purchasers, and no third party is authorized to rely upon Purchaser's rights hereunder or to rely upon an assumption that Purchasers have or will exercise their rights under this Agreement or under any document referred to herein. 6.3. Indemnification. Seller and Guarantor each agrees to jointly and severally indemnify, defend (with counsel satisfactory to Purchasers) and hold Purchasers harmless against any loss, liability, claim or expense, including reasonable attorneys' fees, that Purchasers may incur as a result of any investigation or court or administrative proceeding involving Purchasers' investment in and credit relationship with Seller or Guarantor, except those resulting from Purchasers' gross negligence or willful misconduct. 6.4. Maximum Rate. It is the intention of Seller, Guarantor and Purchasers to conform strictly to all laws applicable to Purchasers that govern or limit the interest and loan charges that may be charged in respect of the indebtedness evidenced hereby. Anything in any of the documents evidencing, securing, or otherwise pertaining to the Secured Indebtedness to the contrary notwithstanding, in no event whatsoever, whether by reason of advancement of proceeds of the loan evidenced hereby, demand for repayment of the unpaid balance of the indebtedness evidenced hereby or otherwise, shall the interest and loan charges agreed to be paid to Purchasers for the use of the money advanced or to be advanced hereunder exceed the maximum amounts collectible pursuant to applicable law. 6.5. Counterparts. This Agreement may be executed in several counterparts and all such counterparts so executed shall constitute one agreement binding on all the parties hereto, notwithstanding that all parties are not signatory to the original or the same counterpart. 6.6. No Marshaling of Assets. Purchasers may proceed against collateral securing the Secured Indebtedness and against parties liable therefor in such order as it may elect, and neither Seller nor any surety or guarantor for Seller nor any creditor of Seller shall be entitled to require Purchasers to marshal assets. The benefit of any rule of law or equity to the contrary is hereby expressly waived. 6.7. Impairment of Collateral. Purchasers may, in their sole discretion, release any collateral securing the Secured Indebtedness or release any party liable therefor. The defenses of impairment of collateral and impairment of recourse and any requirement of diligence on Purchasers' part in collecting the Secured Indebtedness are hereby waived by Seller and Guarantor. 6.8. Business Days. If any payment date under the Secured Indebtedness falls on a day that is not a business day of Purchasers, or if the last day of any notice period falls on such a day, the payment shall be due and the notice period shall end on the next succeeding Purchaser business day. 6.9. Notices. Any communications concerning this Agreement or the credit described herein shall be addressed as follows: - 21 - As to Seller: HLM Design, Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 Attention: Vernon Brannon As to Guarantor: Hansen Lind Meyer Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 Attention: Vernon Brannon BBH Corp. Suite 2950 121 West Trade Street Charlotte, NC 28202 Attention: Vernon Brannon With a copy to: Underwood Kinsey Warren & Tucker PA Charlotte Plaza Building Suite 2020 201 South College Street Charlotte, NC 28244-2020 Attention: Shirley Linn As to Purchasers: Pacific Capital, L.P. Suite 1070 3100 West End Avenue Nashville, Tennessee 37203 Attention: Clay R. Caroland III Equitas, L.P. 2000 Glen Echo Road Suite 101 Nashville, Tennessee 37215 Attn: Shannon LeRoy - 22 - With a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street Suite 1600 Nashville, Tennessee 37219 Attention: John W. Titus Communications to be given hereunder shall be effective when set forth in writing and delivered to the addresses stated above. Any party may change its address for receipt of notices by submitting the change in writing to the other party. 6.10. No Reliance on Purchaser's Analysis. Seller and Guarantor acknowledge and represents that, in connection with the Secured Indebtedness, they have not relied upon any financial projection, budget, assessment or other analysis by Purchasers or upon any representation by Purchaser as to the risks, benefits or prospects of their business activities or present or future capital needs incidental thereto, all such considerations having been examined fully and independently by Seller and Guarantor. 6.11. Survival of Representations, Warranties and Covenants. All representations, warranties and covenants contained herein shall survive the execution and delivery of this Agreement and all of the Transaction Documents and shall continue in full force and effect until the Secured Indebtedness is irrevocably repaid in full. 6.12. Incorporation of Exhibits. All Exhibits referred to in this Agreement are incorporated herein by this reference. 6.13. Indulgence Not Waiver. Purchasers' indulgence in the existence of a default hereunder or any other departure from the terms of this Agreement shall not prejudice Purchasers' rights to declare a default or otherwise demand strict compliance with this Agreement. 6.14. Cumulative Remedies. The remedies provided Purchasers in this Agreement are not exclusive of any other remedies that may be available to Purchasers under any other document or at law or equity. 6.15. Amendment and Waiver in Writing. No provision of this Agreement can be amended or waived, except by a statement in writing signed by the party against which enforcement of the amendment or waiver is sought. 6.16. Assignment. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of Seller, Guarantor and Purchasers, except that Seller and Guarantor shall not assign any rights or delegate any obligations arising hereunder without the prior written consent of Purchasers. Any attempted assignment or delegation by Seller or Guarantor without the required prior consent shall be void. - 23 - 6.17. Entire Agreement. This Agreement and the other written agreements between Seller and Purchaser or Seller and Guarantor represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein. Provided, if there is a conflict between this Agreement and any other document executed contemporaneously herewith with respect to the Secured Indebtedness, the provision most favorable to Purchasers shall control. 6.18. Jury Trial. PURCHASERS, SELLER AND GUARANTOR EACH WAIVE THEIR RIGHT TO JURY TRIAL IN ANY MATTER RELATED TO THE SECURED INDEBTEDNESS OR STOCK PURCHASE WARRANT. PURCHASERS, SELLER AND GUARANTOR AGREE THAT THIS WAIVER IS KNOWINGLY AND VOLUNTARILY GIVEN FOLLOWING CONSULTATION WITH THEIR RESPECTIVE LEGAL COUNSEL. 6.19. Severability. Should any provision of this Agreement be invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect. 6.20. Time of Essence. Time is of the essence of this Agreement, and all dates and time periods specified herein shall be strictly observed, except that Purchasers may permit specific deviations therefrom by its written consent. 6.21. Applicable Law. The validity, construction and enforcement of this Agreement and all other documents executed with respect to the Secured Indebtedness shall be determined according to the laws of Tennessee applicable to contracts executed and performed entirely within that state, in which state this Agreement has been executed and delivered, in which state Purchaser resides and in which state payments hereunder will be made. 6.22. Gender and Number. Words used herein indicating gender or number shall be read as context may require. 6.23. Captions Not Controlling. Captions and headings have been included in this Agreement for the convenience of the parties, and shall not be construed as affecting the content of the respective paragraphs. - 24 - IN WITNESS WHEREOF, this Note Purchase Agreement has been executed as of the date first written above. THE UNDERSIGNED ACKNOWLEDGE A THOROUGH UNDERSTANDING OF THE TERMS OF THIS AGREEMENT AND AGREE TO BE BOUND THEREBY: SELLER: HLM DESIGN, INC. By: /s/ Joseph M. Harris Title: President GUARANTOR: BBH CORP. By: /s/ Joseph M. Harris Title: President HANSEN LIND MEYER INC. By: /s/ Joseph M. Harris Title: President - 25 - (continuation of Note Purchase Agreement signature page) PURCHASERS: PACIFIC CAPITAL, L.P. By: Pacific Capital Corporation Its: General Partner By: /s/ J. Larry Williams Title: Secretary-Treasurer EQUITAS, L.P. By: Tennessee Business Investments, Inc. Its: General Partner By: /s/ Shannon LeRoy Title: President - 26 - EXHIBITS A-1 and A-2 [see copies of promissory notes attached hereto] EXHIBIT B [attach copy of warrant] EX-10 5 EXHIBIT 10.9 THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (ii) UPON FIRST FURNISHING TO THE MAKER AN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER IS NOT IN VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE ACT OR ANY STATE SECURITIES LAW. PROMISSORY NOTE A-1 $1,200,000.00 Nashville, Tennessee May 30, 1997 FOR VALUE RECEIVED, HLM DESIGN, INC. ("Maker"), a Delaware corporation, promises to pay to the order of PACIFIC CAPITAL, L.P. ("Payee"), a Delaware limited partnership, the sum of One Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00), together with interest thereon at the fixed rate of thirteen and one-half percent (13.50%) per annum. Commencing July 1, 1997, and continuing on the first day of each calendar month thereafter until this Note is paid in full, accrued interest payments on the outstanding balance of this Note shall become due and payable. Commencing on June 1, 2000 and continuing on the first day of each calendar month thereafter until and including May 1, 2002, principal payments in the amount of Twenty Thousand and No/100 Dollars ($20,000.00) each shall become due and payable, together with accrued interest. The entire unpaid principal balance, together with all accrued interest, shall be due and payable in full on June 1, 2002. Interest Calculation. Interest hereunder will be calculated based upon a 360-day year and actual days elapsed. The interest rate required hereby shall not exceed the maximum rate permissible under applicable law, and any amounts paid in excess of such rate shall be applied to reduce the principal amount hereof or shall be refunded to Maker, at the option of the holder of this Note. Payment Directions. All amounts due under this Note are payable at par in lawful money of the United States of America, at the principal place of business of Payee in Nashville, Tennessee, or at such other address as the Payee or other holder hereof (herein "Holder") may direct. Defaults; Remedies and Default Interest. The occurrence of any default under that Note Purchase Agreement of even date herewith executed by Maker, Payee and certain other parties thereto, together with any and all amendments and modifications thereof (the "Agreement") and the lapse of any applicable cure period provided therein, shall constitute a default hereunder. Upon the Page 1 of 3 occurrence of an event of default, as defined above, Holder may, at its option and without notice (except as may be required under the Agreement and upon the expiration of any applicable cure period as provided above) declare all principal and interest provided for under this Note, and any other obligations of Maker to Holder, to be presently due and payable, and Holder may enforce any remedies available to Holder at law or equity or under any documents securing or evidencing debts of Maker to Holder. Holder may waive any default before or after it occurs and may restore this Note in full effect without impairing the right to declare it due for a subsequent default, this right being a continuing one. Upon default, the remaining unpaid principal balance of the indebtedness evidenced hereby and all expenses due Holder shall, without any action being required by Holder, bear interest at the lesser of (i) sixteen percent (16.00%) per annum and (ii) the highest rate permissible under applicable law. Application of Payments; Prepayment Rights. All amounts received for payment of this Note shall be first applied to any expenses due Holder under this Note or under any other documents evidencing or securing obligations of Maker to Holder, then to accrued interest, and finally to the reduction of principal. Prepayment of principal or accrued interest may be made, in whole or in part, at any time without penalty at the option of Maker. Any prepayment(s) shall reduce the amount of indebtedness outstanding under the Note according to the prepayment provisions in the Agreement. Consents and Waivers. Maker and all sureties, guarantors, endorsers and other parties to this instrument hereby consent to any and all renewals, waivers, modifications, or extensions of time (of any duration) that may be granted by Holder with respect to this Note and severally waive demand, presentment, protest, notice of dishonor, and all other notices that might otherwise be required by law. All parties hereto waive the defense of impairment of collateral and all other defenses of suretyship. Security. This Note is subject to the terms and provisions set forth in the Agreement and Maker's performance under this Note is secured by that certain collateral as more particularly described in the Agreement. Payments of Legal Fees and Costs. Maker and all sureties, guarantors, endorsers and other parties hereto agree to pay reasonable attorneys' fees and all court and other costs that Holder may incur in the course of efforts to collect the debt evidenced hereby or to protect Holder's interest in any collateral securing the same. Tennessee Law and Construction. The validity and construction of this Note shall be determined according to the laws of Tennessee applicable to contracts executed and performed within that state. If any provision of this Note should for any reason be invalid or unenforceable, the remaining provisions hereof shall remain in full effect. Amendments. The provisions of this Note may be amended or waived only by instrument in writing signed by the Holder and Maker and attached to this Note. Page 2 of 3 Words used herein indicating gender or number shall be read as context may require. Executed as of the date first written above. HLM DESIGN, INC., Maker By: /s/ Joseph M. Harris Title: President Page 3 of 3 EX-10 6 EXHIBIT 10.10 THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (ii) UPON FIRST FURNISHING TO THE MAKER AN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER IS NOT IN VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE ACT OR ANY STATE SECURITIES LAW. PROMISSORY NOTE A-2 $800,000.00 Nashville, Tennessee May 30, 1997 FOR VALUE RECEIVED, HLM DESIGN, INC. ("Maker"), a Delaware corporation, promises to pay to the order of EQUITAS, L.P. ("Payee"), a Delaware limited partnership, the sum of Eight Hundred Thousand and No/100 Dollars ($800,000.00), together with interest thereon at the fixed rate of thirteen and one-half percent (13.50%) per annum. Commencing July 1, 1997, and continuing on the first day of each calendar month thereafter until this Note is paid in full, accrued interest payments on the outstanding balance of this Note shall become due and payable. Commencing on June 1, 2000 and continuing on the first day of each calendar month thereafter until and including May 1, 2002, principal payments in the amount of Thirteen Thousand Three Hundred Thirty-Three and 34/100 Dollars ($13,333.34) each shall become due and payable, together with accrued interest. The entire unpaid principal balance, together with all accrued interest, shall be due and payable in full on June 1, 2002. Interest Calculation. Interest hereunder will be calculated based upon a 360-day year and actual days elapsed. The interest rate required hereby shall not exceed the maximum rate permissible under applicable law, and any amounts paid in excess of such rate shall be applied to reduce the principal amount hereof or shall be refunded to Maker, at the option of the holder of this Note. Payment Directions. All amounts due under this Note are payable at par in lawful money of the United States of America, at the principal place of business of Payee in Nashville, Tennessee, or at such other address as the Payee or other holder hereof (herein "Holder") may direct. Defaults; Remedies and Default Interest. The occurrence of any default under that Note Purchase Agreement of even date herewith executed by Maker, Payee and certain other parties thereto, together with any and all amendments and modifications thereof (the "Agreement") and the lapse of any applicable cure period provided therein, shall constitute a default hereunder. Upon the occurrence of an event of default, as defined above, Holder may, at its option and without notice Page 1 of 3 (except as may be required under the Agreement and upon the expiration of any applicable cure period as provided above) declare all principal and interest provided for under this Note, and any other obligations of Maker to Holder, to be presently due and payable, and Holder may enforce any remedies available to Holder at law or equity or under any documents securing or evidencing debts of Maker to Holder. Holder may waive any default before or after it occurs and may restore this Note in full effect without impairing the right to declare it due for a subsequent default, this right being a continuing one. Upon default, the remaining unpaid principal balance of the indebtedness evidenced hereby and all expenses due Holder shall, without any action being required by Holder, bear interest at the lesser of (i) sixteen percent (16.00%) per annum and (ii) the highest rate permissible under applicable law. Application of Payments; Prepayment Rights. All amounts received for payment of this Note shall be first applied to any expenses due Holder under this Note or under any other documents evidencing or securing obligations of Maker to Holder, then to accrued interest, and finally to the reduction of principal. Prepayment of principal or accrued interest may be made, in whole or in part, at any time without penalty at the option of Maker. Any prepayment(s) shall reduce the amount of indebtedness outstanding under the Note according to the prepayment provisions in the Agreement. Consents and Waivers. Maker and all sureties, guarantors, endorsers and other parties to this instrument hereby consent to any and all renewals, waivers, modifications, or extensions of time (of any duration) that may be granted by Holder with respect to this Note and severally waive demand, presentment, protest, notice of dishonor, and all other notices that might otherwise be required by law. All parties hereto waive the defense of impairment of collateral and all other defenses of suretyship. Security. This Note is subject to the terms and provisions set forth in the Agreement and Maker's performance under this Note is secured by that certain collateral as more particularly described in the Agreement. Payments of Legal Fees and Costs. Maker and all sureties, guarantors, endorsers and other parties hereto agree to pay reasonable attorneys' fees and all court and other costs that Holder may incur in the course of efforts to collect the debt evidenced hereby or to protect Holder's interest in any collateral securing the same. Tennessee Law and Construction. The validity and construction of this Note shall be determined according to the laws of Tennessee applicable to contracts executed and performed within that state. If any provision of this Note should for any reason be invalid or unenforceable, the remaining provisions hereof shall remain in full effect. Amendments. The provisions of this Note may be amended or waived only by instrument in writing signed by the Holder and Maker and attached to this Note. Page 2 of 3 Words used herein indicating gender or number shall be read as context may require. Executed as of the date first written above. HLM DESIGN, INC., Maker By: /s/ Joseph M. Harris Title: President Page 3 of 3 EX-10 7 EXHIBIT 10.11 COLLATERAL ASSIGNMENT OF CONTRACT RIGHTS THIS COLLATERAL ASSIGNMENT OF CONTRACT RIGHTS ("Assignment") made as of this 30th day of May, 1997, by and between HLM DESIGN, INC. ("Borrower"), a Delaware corporation, and PACIFIC CAPITAL, L.P. ("Pacific"), a Delaware limited partnership, and EQUITAS, L.P. ("Equitas"), a Delaware limited partnership (Pacific and Equitas being sometimes referred to herein, collectively as "Lender" with Equitas acting as collateral agent for the Lender pursuant to that certain Intercreditor and Collateral Agent Agreement of even date herewith by and between the Lenders). W I T N E S S E T H WHEREAS, Lender has extended credit to Borrower pursuant to that Note Purchase Agreement of even date herewith by and among Lender, Borrower, Hansen Lind Meyer Inc. and BBH Corp. (together with any modifications or amendments thereof, the "Note Purchase Agreement"), on certain terms and conditions; and WHEREAS, one condition to Lender's extension of credit to Borrower is that Borrower must provide Lender a first priority security interest in Borrower's architectural and engineering management and services contract rights; NOW, THEREFORE, as an inducement to cause Lender to extend credit to Borrower, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: (1) Definition of Secured Indebtedness. As used herein, "Secured Indebtedness" shall mean all present and future debts and other obligations of Borrower to Lender under the Note Purchase Agreement, including those certain Promissory Notes of even date herewith in the aggregate original principal amount of $2,000,000.00 made by Borrower payable to the order of Lender, or each of them as the case may be, including all modifications, amendments, extensions and renewals thereof. (2) Assignment; Security Interest. To secure the payment of the Secured Indebtedness Borrower hereby collaterally assigns to Lender (including Equitas, L.P., as agent for the benefit of Lender) and grants to Lender (including Equitas, L.P., as agent for the benefit of Lender) a security interest in all of Borrower's presently existing and hereafter arising contract rights arising from, or related or incidental to, management and services agreements (and all amendments and modifications thereof) which Borrower enters into with various architectural and engineering firms (each, an "Obligor," and collectively, the "Obligors"), including without limitation, those certain management and services agreements identified on Exhibit A attached hereto and incorporated by reference (collectively, the "Contracts"), copies of which are also attached hereto, together with all renewals, modifications, amendments and extensions thereof, and all existing and hereafter arising accounts and/or rights to receive payments associated therewith, rights to any claims and/or damages with respect thereto, and any and all proceeds from any of the foregoing (collectively the "Contract Rights"). (3) No Assumption of Obligations. Neither Lender's execution hereof nor Lender's exercise of any remedies hereunder shall cause Lender to assume any obligations of Borrower under the Contracts; provided, however, Lender may assume Borrower's obligations under any of the Contracts if Lender - 1 - so agrees by written instrument specifically referencing this Paragraph and addressed to the respective Obligor thereto. (4) Notice of Assignment. Borrower agrees to execute and cause each Obligor under the Contracts to execute that certain letter in substantially the same form as Exhibit B which is attached hereto and incorporated herein by reference. (5) Warranties. Borrower warrants to Lender the following: (a) Valid Contract. Each Contract is and shall remain valid and enforceable according to its terms. (b) No Default. No default presently exists under any of the Contracts and no condition exists which, with the giving of notice, the passage of time, or both, would allow any party thereto to declare any other party in default under the terms of any of the Contracts. (c) No Other Lien. Borrower's rights under the Contracts are not subject to any other assignment, security interest, lien, claim or other encumbrance. (d) Title. Borrower is the legal and equitable owner of the Contracts and Contract Rights assigned hereby, and each Contract is described on Exhibit A attached hereto. (e) No Amendments to Contract. The terms of the Contracts have not been modified or waived as to vary in any way from the terms set forth in the copy of the Contracts attached hereto as Exhibit A, which represents the entire agreements between the contracting parties. (6) Covenants. Borrower covenants with Lender as follows: (a) Performance of Contract Obligations. Borrower shall duly perform Borrower's obligations under the Contracts, and shall not cause or allow a default on its part thereunder. (b) No Amendment Without Consent. Borrower shall not modify, amend, cancel or waive any obligation or right of Borrower or any other party to the Contracts, without the prior written approval of Lender. Any attempted modification, amendment, cancellation or waiver without such consent shall be void. (c) Notice of Default. Borrower shall promptly notify Lender in writing if Borrower or any other party to any of the Contracts defaults thereunder. (d) Supporting Documents. Borrower shall furnish Lender any information that Lender may reasonably request pertaining to the Contracts. Upon the reasonable request of Lender, Lender shall cause Borrower or an independent auditor (at Borrower's expense) to obtain audit confirmations relating to the Contracts from any Obligor at any time. (e) No Other Lien. Borrower shall not grant or allow any security interest or lien to attach to the Contract Rights, except for the security interest provided for herein. -2- (f) Perfection/New Contracts/Assignments. Borrower agrees to take such action that Lender may reasonably request at any time to perfect Lender's security interest in the Contract Rights, whether currently existing or hereafter arising. Borrower shall give Lender twenty (20) days written notice prior to entering into any new Contract, the terms of which shall be subject to Lender's prior written approval. Upon entering into any new Contract which is approved by Lender, Exhibit A to this Assignment shall be amended by Borrower and Lender to reflect the additional Contract. None of the Contracts shall prohibit a security interest and collateral assignment in favor of Lender (or subsequent assignee of Lender). Upon Lender's request, Borrower shall immediately execute and deliver to Lender additional specific assignments related to the Contracts, including those Contracts entered into following the date of this Assignment. A copy of this Assignment may be filed as a financing statement. (g) Collection Rights of Lender. Upon the occurrence of a default hereunder, Lender may notify any Obligor(s) to make all payments due under its respective Contract directly to Lender for the account of Borrower, and Borrower hereby directs each Obligor to comply with Lender's instructions without the need of confirmation from Borrower. (h) Prohibition against Assignment. Except as provided hereunder, neither Borrower nor any Obligor shall assign any rights or delegate any obligations arising hereunder without the prior written consent of Lender. Any attempted assignment or delegation by Borrower or Obligor without the required prior consent shall be void and shall be a default hereunder. (7) Compliance with Law. Borrower warrants that the Contracts, and the performance by the parties of their obligations thereunder, comply with all applicable laws and regulations. (8) Name. Borrower warrants that Borrower has not been known under or done business under any name other than the name used by Borrower in executing this Assignment. Borrower agrees to give Lender at least fifteen (15) days prior written notice before Borrower begins using any name other than that used in executing this Assignment. (9) Further Assurances. Borrower covenants to execute such other assignments, security agreements, financing statements, and other documents that Lender may deem necessary to further evidence the obligations provided for herein or to perfect, extend, or clarify Lender's rights in any property and contract rights securing or intended to secure the Secured Indebtedness. Lender is hereby appointed as Borrower's attorney-in-fact for the signing of such documents. Borrower acknowledges that this power of attorney is coupled with an interest and is irrevocable. (10) Default Defined. Applying the applicable cure periods as forth in the Note Purchase Agreement, the occurrence of any one or more of the following events shall constitute a default under this Agreement: (a) Default under Note Purchase Agreement. The occurrence of a default under the Note Purchase Agreement. (b) Breach of Covenant. The failure of Borrower or any other party to perform or observe any obligation or covenant made under this Assignment or with respect to the Secured Indebtedness. (c) Breach of Warranty. Lender's discovery that any representation or warranty in connection with this Assignment or the Secured Indebtedness is materially false. -3- (d) Contract Default or Termination. The occurrence of a default under any Contract by any party thereto, or the termination or cancellation of any Contract whether voluntary or involuntary. (11) Remedies Upon Default. Upon the occurrence of a default hereunder, Lender may pursue any or all of the following remedies, without any notice to Borrower except as required below: (a) Exercise of Rights. Lender may, but shall not be obligated to, exercise any or all of Borrower's rights under any or all of the Contracts. If Lender notifies an Obligor of Lender's election to exercise its rights under this Assignment, such Obligor shall thereafter give all notices concerning the respective Contract directly to Lender, and shall otherwise regard Lender as the sole owner of Borrower's rights under the Contract unless otherwise instructed by Lender. Borrower hereby directs each and every Obligor to comply with the provisions of this subparagraph upon receipt of said notice from Lender, without any inquiry on Obligor's part. An Obligor shall not be liable to Borrower for compliance with such notice. Lender may exercise Borrower's rights under the Contracts by giving any notice or demand; by initiating or settling any claim or administrative or judicial proceeding; or by taking any other action that is, in Lender's judgment, appropriate in connection with the exercise of Borrower's rights under the Contracts. Any such actions may be taken by Lender without notice to Borrower, and may be taken in Lender's own name or in the name of Borrower. Borrower hereby irrevocably appoints Lender as Borrower's attorney-in-fact for the purpose of so enforcing Borrower's rights under the Contracts. All expenses incurred by Lender in the course of enforcing Borrower's rights under the Contracts shall become part of the Secured Indebtedness. (b) Performance of Obligations. Lender may, but shall not be obligated to, perform or cause to be performed any or all of Borrower's obligations under the Contracts. Lender may take such action pursuant to the terms of the Contracts or pursuant to any demand made by any Obligor concerning the Contracts. Any demand made by any Obligor concerning the Contracts may be settled, complied with, or contested by Lender in its name or in Borrower's name and by any means, including administrative proceedings and litigation, without notice to Borrower. Borrower hereby appoints Lender as Borrower's attorney-in-fact for the purpose of settling or contesting any matter regarding Borrower's obligations under the Contracts. This power of attorney shall be deemed a power coupled with an interest. No action taken by Lender hereunder shall cause Lender to assume Borrower's obligations under the Contracts, except as otherwise provided herein. All expenses incurred by Lender in the course of performing Borrower's obligations under the Contracts shall become part of the Secured Indebtedness. (c) Further Assignment. Upon five (5) days notice to Borrower, Lender may assign Borrower's rights in any or all the Contracts to such party as Lender may elect, with all consideration therefor to be applied to the Secured Indebtedness as received. Lender may execute such assignment in Lender's own name or in the name of Borrower. Borrower hereby appoints Lender as Borrower's attorney-in-fact for the purpose of executing such an assignment. This power of attorney shall be deemed a power coupled with an interest. (d) Setoff. Lender may exercise its lien upon and right of setoff against any monies, items, credits, deposits or instruments that Lender may have in its possession and which belong to Borrower or any other person or entity liable for the payment of any or all of the Secured Indebtedness. (e) Other Remedies. Borrower may seek any other remedy available under any other document evidencing or securing the Secured Indebtedness or otherwise available at law or equity. -4- (f) Application of Proceeds. All amounts received by Lender for Borrower's account through Lender's exercise of its remedies hereunder shall be applied as set forth in the Note Purchase Agreement. (12) Incorporation of Exhibits. All Exhibits referred to in this Assignment are incorporated herein by this reference. (13) Indulgence Not Waiver. Lender's indulgence in the existence of a default hereunder or any other departure from the terms of this Assignment shall not prejudice Lender's rights to declare a default or otherwise demand strict compliance with this Assignment. (14) Cumulative Remedies. The remedies provided Lender in this Assignment are not exclusive of any other remedies that may be available to Lender under any other document or at law or equity. (15) Amendment and Waiver in Writing. No provision of this Assignment can be amended or waived, except by a statement in writing signed by the party against which enforcement of the amendment or waiver is sought. (16) Notices. Any communications concerning this Assignment or the credit described herein shall be addressed as follows: As to Borrower: HLM Design, Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 Attention: Vernon Brannon As to Lender: Pacific Capital, L.P. Suite 1070 3100 West End Avenue Nashville, Tennessee 37203 Attention: Clay R. Caroland III Equitas, L.P. 2000 Glen Echo Road Suite 101 Nashville, Tennessee 37215 Attn: Shannon LeRoy -5- With a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street Suite 1600 Nashville, Tennessee 37219 Attention: John W. Titus Communications to be given to Lender shall only be effective when set forth in writing and actually received by an officer of Lender at the address indicated above. Communications to be given to Borrower shall be effective when actually or constructively received by Borrower or when set forth in writing and mailed or delivered to Borrower's address stated above. Lender or Borrower may change its address for receipt of notices by submitting the change in writing to the other party. (17) Assignment. This Assignment shall be binding upon and inure to the benefit of the respective heirs, successors and assigns of Borrower and Lender, except that Borrower shall not assign any rights or delegate any obligations arising hereunder without the prior written consent of Lender. Any attempted assignment or delegation by Borrower without the required prior consent shall be void. (18) Entire Agreement. This Assignment and the other written agreements between Borrower and Lender represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein. Provided, if there is a conflict between this Assignment and any other document executed contemporaneously herewith with respect to the Secured Indebtedness, the provision most favorable to Lender shall control. (19) Severability. Should any provision of this Assignment be invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect. (20) Time of Essence. Time is of the essence of this Assignment, and all dates and time periods specified herein shall be strictly observed, except that Lender may permit specific deviations therefrom by its written consent. (21) Applicable Law. The validity, construction and enforcement of this Assignment and all other documents executed with respect to the Secured Indebtedness shall be determined according to the laws of Tennessee applicable to contracts executed and performed entirely within that state, in which state this Assignment has been executed and delivered. (22) Gender and Number. Words used herein indicating gender or number shall be read as context may require. (23) Captions Not Controlling. Captions and headings have been included in this Assignment for the convenience of the parties, and shall not be construed as affecting the content of the respective paragraphs. -6- IN WITNESS WHEREOF, the parties hereto have caused this Collateral Assignment of Contract Rights to be executed and delivered on their behalf by their duly authorized officers, as of the date first set out above. THE UNDERSIGNED ACKNOWLEDGE A THOROUGH UNDERSTANDING OF THE TERMS OF THIS AGREEMENT AND AGREE TO BE BOUND THEREBY: Borrower: HLM DESIGN, INC. By:___________________________________ Title:________________________________ Lender: PACIFIC CAPITAL, L.P. By: Pacific Capital Corporation, General Partner By:___________________________________ Title:________________________________ EQUITAS, L.P. By: Tennessee Business Investments, Inc., General Partner By:___________________________________ Title:________________________________ -7- EXHIBIT A Contracts, together with amendments and modifications EXHIBIT B PACIFIC CAPITAL, L.P. EQUITAS, L.P. May ___, 1997 VIA CERTIFIED MAIL- RETURN RECEIPT REQUESTED __________________________ Attn:_____________________ __________________________ __________________________ Re: Notice of Collateral Assignment of Contract Rights under that certain Management and Services Agreement dated ________, 1997 between HLM Design, Inc. and ________________ (the "Contract"); Consent to Assignment to Pacific Capital, L.P. and Equitas, L.P. (collectively, "Lender") Ladies and Gentlemen: As you know, your firm, ______________________ ("Obligor"), has entered into the above-referenced Contract with HLM Design, Inc. ("HLM") whereby HLM will provide Obligor certain management services specified in the Contract and Obligor will pay HLM certain amounts on a [monthly] [quarterly] basis (the "Contract Payments") for said services, said Contract to expire ____________________ [any renewal options]. Please be informed that HLM's rights under the Contract, including HLM's right to the Contract Payments, is to be collaterally assigned to Lender, pursuant to that certain Collateral Assignment of Contract Rights ("Collateral Assignment") dated May 30, 1997, between HLM and Lender. HLM's entering into the Collateral Assignment is one of the conditions to Lender's extension of credit to HLM. No provision of the Contract may hereafter be amended, waived, renewed, modified or extended without Lender's prior written consent. Obligor hereby agrees to promptly notify Lender in writing of any default under the Contract, and if said default is not cured by HLM within 20 days of Lender's receipt of written notice of the default, Obligor hereby agrees to give Lender 30 days thereafter to cure said default (collectively, the "Cure Period"). Obligor agrees that it shall not terminate the Contract in the event HLM is in default or breach of the Contract during the Cure Period. In the event of default, Obligor hereby agrees to permit Lender, or any agent appointed by Lender, to assume all of HLM's obligations under the Contract, and upon written notice from Lender to Obligor, and without the need of confirmation from HLM, Obligor will send all Contract Payments, and any other monies, due under the Contract directly to Lender at the such address as Lender may designate from time to time. In the event Lender elects to assume HLM's obligations under the Contract, Lender shall be entitled to exercise any and all of HLM's renewal or extension options under the Contract and shall be entitled to all other rights and benefits under the Contract. Notwithstanding the foregoing, Obligor and its affiliates agree to hold Lender harmless from any and all existing or future claims against HLM or its affiliates, or for any existing or future violations of any applicable laws by HLM or its affiliates, and shall not, as a result of said claims or violations, deduct or setoff any amounts payable by Obligor under the Contract. Upon Lender's request, Obligor agrees to furnish Lender with a letter confirming that neither Obligor, nor, to Obligor's knowledge, HLM, is in default under the Contract, and that Obligor is not aware of any fact that may now or in the future result in a default under the Contract. This letter is a standard notice given by Lender when the rights under a contract are collaterally assigned to Lender. Please sign below to evidence your acknowledgment and consent to the terms of this letter, and return the original of this letter to Lender at the above- referenced address. HLM has consented to the sending of this notice and the terms contained herein, evidenced by its signature below. Please contact Shannon LeRoy of Equitas, L.P. at (615) 383-8673 if you have any questions regarding this notice of collateral assignment of contract rights. Sincerely, PACIFIC CAPITAL, L.P. By: Pacific Capital Corporation Its: General Partner By: /s/ J. Larry Williams Title: Secretary-Treasurer EQUITAS, L.P. By: Tennessee Business Investments, Inc. Its: General Partner By: /s/ Shannon LeRoy Title: President THE UNDERSIGNED, ACTING THROUGH ITS DULY AUTHORIZED OFFICER, HEREBY AGREES TO THE TERMS AND PAYMENT INSTRUCTIONS AS SET FORTH HEREIN. HLM DESIGN, INC., as assignor of its rights under the Contract By: /s/ Joseph M. Harris Title: President THE UNDERSIGNED, ACTING THROUGH ITS DULY AUTHORIZED OFFICER, HEREBY ACKNOWLEDGES AND CONSENTS TO THE ABOVE REFERENCED COLLATERAL ASSIGNMENT OF THE CONTRACT AND AGREES TO THE TERMS AND PAYMENT INSTRUCTIONS AS SET FORTH HEREIN. ___________________________, a _________ corporation By:_____________________________________ Title:__________________________________ EX-10 8 EXHIBIT 10.12 SECURITY AGREEMENT This Security Agreement ("Agreement") entered into as of the 30th day of May, 1997, by and between HLM DESIGN, INC. ("Borrower"), a Delaware corporation, and PACIFIC CAPITAL, L.P. ("Pacific"), and EQUITAS, L.P. ("Equitas"), a Delaware limited partnership (Pacific and Equitas being sometimes referred to herein, collectively as "Lender," with Equitas acting as collateral agent for the Lender pursuant to that certain Intercreditor and Collateral Agent Agreement of even date herewith by and between the Lender). W I T N E S S E T H WHEREAS, Lender has extended credit to Borrower, on certain terms and conditions; and WHEREAS, one condition to Lender's extension of credit to Borrower is that Borrower must provide Lender a first priority security interest in all of its personal property and fixtures; NOW, THEREFORE, as an inducement to cause Lender to take the aforementioned actions, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: 1. Definition of Secured Indebtedness. As used herein, the "Secured Indebtedness" shall mean all obligations and indebtedness of Borrower under this Agreement, the Note Purchase Agreement of even date herewith by and between Borrower, BBH Corp., Hansen Lind Meyer Inc., and Lender (together with any modifications or amendments thereof, the "Note Purchase Agreement") and under those certain Promissory Notes of even date herewith in the aggregate original principal amount of $2,000,000.00 made by Borrower payable to the order of Lender, or each of them as the case may be, together with all modifications, extensions and renewals thereof. 2. Grant of Security Interest. To secure the payment of the Secured Indebtedness, Borrower hereby grants to Lender (including Equitas, L.P., as agent for the benefit of Lender) a security interest in all of Borrower's presently owned and hereafter acquired personal property and fixtures, including, but not limited to, all equipment, inventory, accounts, general intangibles, instruments, documents, contract rights, chattel paper and fixtures, and all products and proceeds thereof (all as defined in the UCC), including insurance proceeds (collectively the "Collateral"). For purposes hereof, "UCC" shall mean the Uniform Commercial Code as in effect on the date hereof in the State of Tennessee, as it may be amended from time to time; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of a security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than Tennessee, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. 3. Warranties. Borrower warrants to Lender the following: (a) Title. Borrower is the sole legal and equitable owner of the Collateral. (b) No Other Encumbrances. None of the Collateral is subject to any security interest, lien, option or other encumbrance, except for the security interest provided for in this Agreement and Permitted Encumbrances. As used herein, Permitted Encumbrances shall mean, and be limited solely to, liens arising by operation of law evidencing accounts not past due, including ad valorem tax liens and artisans liens. (c) No Financing Statement. None of the Collateral is covered by any financing statement executed by Borrower and not yet terminated, except for financing statements executed in favor of Lender. (d) Valid Security Interest. This Agreement grants to Lender a valid security interest in the Collateral, subject only to Permitted Encumbrances. (e) No Leased Property. Borrower presently possesses no property of a type included in the Collateral as lessee or on consignment or as bailee for hire or otherwise. (f) Collateral Not Leased. None of the Collateral is presently subject to a lease, agreement to lease, option, or other such obligation pursuant to which Borrower is lessor, optionor, or subject to such other obligation. (g) No Warehousing. None of the Collateral is presently stored in a commercial warehouse, and none of the Collateral is presently subject to a negotiable shipper's bill or other negotiable document. (h) Collateral Acquired in Ordinary Course of Business. Borrower has acquired all the Collateral by purchases in the ordinary course of business from sellers in the business of selling such property. Without limiting the foregoing, Borrower warrants that none of the Collateral has been purchased in a bulk sale or other purchase of a business. 4. Limitation on Assignment of General Intangibles and Accounts. The security interest granted herein covering accounts and general intangibles shall be effective only to the extent that rights thereunder may be assigned under applicable laws without causing default under or termination of any agreements giving rise thereto. 5. Maintenance of Collateral. Borrower shall take all reasonable measures to protect the Collateral and to maintain all Collateral in good condition. Borrower shall notify Lender of any event or condition that materially impairs the value of any part of the Collateral. 6. Insurance. Borrower shall obtain and keep insurance against "all risks of physical loss" (except flood and earthquake, unless Lender specifically so requires) and such other insurance as Lender may require on all tangible Collateral in an amount - 2 - equal to its maximum insurable value, with insurers and insurance policies that are acceptable to Lender. Borrower shall deliver copies of all insurance policies covering the Collateral to Lender. All such policies shall name Lender as insured mortgagee and loss payee and shall provide that coverage shall not be terminated or amended without at least twenty (20) days prior written notice to Lender. If Borrower fails to provide evidence that it has obtained the required insurance or if Borrower fails to pay the premiums therefor, Lender may, at its option, obtain or bring current insurance coverage on the Collateral. Any insurance obtained by Lender may, at Lender's option, insure only its interest in the Collateral. Borrower hereby assigns to Lender any claim settlements, unearned premiums or other payments that may be made by or on behalf of an insurer under any policy covering the Collateral, and Borrower hereby directs such insurer(s) to pay Lender any amount so due. Lender is hereby irrevocably appointed Borrower's attorney-in-fact to endorse with Borrower's name any draft or check that may be issued by or on behalf of the issuer of any insurance policy covering the Collateral. All proceeds, unearned premiums, or other sums received by Lender as a result of said insurance policies may be applied by Lender, at its option and in its sole discretion, and in whole or in part, to the reduction of the Secured Indebtedness, in such manner as Lender may determine, or may be paid to Borrower with or without restrictions. 7. Compliance With Law; Taxes. Borrower shall comply with all laws, regulations and other requirements of governmental bodies or agencies having jurisdiction pertaining to the ownership or operation of the Collateral, and Borrower shall pay all taxes and fees assessed on account of the Collateral as they become due. 8. Disposition or Encumbrance Prohibited. Borrower shall not sell, lease, transfer, assign or otherwise dispose of title or possession of any of the Collateral, except that, as long as no default exists hereunder, inventory may be sold in the ordinary course of business. Borrower shall not grant or allow any security interest, lien, attachment or other encumbrance to attach to any part of the Collateral, except for Permitted Encumbrances and encumbrances in favor of Lender, without the prior written consent of Lender. 9. Location of Collateral. Tangible Collateral shall be stored only at Suite 2950, 121 West Trade Street, Charlotte, North Carolina 28202. No material amount of Collateral shall be removed from said location(s), except for repairs or other temporary purposes in the ordinary course of business, without the prior written approval of Lender. In no event shall Collateral be moved outside the State of North Carolina for any purpose or duration without Lender's prior written consent. Notwithstanding the foregoing, nothing shall preclude Borrower from owning tangible or intangible Collateral acquired in the future which is not located within the State of North Carolina, provided that, Borrower gives Lender ten (10) days written notice prior to Borrower's acquisition of such Collateral, and at Lender's request, Borrower takes all reasonable actions to perfect Lender's first priority security interest in such after-acquired Collateral which is located outside the State of North Carolina. 10. Fixtures. Borrower warrants that the Collateral presently affixed to real property as to become a fixture thereto is located at Suite 2950, 121 West Trade Street, Charlotte, North Carolina 28202. Borrower covenants that none of the Collateral will be here after so affixed to real property except at said location. - 3 - 11. Inspection; Inventory. Agents of Lender shall be allowed to inspect the Collateral at any time. Additionally, Borrower shall prepare an inventory of the Collateral and submit the same to Lender within five (5) business days after Lender so requests. 12. Availability Upon Default. Borrower covenants that if Lender declares a default hereunder and so requests, Borrower shall make all Collateral and records pertaining thereto available to Lender at a reasonable time and place. 13. Rental Proceeds. Borrower acknowledges that the security interest granted herein extends to all of Borrower's rights as lessor under any future lease of any of the Collateral. Borrower acknowledges and agrees that all rental proceeds of the Collateral constitute "cash collateral" under the Bankruptcy Code. As provided above, Borrower must obtain Lender's prior consent if Borrower wishes to lease any of the Collateral. Notwithstanding Lender's consent to any proposed lease, such lease shall be subordinate to Lender's security interest in the leased Collateral unless Lender specifically agrees to the contrary in writing. 14. Warranties and Other Rights. Borrower acknowledges that the security interest granted herein extends to all of Borrower's rights under warranties pertaining to the Collateral and also includes all rights of Borrower against any third party arising from damage to any Collateral. Borrower agrees to give Lender prompt written notice of any warranty claim or other claim that Borrower may have against a third party as a result of the condition or performance of the Collateral or as a result of any damage caused thereto. No such claim shall be settled without the written consent of Lender. 15. No Warehousing. None of the Collateral shall be stored by a commercial warehouse or shipped under a negotiable document unless Lender is given at least thirty (30) days prior notice to enable it to take such measures as it may deem appropriate to protect its rights in the Collateral to be so stored. 16. Notice of Subsequent Leases. Borrower agrees to give Lender prompt written notice if Borrower hereafter leases from others property of a type included in the Collateral or if Borrower accepts such property on consignment or as bailee. 17. Chief Executive Office. Borrower warrants that Borrower's chief executive and principal office is Suite 2950, 121 West Trade Street, Charlotte, North Carolina 28202. Borrower shall not move Borrower's chief executive office from that address without at least thirty (30) days prior written notice to Lender; provided, however, this undertaking by Borrower does not evidence Lender's consent to such a move if Lender's consent is required therefor under any other document pertaining to the Secured Indebtedness. 18. Perfection. Borrower agrees to take such action as may be requested by Lender at any time to perfect Lender's security interest in the Collateral. Without limiting the foregoing, Borrower agrees (i) to immediately deliver to Lender, upon receipt by Borrower, any instrument, chattel paper, document or other Collateral (other than goods) in which a security interest may be perfected or Lender's rights against purchasers protected by possession, with any appropriate - 4 - endorsement affixed, and (ii) to immediately notify Lender upon Borrower's acquisition of an aircraft, copyright, trademark, patent titled vehicle, or other Collateral in which a security interest may be perfected or Lender's rights against purchasers protected by means other than possession or by the filing of a financing statement with a government office located within the state in which the Collateral, or any part thereof, is deemed located. A copy of this Agreement may be filed as a financing statement. 19. Rights Against Prior Parties. Lender shall not be obligated to take any steps to preserve rights against prior parties under any instrument or chattel paper which is part of the Collateral and which is at any time in Lender's possession. 20. Accounts. (a) Records of Accounts. Borrower shall maintain detailed records of its accounts, including an itemized list of each charge giving rise to the accounts, the name and address of each account debtor, all relevant charge and billing dates, and all other information that Lender may deem necessary or which is ordinarily maintained with respect to such accounts. All records of the accounts shall be maintained at Borrower's office at Suite 2950, 121 West Trade Street, Charlotte, North Carolina 28202, and Lender may require that they be plainly marked to the effect that they have been assigned to Lender as Collateral for an outstanding obligation. Payments on Borrower's accounts shall be received by mail at Borrower's principal address provided herein. If Lender so requires, Borrower shall store its account records in an appropriately fire-rated vault or Borrower shall store a duplicate set of records of accounts at an off-premises location. Lender may inspect such records at any time. (b) Information Regarding Accounts. Upon demand, Borrower shall furnish Lender any information that Lender may reasonably request pertaining to Borrower's accounts, including, but not limited to, a detailed listing of all account balances, arranged according to age of the accounts, together with the invoices evidencing the transactions that gave rise to the accounts, addresses, and phone numbers of all account debtors. Lender may cause Borrower or an independent auditor (at Borrower's expense) to obtain audit confirmations from Borrower's account debtors at any time. (c) Specific Assignments. Upon Lender's request, Borrower shall immediately execute and deliver to Lender additional specific assignments of any or all of its accounts. (d) Lock Box. Following an event of default, Lender may at any time require that Borrower direct its account debtors to forward all payments to a lock box under Lender's exclusive control, with all payment proceeds to be applied in accordance with this Agreement. (e) Collection Rights of Lender. Following an event of default, Lender may notify any or all account debtors under the accounts to make all payments due Borrower directly to Lender for the account of Borrower. Borrower hereby directs account debtors so notified to comply with Lender's instructions without the need of confirmation from Borrower. - 5 - 21. Capacity. Borrower warrants that its execution of and performance under this Agreement and all related documents are permitted under and will not violate any provision of Borrower's Charter or By-Laws. Borrower further warrants that the execution of all necessary resolutions and other prerequisites of corporate action have been duly performed so that the individual executing this Agreement and related documents on behalf of Borrower is duly authorized to bind Borrower by his signature. By signing below on behalf of Borrower, the individual executing this Agreement on behalf of Borrower also personally makes the warranties set forth in the preceding sentence. 22. Insurance. In addition to any specific insurance requirements contained herein or in any other document pertaining to the Secured Indebtedness, Borrower agrees to generally maintain adequate insurance against casualty and liability losses in accordance with customary practices in Borrower's field of enterprise. Borrower agrees to provide Lender with proof of the existence of such insurance upon demand. 23. Recitals. Borrower warrants and agrees that the recitals set forth at the beginning of this Agreement are true. 24. No Burdensome Agreements. Borrower warrants that Borrower is not a party to any contract or agreement and is not subject to any contingent liability that does or may impair Borrower's ability to perform under the terms of this Agreement. Borrower further warrants that the execution and performance of this Agreement will not cause a default, acceleration or other event under any other contract or agreement to which Borrower or any property of Borrower is subject, and will not result in the imposition of any charge, penalty, lien or other encumbrance against any of Borrower's property except in favor of Lender. 25. Legal and Binding Agreement. Borrower warrants that the execution and performance of this Agreement will not violate any judicial or administrative order or governmental law or regulation, and that this Agreement is valid, binding and enforceable in every respect according to its terms. 26. No Consent Required. Borrower warrants that Borrower's execution, delivery and performance of this Agreement do not require the consent of or the giving of notice to any third party including, but not limited to, any other lender, governmental body or regulatory authority. 27. No Default. Borrower warrants that, as of the execution of this Agreement, no default exists hereunder and no condition exists which, with the giving of notice, the passing of time, or both, would constitute such a default. 28. Security Interest; Setoff. In order to further secure the payment of the Secured Indebtedness, Borrower hereby grants to Lender a security interest and right of setoff against all of Borrower's presently owned or hereafter acquired monies, items, credits, deposits and instruments (including certificates of deposit) presently or hereafter in the possession of Lender. By maintaining any such accounts or other property at Lender, Borrower acknowledges that Borrower voluntarily subjects the property to Lender's rights hereunder. Lender may exercise its rights under this - 6 - Paragraph without prior notice following default. Borrower agrees that Lender shall not be liable for the dishonor of any instrument resulting from Lender's exercise of its rights under this Paragraph. 29. Default Defined. After applying the applicable cure periods as forth in the Note Purchase Agreement, the occurrence of any one or more of the following events shall constitute a default under this Agreement: (a) Default under Note Purchase Agreement. The occurrence of a default under the Note Purchase Agreement. (b) Breach of Covenant. The failure of Borrower or any other party to perform or observe any obligation or covenant made under this Agreement or with respect to the Secured Indebtedness. (c) Breach of Warranty. Lender's discovery that any representation or warranty in connection with this Agreement or the Secured Indebtedness is materially false. 30. Remedies Upon Default. Upon default, Lender may pursue any or all of the following remedies, without any notice to Borrower except as required below: (a) Notice of Default. Lender may give written notice of default to Borrower, following which Borrower shall not dispose of, conceal, transfer, sell or encumber any of the Collateral (including, but not limited to, cash proceeds) without Lender's prior written consent. Any such disposition, concealment, transfer or sale after the giving of such notice shall constitute a wrongful conversion of the Collateral. Lender may obtain a temporary restraining order or other equitable relief to enforce Borrower's obligation to refrain from so impairing Lender's Collateral. (b) Repossession. Lender may take possession of any or all of the Collateral. Borrower hereby consents to Lender's entry into any of Borrower's premises to repossess Collateral, and specifically consents to Lender's forcible entry thereto as long as Lender causes no significant damage to the Premises in the process of entry (drilling of locks, cutting of chains and the like do not in themselves cause "significant" damage for the purposes hereof) and provided that Lender accomplishes such entry without a breach of the peace. (c) Disposition. Lender may dispose of the Collateral at private or public sale. Any required notice of sale shall be deemed commercially reasonable if given at least five (5) days prior to sale. Lender may adjourn any public or private sale to a different time or place without notice or publication of such adjournment, and may adjourn any sale either before or after offers are received. The Collateral may be sold in such lots as Lender may elect, in its sole discretion. Lender may take such action as it may deem necessary to repair, protect, or maintain the Collateral pending its disposition. (d) Recovery of Proceeds of Accounts. Lender may recover any or all proceeds of accounts from any bank or other custodian who may have possession thereof. Borrower hereby authorizes and directs all custodians of Borrower's assets to comply with any demand for - 7 - payment made by Lender pursuant to this Agreement, without the need of confirmation from Borrower and without making any inquiry as to the existence of a default hereunder or any other matter. Lender may engage a collection agent to collect accounts for a reasonable percentage commission or on any other reasonable compensation arrangement. (e) Notice to Account Debtors. Lender may notify any or all account debtors that subsequent payments must be made directly to Lender or its designated agent. Such notice may be made over Lender's signature or over Borrower's name with no signature or both, in Lender's discretion. Borrower hereby authorizes and directs all existing or future account debtors to comply with any such notice given by Lender, without the need of confirmation from Borrower and without making any inquiry as to the existence of a default hereunder or as to any other matter. (f) Enforcement of Rights of Collection. Lender may, but shall not be obligated to, take such measures as Lender may deem necessary in order to collect any or all of the accounts. Without limiting the foregoing, Lender may institute any administrative or judicial action that it may deem necessary in the course of collecting and enforcing any or all of the accounts. Any administrative or judicial action or other action taken by Lender in the course of collecting the accounts may be taken by Lender in its own name or in Borrower's name. Lender may compromise any disputed claims and may otherwise enter into settlements with account debtors or obligors under the accounts, which compromises or settlements shall be binding upon Borrower. Lender shall have no duty to pursue collection of any account, and may abandon efforts to collect any account after such efforts are initiated. (g) Action to Preserve Accounts and Other Contractual Collateral. Lender may, with respect to any account involving uncompleted performance by Borrower, and with respect to any general intangible or other Collateral whose value may be preserved by additional performance on Borrower's part, take such action as Lender may deem appropriate including, but not limited, to performing or causing the performance of any obligation of Borrower thereunder, the making of payments to prevent defaults thereunder, and the granting of adequate assurances to other parties thereto with respect to future performance. Lender's action with respect to any such accounts or general intangibles shall not render Lender liable for further performance thereunder unless Lender so agrees in writing. (h) Setoff. Lender may exercise its lien upon and right of setoff against any monies, items, credits, deposits or instruments that Lender may have in its possession and which belong to Borrower or to any other person or entity liable for the payment of any or all of the Secured Indebtedness. (i) Other Remedies. Lender may exercise any right that it may have under any other document evidencing or securing the Secured Indebtedness or otherwise available to Lender at law or equity. (j) Attorney-in-Fact. Borrower hereby irrevocably appoints Lender as Borrower's attorney-in-fact to take any action to facilitate Lender's exercise of its remedies hereunder. - 8 - (k) Application of Proceeds. All amounts received by Lender for Borrower's account by exercise of its remedies hereunder shall be applied as follows: First, to the payment of all expenses incurred by Lender in exercising its rights hereunder, including attorney's fees, and any other expenses due Lender from Borrower; Second, to the payment of all interest included in the Secured Indebtedness, in such order as Lender may elect; Third, to the payment of all principal included in the Secured Indebtedness, in such order as Lender may elect; and Fourth, surplus to Borrower or other party entitled thereto. 31. Notices. Any communications concerning this Guaranty or the credit described herein shall be addressed as follows: As to Borrower: HLM Design, Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 Attention: Vernon Brannon With a copy to: Underwood Kinsey Warren & Tucker PA Charlotte Plaza Building Suite 2020 201 South College Street Charlotte, NC 28244-2020 Attention: Shirley Linn As to Lender: Pacific Capital, L.P. Suite 1070 3100 West End Avenue Nashville, Tennessee 37203 Attention: Clay R. Caroland III Equitas, L.P. 2000 Glen Echo Road Suite 101 Nashville, Tennessee 37215 Attn: Shannon LeRoy - 9 - With a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street Suite 1600 Nashville, Tennessee 37219 Attention: John W. Titus Communications to be given to Lender shall only be effective when set forth in writing and actually received by an officer of Lender at the address indicated above. Communications to be given to Borrower shall be effective when actually or constructively received by Borrower or when set forth in writing and mailed or delivered to Borrower's address stated above. Lender or Borrower may change its address for receipt of notices by submitting the change in writing to the other party. 32. Incorporation of Exhibits. All Exhibits referred to in this Agreement are incorporated herein by this reference. 33. Indulgence Not Waiver. Lender's indulgence in the existence of a default hereunder or any other departure from the terms of this Agreement shall not prejudice Lender's rights to declare a default or otherwise demand strict compliance with this Agreement. 34. Cumulative Remedies. The remedies provided Lender in this Agreement are not exclusive of any other remedies that may be available to Lender under any other document or at law or equity. 35. Amendment and Waiver in Writing. No provision of this Agreement can be amended or waived, except by a statement in writing signed by the party against which enforcement of the amendment or waiver is sought. 36. Assignment. This Agreement shall be binding upon and inure to the benefit of the respective heirs, successors and assigns of Borrower and Lender, except that Borrower shall not assign any rights or delegate any obligations arising hereunder without the prior written consent of Lender. Any attempted assignment or delegation by Borrower without the required prior consent shall be void. 37. Entire Agreement. This Agreement and the other written agreements between Borrower and Lender represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein. 38. Severability. Should any provision of this Agreement be invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect. 39. Time of Essence. Time is of the essence of this Agreement, and all dates and time periods specified herein shall be strictly observed, except that Lender may permit specific deviations therefrom by its written consent. - 10 - 40. Applicable Law. The validity, construction and enforcement of this Agreement and all other documents executed with respect to the Secured Indebtedness shall be determined according to the laws of Tennessee applicable to contracts executed and performed entirely within that state, in which state this Agreement has been executed and delivered. 41. Gender and Number. Words used herein indicating gender or number shall be read as context may require. 42. Captions Not Controlling. Captions and headings have been included in this Agreement for the convenience of the parties, and shall not be construed as affecting the content of the respective paragraphs. - 11 - IN WITNESS WHEREOF, this Security Agreement has been executed as of the date first written above. THE UNDERSIGNED ACKNOWLEDGE A THOROUGH UNDERSTANDING OF THE TERMS OF THIS AGREEMENT AND AGREE TO BE BOUND THEREBY: Borrower: HLM DESIGN, INC. By: /s/ Joseph M. Harris Title: President Lender: PACIFIC CAPITAL, L.P. By: Pacific Capital Corporation Its: General Partner By: /s/ J. Larry Williams Title: Secretary-Treasurer EQUITAS, L.P., in its capacity as a Lender and agent for the benefit of Lender By: Tennessee Business Investments, Inc. Its: General Partner By: /s/ Shannon LeRoy Title: President - 12 - EX-10 9 EXHIBIT 10.13 THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR (ii) UPON FIRST FURNISHING TO THE MAKER AN OPINION OF COUNSEL SATISFACTORY TO IT THAT SUCH TRANSFER IS NOT IN VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE ACT OR ANY STATE SECURITIES LAW. AFFILIATE PROMISSORY NOTE $3,200,000.00 Charlotte, North Carolina May 30, 1997 FOR VALUE RECEIVED, BBH CORP. ("Maker"), a Delaware corporation, promises to pay to the order of HLM DESIGN, INC. ("Payee"), a Delaware corporation, the sum of Three Million Two Hundred Thousand and No/100 Dollars ($3,200,000.00), together with interest thereon at the fixed rate of thirteen and one-half percent (13.50%) per annum. Commencing July 1, 1997, and continuing on the first day of each calendar month thereafter until this Note is paid in full, accrued interest payments on the outstanding balance of this Note shall become due and payable. Commencing on June 1, 2000 and continuing on the first day of each calendar month thereafter until and including May 1, 2002, principal payments in the amount of Fifty-Three Thousand Three Hundred Thirty-Three and 34/100 ($53,333.34) each shall become due and payable, together with accrued interest. The entire unpaid principal balance, together with all accrued interest, shall be due and payable in full on June 1, 2002. Interest Calculation. Interest hereunder will be calculated based upon a 360-day year and actual days elapsed. The interest rate required hereby shall not exceed the maximum rate permissible under applicable law, and any amounts paid in excess of such rate shall be applied to reduce the principal amount hereof or shall be refunded to Maker, at the option of the holder of this Note. Payment Directions. All amounts due under this Note are payable at par in lawful money of the United States of America, at the principal place of business of Payee in Charlotte, North Carolina, or at such other address as the Payee or other holder hereof (herein "Holder") may direct. Defaults; Remedies and Default Interest. The occurrence of any default in the timely payment of any part of principal or interest in accordance with the terms hereof which is not cured within five (5) days after the due date of any such payment, or upon failure of Maker to keep and perform all the covenants and Page 1 of 3 provisions of this Note, or the occurrence of any default under that Note Purchase Agreement of even date herewith executed by Maker, Payee and certain other parties thereto, together with any and all amendments and modifications thereof (the "Agreement") and the lapse of any applicable cure period provided therein, shall constitute a default hereunder. Upon the occurrence of an event of default, as defined above, Holder may, at its option and without notice (except as may be required under the Agreement and upon the expiration of any applicable cure period) declare all principal and interest provided for under this Note, and any other obligations of Maker to Holder, to be presently due and payable, and Holder may enforce any remedies available to Holder at law or equity or under any documents securing or evidencing debts of Maker to Holder. Holder may waive any default before or after it occurs and may restore this Note in full effect without impairing the right to declare it due for a subsequent default, this right being a continuing one. Upon default, the remaining unpaid balance of the indebtedness evidenced hereby and all expenses due Holder shall, without any action being required by Holder, bear interest at the lesser of (i) sixteen percent (16.00%) per annum and (ii) the highest rate permissible under applicable law. Application of Payments; Prepayment Rights. All amounts received for payment of this Note shall be first applied to any expenses due Holder under this Note or under any other documents evidencing or securing obligations of Maker to Holder, then to accrued interest, and finally to the reduction of principal. Prepayment of principal or accrued interest may be made, in whole or in part, at any time without penalty at the option of Maker. Any prepayment(s) shall reduce the amount of indebtedness outstanding under the Note according to the prepayment provisions in the Agreement. Consents and Waivers. Maker and all sureties, guarantors, endorsers and other parties to this instrument hereby consent to any and all renewals, waivers, modifications, or extensions of time (of any duration) that may be granted by Holder with respect to this Note and severally waive demand, presentment, protest, notice of dishonor, and all other notices that might otherwise be required by law. All parties hereto waive the defense of impairment of collateral and all other defenses of suretyship. Payments of Legal Fees and Costs. Maker and all sureties, guarantors, endorsers and other parties hereto agree to pay reasonable attorneys' fees and all court and other costs that Holder may incur in the course of efforts to collect the debt evidenced hereby or to protect Holder's interest in any collateral securing the same. North Carolina Law and Construction. The validity and construction of this Note shall be determined according to the laws of North Carolina applicable to contracts executed and performed Page 2 of 3 within that state. If any provision of this Note should for any reason be invalid or unenforceable, the remaining provisions hereof shall remain in full effect. Amendments. The provisions of this Note may be amended or waived only by an instrument in writing signed by the Holder and Maker and attached to this Note. Words used herein indicating gender or number shall be read as the context may require. IN WITNESS WHEREOF, this Note has been executed effective as of May 22, 1997. BBH CORP., Maker By: /s/ Vernan B. Brannon Title: Vice President PAY TO THE ORDER OF PACIFIC CAPITAL, L.P., a Delaware limited partnership and EQUITAS, L.P., a Delaware limited partnership HANSEN LIND MEYER INC., an Iowa corporation (successor by merger with BBH Corp.) By: Vernan B. Brannon Title: Vice President Page 3 of 3 EX-10 10 EXHIBIT 10.14 COLLATERAL ASSIGNMENT OF PROMISSORY NOTE THIS COLLATERAL ASSIGNMENT OF PROMISSORY NOTE ("Assignment") made as of this 30th day of May, 1997, by and between HLM DESIGN, INC. ("Borrower"), a Delaware corporation, and PACIFIC CAPITAL, L.P. ("Pacific"), a Delaware limited partnership, and EQUITAS, L.P. ("Equitas"), a Delaware limited partnership (Pacific and Equitas being sometimes referred to herein, collectively as "Lender" with Equitas acting as collateral agent for the Lender pursuant to that certain Intercreditor and Collateral Agent Agreement of even date herewith by and between the Lenders). W I T N E S S E T H WHEREAS, Lender has extended credit to Borrower pursuant to that Note Purchase Agreement of even date herewith by and among Lender, Borrower, Hansen Lind Meyer Inc. and BBH Corp. (together with any modifications or amendments thereof, the "Note Purchase Agreement"), on certain terms and conditions; and WHEREAS, one condition to Lender's agreement to extend credit to Borrower is that Lender must be provided a first priority perfected collateral assignment of a certain promissory note owned by Borrower; NOW, THEREFORE, as an inducement to cause Lender to extend credit to Borrower, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: 1. Definition of Secured Indebtedness. As used herein, "Secured Indebtedness" shall mean all present and future debts and other obligations of Borrower to Lender under this Assignment, the Note Purchase Agreement, including those certain Promissory Notes of even date herewith in the aggregate original principal amount of $2,000,000.00 made by Borrower payable to the order of Lender, or each of them as the case may be, including all modifications, amendments, extensions and renewals thereof. 2. Security Interest; Assignment. To secure the payment of the Secured Indebtedness, Borrower hereby assigns to Lender and grants Lender a security interest in that Affiliate Promissory Note dated May ___, 1997, made by BBH Corp., a Delaware corporation, and assumed by Hansen Lind Meyer Inc., an Iowa corporation, pursuant to merger between BBH Corp. and Hansen Lind Meyer Inc. ("Obligor"), in the original principal amount of $3,200,000.00 payable to the order of Borrower (the "Collateral Note"), together with all proceeds thereof. 3. Negotiation of Collateral Note; Perfection. Borrower shall negotiate the Collateral Note to Lender by endorsing the Collateral Note to the order of Lender (without restriction or qualification) and delivering the Collateral Note to Lender. Lender shall retain possession of the Collateral Note to perfect its security interest therein. 4. Warranties. Borrower warrants to Lender the following: (a) Sole Instrument. The Collateral Note is the only instrument evidencing the indebtedness described therein. (b) Ownership of Collateral. Borrower is the lawful holder and owner of the Collateral Note. (c) No Obligation to Remit Payments. Borrower has not agreed, and no holder of the Collateral Note shall be obligated, to remit any payments made under the Collateral Note for the account of any other person or business entity, except that Lender shall apply all funds received by it as holder thereof for the account of Borrower. (d) Binding Agreement. The Collateral Note is valid, binding and enforceable according to its terms. (e) No Other Assignment. The Collateral Note is not subject to any assignment, lien or other encumbrance or claim except for the security interest provided for herein in favor of Lender. (f) Payments Current. All payments due under the Collateral Note to date have been timely made, and no amount of the principal debt evidenced by the Collateral Note has been prepaid. (g) No Default. No default presently exists under the Collateral Note and no condition presently exists which, with the giving of notice, the passage of time, or both, will cause such a default. (h) No Setoff. The indebtedness evidenced by the Collateral Note is not, and shall not be, subject to any defense or setoff. (i) Principal Balance. The present principal balance outstanding under the Collateral Note is $3,200,000.00. (j) Valid Assignment. This Assignment grants Lender a valid first priority assignment of, and security interest in, the Collateral Note. (k) Copy of Collateral Note. A correct and complete copy of the Collateral Note is attached hereto as Exhibit A. (l) No Amendment or Waiver. No provision of the Note has been amended or waived as to vary from the terms shown in Exhibit A hereto. (m) Address of Obligor. The correct current address of Obligor is as follows: Hansen Lind Meyer Inc. (successor by merger with BBH Corp.) Suite 2950 121 West Trade Street Charlotte, NC 28202 (n) Financial Ability of Obligor. Obligor is financially capable of performing pursuant to the Collateral Note. (o) Negotiability. The Collateral Note is a negotiable instrument under the Uniform Commercial Code as adopted in North Carolina. - 2 - (p) Holder in Due Course. Upon the negotiation of the Collateral Note to Lender, Lender shall become the holder in due course of the Note as provided by the Uniform Commercial Code as adopted in North Carolina. 5. Covenants. Borrower covenants with Lender as follows: (a) Notice of Default. Borrower shall immediately notify Lender if a default occurs under the Collateral Note. (b) No Amendment or Waiver. Borrower shall not purport to modify or waive any terms of the Collateral Note without the prior written approval of Lender. (c) Notice of Prepayment. Borrower shall notify Lender immediately if prepayment is made on the Collateral Note, and will hold prepayment proceeds in trust for Lender pending notice to Lender and instructions from Lender regarding the disposition of such proceeds, which Lender may, in its sole discretion, require to be applied to the Secured Indebtedness. (d) Notices. Borrower shall promptly convey to Lender any notice received by Borrower concerning the Collateral Note. (e) No Further Encumbrances. Borrower shall not sell, assign, or grant or allow any other security interest, claim or encumbrance to attach to the Collateral Note, or to permit the payment under the Collateral Note to be subject to any defense or right of setoff. 6. Collection Rights of Lender. Upon the occurrence of a default under this Assignment (notwithstanding and excluding the application of any applicable cure period for purposes of this Section 6), all payments made under the Collateral Note by Obligor shall be payable as Lender shall so direct, and Obligor shall send all payments, or such portion thereof as specified by Lender, directly and exclusively to Lender at such address or addresses as Lender may specify, and Obligor is hereby authorized and directed by Borrower to comply with any such instructions given by Lender, without any inquiry on Obligor's part. Obligor shall not be liable to Borrower for compliance with such instructions given by Lender and Obligor shall receive full credit against the Note for payments delivered to Lender. 7. Notice to Obligor. Concurrently with the execution hereof, Borrower shall execute a letter in form and substance acceptable to Lender, in substantially the same form as Exhibit B attached hereto, to be sent to inform Obligor of Lender's rights under this Assignment. 8. No Conflict. Borrower warrants that its execution of and performance under this Assignment and all related documents are permitted under and will not violate any provision of Borrower's Charter or By-Laws. Borrower further warrants that the execution of all necessary resolutions and other prerequisites of corporate action have been duly performed so that the individual executing this Assignment and related documents on behalf of Borrower is duly authorized to bind Borrower by his signature. By signing below on behalf of Borrower, the individual executing this Assignment on behalf of Borrower also personally makes the warranties set forth in the preceding sentence. 9. Chief Executive Office. Borrower warrants that the address designated herein to which notices are to be sent to Borrower is Borrower's chief executive office. Borrower agrees to notify Lender - 3 - in writing of any change thereof and agrees that the same shall not in any event be moved outside Mecklenburg County, North Carolina, without Lender's prior written consent. 10. Recitals. Borrower warrants and agrees that the recitals set forth at the beginning of this Assignment are true. 11. No Burdensome Agreements. Borrower warrants that Borrower is not a party to any contract or agreement and is not subject to any contingent liability that does or may impair Borrower's ability to perform under the terms of this Assignment. Borrower further warrants that the execution and performance of this Assignment will not cause a default, acceleration or other event under any other contract or agreement to which Borrower or any property of Borrower is subject, and will not result in the imposition of any charge, penalty, lien or other encumbrance against any of Borrower's property except in favor of Lender. 12. Legal and Binding Agreement. Borrower warrants that the execution and performance of this Assignment will not violate any judicial or administrative order or governmental law or regulation, and that this Assignment is valid, binding and enforceable in every respect according to its terms. 13. No Consent Required. Borrower warrants that Borrower's execution, delivery and performance of this Assignment do not require the consent of or the giving of notice to any third party including, but not limited to, any other lender, governmental body or regulatory authority. 14. Default Defined. Applying the applicable cure periods set forth in the Note Purchase Agreement, the occurrence of any one or more of the following events shall constitute a default under this Agreement: (a) Default under Note Purchase Agreement. The occurrence of a default under the Note Purchase Agreement. (b) Breach of Covenant. The failure of Borrower or any other party to perform or observe any obligation or covenant made under this Assignment or with respect to the Secured Indebtedness. (c) Breach of Warranty. Lender's discovery that any representation or warranty in connection with this Assignment or the Secured Indebtedness is materially false. (d) Collateral Note Default. The occurrence of a default under the Collateral Note. 15. Remedies Upon Default. Upon default, Lender may pursue any or all of the following remedies without notice to Borrower except as required below: (a) Rights of Holder. Lender may exercise any or all rights of the holder of the Collateral Note. Without limiting the foregoing, Lender may initiate any administrative or judicial proceeding that it may deem necessary in the course of enforcing any rights under the Collateral Note. Any administrative or judicial action or other action taken by Lender pursuant to the Collateral Note may be taken by Lender in its own name or in Borrower's name. Lender may enter into any amendment or extension of the Collateral Note and may grant any indulgences with respect thereto that Lender may deem appropriate in the course of exercising its rights under the Collateral Note. Borrower hereby appoints Lender Borrower's attorney-in-fact - 4 - to take any action authorized by this Assignment upon default. Borrower acknowledges that this power of attorney is coupled with an interest and is irrevocable. (b) Sale of Collateral Note. Lender may sell the Collateral Note pursuant to Lender's rights under the Uniform Commercial Code. Any such sale may be either public or private. If public, the sale may be postponed by announcement at the scheduled time and place and adjourned to another time or place, or both. It is agreed that five (5) days' notice of any sale is commercially reasonable notice thereof. Any public sale may be adjourned to a different time, place, or both by announcement at the advertised time and place of sale, without further publication. Any advertised sale may be cancelled in Lender's discretion, either before or after the opening of bidding. Lender shall transfer the Collateral Note to any purchaser thereof by endorsing the Collateral Note to the purchaser's order, without warranty or recourse on the part of Lender. (c) Setoff. Lender may exercise its lien upon and right of setoff against any monies, items, credits, deposits or instruments that Lender may have in its possession and which belong to Borrower or any other person or entity liable for the payments of any or all of the Secured Indebtedness. (d) Other Remedies. Lender may pursue any other remedies available under any other document evidencing or securing the Secured Indebtedness or otherwise available to Lender at law or equity. (e) Application of Proceeds. All amounts received by Lender for Borrower's account by exercise of its remedies hereunder shall be applied as set forth in the Note Purchase Agreement. 16. Incorporation of Exhibits. All Exhibits referred to in this Assignment are incorporated herein by this reference. 17. Indulgence Not Waiver. Lender's indulgence in the existence of a default hereunder or any other departure from the terms of this Assignment shall not prejudice Lender's rights to declare a default or otherwise demand strict compliance with this Assignment. 18. Cumulative Remedies. The remedies provided Lender in this Assignment are not exclusive of any other remedies that may be available to Lender under any other document or at law or equity. 19. Amendment and Waiver in Writing. No provision of this Assignment can be amended or waived, except by a statement in writing signed by the party against which enforcement of the amendment or waiver is sought. 20. Notices. Any communications concerning this Assignment or the credit described herein shall be addressed as follows: As to Borrower: HLM Design, Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 Attention: Vernon Brannon - 5 - As to Lender: Pacific Capital, L.P. Suite 1070 3100 West End Avenue Nashville, Tennessee 37203 Attention: Clay R. Caroland III Equitas, L.P. 2000 Glen Echo Road Suite 101 Nashville, Tennessee 37215 Attn: Shannon LeRoy With a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street Suite 1600 Nashville, Tennessee 37219 Attention: John W. Titus Communications to be given to Lender shall only be effective when set forth in writing and actually received by an officer of Lender at the address indicated above. Communications to be given to Borrower shall be effective when actually or constructively received by Borrower or when set forth in writing and mailed or delivered to Borrower's address stated above. Lender or Borrower may change its address for receipt of notices by submitting the change in writing to the other party. 21. Assignment. This Assignment shall be binding upon and inure to the benefit of the respective heirs, successors and assigns of Borrower and Lender, except that Borrower shall not assign any rights or delegate any obligations arising hereunder without the prior written consent of Lender. Any attempted assignment or delegation by Borrower without the required prior consent shall be void. 22. Entire Agreement. This Assignment and the other written agreements between Borrower and Lender represent the entire agreement between the parties concerning the subject matter hereof, and all oral discussions and prior agreements are merged herein. Provided, if there is a conflict between this Assignment and any other document executed contemporaneously herewith with respect to the Secured Indebtedness, the provision most favorable to Lender shall control. 23. Severability. Should any provision of this Assignment be invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect. 24. Time of Essence. Time is of the essence of this Assignment, and all dates and time periods specified herein shall be strictly observed, except that Lender may permit specific deviations therefrom by its written consent. 25. Applicable Law. The validity, construction and enforcement of this Assignment and all other documents executed with respect to the Secured Indebtedness shall be determined according to the - 6 - laws of Tennessee applicable to contracts executed and performed entirely within that state, in which state this Assignment has been executed and delivered. 26. Gender and Number. Words used herein indicating gender or number shall be read as context may require. 27. Captions Not Controlling. Captions and headings have been included in this Assignment for the convenience of the parties, and shall not be construed as affecting the content of the respective paragraphs. - 7 - IN WITNESS WHEREOF, this Collateral Assignment of Promissory Note has been executed as of the date first written above. THE UNDERSIGNED ACKNOWLEDGE A THOROUGH UNDERSTANDING OF THE TERMS OF THIS ASSIGNMENT AND AGREE TO BE BOUND THEREBY: Borrower: HLM DESIGN, INC. By: /s/ Joseph M. Harris Title: President Lender: PACIFIC CAPITAL, L.P. By: Pacific Capital Corporation, General Partner By: /s/ J. Larry Williams Title: Secretary-Treasurer EQUITAS, L.P. By: Tennessee Business Investments, Inc., General Partner By: /s/ Shannon LeRoy Title: President - 8 - EXHIBIT A Copy of Collateral Note EXHIBIT B PACIFIC CAPITAL, L.P. EQUITAS, L.P. May 30, 1997 Hansen Lind Meyer Inc. (successor by merger with BBH Corp.) Suite 2950 121 West Trade Street Charlotte, NC 28202 Re: Notice of Assignment of Promissory Note; Direct Payment to Lender Ladies and Gentlemen: As you know, you are the obligor under that certain Affiliate Promissory Note dated May ___, 1997, made by BBH Corp. and assumed by Hansen Lind Meyer Inc., an Iowa corporation, pursuant to merger between BBH Corp. and Hansen Lind Meyer Inc. (the "Obligor") in the original principal amount of $3,200,000.00 payable to the order of HLM Design Inc. (the "Note"). Please be advised that the Note has been negotiated to Pacific Capital, L.P. and Equitas, L.P. (collectively, "Lender") as collateral for certain obligations of HLM Design, Inc. to Lender. Upon your notification by Lender that an event of default has occurred with respect to certain obligations of HLM Design, Inc. to Lender pursuant to that Note Purchase Agreement dated May 30, 1997, by and among Lender, HLM Design, Inc., Hansen Lind Meyer Inc. and BBH Corp., or related Transaction Documents described therein, you are hereby directed to send all payments, or a portion thereof, as directed by Lender, made under the Note, without deduction or offset, directly to Lender, at such address or addresses as Lender may specify. Obligor is hereby authorized and directed by HLM Design, Inc. to comply with any such instructions given by Lender, without any inquiry on Obligor's part. All such payments shall be made payable to the order of Lender, or shall be sent via wire transfer to an account or accounts designated by Lender. If you wish to prepay principal or interest under the Note, you must first obtain the written consent of Lender in order to ensure that you receive proper credit for the payment. No provision of the Note may hereafter be amended or waived without Lender's written consent. It is Lender's understanding that thus far you have not made any prepayment toward any amounts due under the Note. Please advise Lender immediately if this is not correct. Notwithstanding the foregoing, Obligor and its affiliates agree to hold Lender harmless from any and all existing or future claims against HLM Design, Inc. or its affiliates, or for any existing or future - 10 - violations of any applicable laws by HLM Design, Inc. or its affiliates, and shall not, as a result of said claims or violations, or for any other reason whatsoever, deduct or setoff any amounts payable by Obligor under the Note. This letter is a standard notice given by Lender when a promissory note is negotiated to it as collateral. Please sign below to evidence your acknowledgment and consent to the terms of this letter, and return the original of this letter to Lender at the above-referenced address. HLM Design, Inc., the previous holder of the Note, has consented to the sending of this notice and the terms contained herein, evidenced by its signature below. Please contact Shannon LeRoy of Equitas, L.P. at (615) 383-8673 if you have any questions regarding this notice of collateral assignment of promissory note. Sincerely, PACIFIC CAPITAL, L.P. By: Pacific Capital Corporation Its: General Partner By: /s/ J. Larry Williams Title: Secretary-Treasurer EQUITAS, L.P. By: Tennessee Business Investments, Inc. Its: General Partner By: /s/ Shannon LeRoy Title: President - 11 - THE UNDERSIGNED, ACTING THROUGH ITS DULY AUTHORIZED OFFICER, HEREBY AGREES TO THE TERMS AND PAYMENT INSTRUCTIONS AS SET FORTH HEREIN. HLM DESIGN, INC., as assignor of the Note By: /s/ Joseph M. Harris Title: President THE UNDERSIGNED, ACTING THROUGH ITS DULY AUTHORIZED OFFICER, HEREBY ACKNOWLEDGES AND CONSENTS TO THE ABOVE REFERENCED COLLATERAL ASSIGNMENT OF THE NOTE AND AGREES TO THE TERMS AND PAYMENT INSTRUCTIONS AS SET FORTH HEREIN. HANSEN LIND MEYER INC., an Iowa corporation (successor by merger with BBH Corp.) By: /s/ Vernon B. Brannon Title: Senior Vice President - 12 - EX-10 11 EXHIBIT 10.15 UNCONDITIONAL GUARANTY THIS UNCONDITIONAL GUARANTY ("Guaranty") is executed as of the 30th day of May, 1997, by HANSEN LIND MEYER INC. ("Hansen Lind"), an Iowa corporation, and BBH CORP. ("BBH"), a Delaware corporation (Hansen Lind and BBH being collectively referred to herein as "Guarantor"), in favor of PACIFIC CAPITAL, L.P. ("Pacific"), a Delaware limited partnership, and EQUITAS, L.P. ("Equitas"), a Delaware limited partnership (Pacific and Equitas being sometimes referred to herein, collectively as "Lender"). W I T N E S S E T H: WHEREAS, Lender has agreed to extend credit (the "Loan") to HLM Design, Inc. ("Borrower"), a Delaware corporation, on certain terms and conditions pursuant to that Note Purchase Agreement of even date herewith by and among Lender, Borrower and Guarantor (the "Note Purchase Agreement"); and WHEREAS, Guarantor is an affiliate of Borrower, and concurrently with the extension of the Loan, Borrower shall extend credit to BBH in the approximate amount of $3,200,000.00 to fund BBH's obligations pursuant to the terms of that certain Merger Agreement dated as of April 3, 1997 by and between BBH and Hansen Lind, whereby BBH will merge with and into Hansen Lind, with Hansen Lind being the surviving entity (the "Merger"); WHEREAS, one condition to Lender's agreement to extend credit to Borrower is that Guarantor must unconditionally guarantee certain obligations of Borrower to Lender, including the Loan; and WHEREAS, Guarantor has determined that the consummation of the transactions described above will inure to their direct and indirect benefit; NOW, THEREFORE, as an inducement to cause Lender to extend credit to Borrower, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: (1) Definition of Obligations. As used herein, the "Obligations" shall mean all obligations of Guarantor under this Guaranty and all obligations and indebtedness of Borrower and/or Guarantor under the Note Purchase Agreement (as defined herein) and under those certain Promissory Notes of even date herewith in the aggregate original principal amount of $2,000,000.00 made by Borrower payable to the order of Lender, or each of them as the case may be, together with all modifications, extensions and renewals thereof. (2) Solvency of Guarantor. Guarantor warrants to Lender that Guarantor is not insolvent and that Guarantor's execution hereof does not render Guarantor insolvent, either before or after the consummation of the Merger, for the purpose of state or federal fraudulent transfer laws, other avoidance laws, laws regarding corporate distributions or any other law. (3) Guaranty of Payment. Guarantor hereby guarantees to Lender the timely payment and performance of the Obligations. (4) Savings Provision. Should the liability of Guarantor hereunder for the entire amount of the Obligations be subject to avoidance or limitation, notwithstanding the contrary agreement and intention of Guarantor and Lender, under any state or federal fraudulent transfer laws, laws regarding corporate distributions or other law, then the liability of Guarantor for the Obligations shall be limited to the maximum amount for which Guarantor may be liable without legal impairment. (5) Guaranty Unconditional. Guarantor's guarantee of the Obligations is absolute and unconditional. The validity of this Guaranty shall not be impaired by any event whatsoever, including, but not limited to, the merger, consolidation, dissolution, cessation of business or liquidation of Borrower; the financial decline or bankruptcy of Borrower; the failure of any other party to guarantee the Obligations or to provide collateral therefor; Lender's compromise or settlement with or without release of Borrower or any other party liable for the Obligations; Lender's release of any collateral for the Obligations; Lender's failure to file suit against Borrower (regardless of whether Borrower is becoming insolvent, is believed to be about to leave the state or any other circumstance); Lender's failure to give Guarantor notice of default by Borrower; the unenforceability of the Obligations against Borrower due to bankruptcy discharge, counterclaim or for any other reason; Lender's acceleration of the Obligations at any time; the extension, modification or renewal of the Obligations; Lender's failure to undertake or exercise diligence in collection efforts against any party or property; the termination of any relationship of Guarantor with Borrower, including, but not limited to, any relationship of employment, ownership or commerce; Borrower's change of name or use of any name other than the name used to identify Borrower in this Guaranty; or Borrower's use of the credit extended for any purpose whatsoever. All Obligations arising after the execution hereof shall be deemed made in reliance upon the continued operation of this Guaranty and shall constitute additional consideration for Guarantor's execution of this Guaranty. Guarantor agrees that this Guaranty shall be valid and binding upon Guarantor upon the delivery of this executed Guaranty to Lender by any party whomsoever. (6) Primary Liability of Guarantor. This Guaranty constitutes a guarantee of payment and performance and not of collection. Accordingly, Lender may enforce this Guaranty against Guarantor without first making demand upon or instituting collection proceedings against Borrower. Guarantor's liability for the Obligations is hereby declared to be primary, and not secondary, and Guarantor may be called upon hereunder to make any payment when due under the Obligations. Each document presently or hereafter executed by Borrower to evidence or secure an obligation to Lender is incorporated herein by reference and shall be fully enforceable against Guarantor. (7) Irrevocable Guaranty. Guarantor's guarantee of the Obligations is irrevocable. (8) Corporate Capacity. BBH warrants that it is a duly organized Delaware corporation in good standing under the laws of Delaware, and that BBH is duly qualified to do business in each other state in which qualification is necessary. Hansen Lind warrants that it is and shall remain a duly organized Iowa corporation in good standing under the laws of Iowa, and that Hansen Lind is and shall remain duly qualified to do business in each other state in which qualification is necessary. Guarantor warrants that its execution and delivery of and performance under this Guaranty and all related documents are permitted under and will not violate any provision of Guarantor's Charter or By-Laws. Guarantor further warrants that the execution of all necessary resolutions and other prerequisites of corporate action have been duly performed so that the individual executing this Guaranty and related documents on behalf of Guarantor is duly authorized to bind Guarantor by his signature. By signing below on behalf of Guarantor, the individual executing this Guaranty on behalf of Guarantor also personally makes the warranties set forth in the preceding sentence. - 2 - (9) No Marshalling of Assets. Lender may proceed against any collateral securing the Obligations and against parties liable therefor in such order as it may elect, and Guarantor shall not be entitled to require Lender to marshal assets. The benefit of any rule of law or equity to the contrary is hereby expressly waived. (10) Impairment of Collateral; Release of Liable Parties. Lender may, in its sole discretion and with or without consideration, release any collateral securing the Obligations or release any party liable therefor. The defenses of impairment of collateral and impairment of recourse and any requirement of diligence on Lender's part in collecting the Obligations are hereby waived. (11) Amendment of Obligations. Lender may, without notice to or the joinder of Guarantor and without affecting Guarantor's liability hereunder, modify, extend, accelerate, reinstate, refinance or renew the Obligations (with or without the execution of new promissory notes) and grant any consent or indulgence with respect thereto. (12) Waivers of Notice. Guarantor hereby waives any requirement of presentment, protest, notice of dishonor, notice of default, demand, and all other actions or notices that may be otherwise required on Lender's part in connection with the Obligations. (13) Subordination. Guarantor agrees that any existing or future loan made by Guarantor to Borrower and any other existing or future obligation of Borrower to Guarantor (including but not limited to any rights Guarantor may have against Borrower by virtue of Guarantor's performance hereunder) shall be subordinate to the Obligations as to both payment and collection. Accordingly, Guarantor agrees not to accept any payment whatsoever from Borrower or to allow any payment by Borrower on Guarantor's behalf until this Guaranty has been terminated in full; provided, however, that Lender consents to Borrower repaying inter-company loans from Guarantor in the ordinary course of business so long as no event of default exists hereunder or under the Loan Agreement. Guarantor hereby grants Lender a security interest in all obligations now or hereafter owed Guarantor by Borrower and in all instruments, chattel paper and other property now or hereafter evidencing obligations of Borrower to Guarantor, together with all collateral therefor. Guarantor shall advise Lender of the status of such obligations and shall provide a payment history therefor upon request. Lender may file this Guaranty (or a copy hereof) as a financing statement with respect thereto, or Lender may require Guarantor to execute a separate financing statement with respect thereto, or Lender may require Guarantor to take any other action necessary to perfect Lender's security interest therein, at Guarantor's expense. Without limiting the foregoing, all such property owned by Guarantor in which a security interest may be perfected by possession shall be delivered to Lender immediately as made available to Guarantor. Guarantor agrees that, in the event of a bankruptcy or other insolvency proceeding involving Borrower, Guarantor will timely file a claim for the amount of the subordinated debt described herein, in form approved by Lender. Guarantor agrees to pursue said claim with diligence and to comply with any instructions from Lender pertaining to the pursuit of the claim. The proceeds of any such claim shall be delivered to Lender for application to the Obligations. (14) Postponement of Rights Against Borrower. Guarantor hereby agrees to exercise no right of subrogation, indemnity, or other right of reimbursement against Borrower in connection with the Obligations, or any right of contribution against any other party whatsoever in connection with the Obligations, in either case until and unless the Obligations have been satisfied in full. (15) Statute of Limitations. Guarantor acknowledges and agrees that the statute of limitation applicable to this Guaranty shall begin to run only upon Lender's accrual of a cause of action against - 3 - Guarantor hereunder caused by Guarantor's refusal to honor a demand for performance hereunder made by Lender in writing; provided, however, if, subsequent to the demand upon Guarantor, Lender reaches an agreement with Borrower on any terms causing Lender to forbear in the enforcement of its demand upon Guarantor, the statute of limitation shall be reinstated for its full duration until Lender subsequently again makes demand upon Guarantor. (16) Cancellation by Lender. Lender may evidence its cancellation of this Guaranty and the release of Guarantor from liability hereunder by delivering to Guarantor an instrument of release, or by delivering this Guaranty to Guarantor, or both. Unless Lender delivers this original Guaranty to Guarantor with a notation on its face signed and dated by an authorized officer of Lender stating "Cancelled in Full As To All Obligations," however, the purported cancellation hereof and release of Guarantor shall not impair Guarantor's continuing liability for: (i) any amount of principal, interest or expenses that was mistakenly omitted by Lender in calculating the final payment due under the Obligations, if the release of Guarantor was based upon Lender's belief that it had been paid in full; (ii) any surviving liability of Borrower to reimburse Lender for expenses or to indemnify Lender provided for in any document executed prior to the purported cancellation hereof evidencing or securing the Obligations; and (iii) liability for avoided payments and expenses related thereto (as provided in detail below). Lender shall not be obligated to release any collateral securing this Guaranty until after all applicable time periods have expired regarding bankruptcy preferences or other avoidance actions that may be applicable to the circumstances of payment of any or all of the Obligations. (17) Recovery of Avoided Payments. If any amount applied by Lender to the Obligations is subsequently challenged by a bankruptcy trustee or debtor-in-possession as an avoidable transfer on the grounds that the payment constituted a preferential payment or a fraudulent conveyance under state law or the Bankruptcy Code or any successor statute thereto or on any other grounds, Lender may, at its option and in its sole discretion, elect whether to contest such challenge. If Lender contests the avoidance action, all costs of the proceeding, including Lender's attorneys fees, will become part of the Obligations. If the contested amount is nevertheless successfully avoided, the avoided amount will become part of the Obligations hereunder. If Lender elects not to contest the avoidance action, Lender may tender the amount subject to the avoidance action to the bankruptcy court, trustee or debtor-in-possession and the amount so advanced shall become part of the Obligations hereunder. Guarantor's obligation to reimburse Lender for amounts due under this paragraph shall survive the purported cancellation hereof except as otherwise provided above. (18) Costs of Collection Against Guarantor. Guarantor agrees to pay all costs of collection, including, without limitation, court costs, attorney's fees and compensation for time spent by Lender employees, that Lender may incur in enforcing the terms of this Guaranty against Guarantor. (19) Changes in Financial Condition. Guarantor covenants to give Lender prompt written notice of the creation or discovery of any additional material contingent liability or the occurrence of any other material adverse change in the financial condition of Guarantor. (20) No Unpaid Taxes. Guarantor warrants that Guarantor is not presently delinquent in the payment of any taxes imposed by any governmental authority or in the filing of any tax return and that Guarantor is not involved in a dispute with any taxing authority over tax amounts due. Guarantor covenants that all future taxes assessed against Guarantor shall be timely paid and that all tax returns required of Guarantor shall be timely filed. - 4 - (21) Compliance with Law. Guarantor warrants that Guarantor's business activities are conducted in accordance with all applicable laws and regulations, and Guarantor covenants that such activities shall continue to be so conducted. (22) Assistance in Litigation. Guarantor covenants to, upon request, cooperatively participate in any proceeding in which Guarantor is not an adverse party to Lender and which concerns Lender's rights regarding the Obligations or any collateral securing its payment. (23) Recitals. Guarantor warrants and agrees that the recitals set forth at the beginning of this Guaranty are true. (24) No Burdensome Agreements. Guarantor warrants that Guarantor is not a party to any contract or agreement and is not subject to any contingent liability that does or may materially impair Guarantor's ability to perform under the terms of this Guaranty. Guarantor further warrants that the execution and performance of this Guaranty will not cause a default, acceleration or other event under any other contract or agreement to which Guarantor or any property of Guarantor is subject, and will not result in the imposition of any charge, penalty, lien or other encumbrance against any of Guarantor's property, except in favor of Lender. (25) Legal and Binding Agreement. Guarantor warrants that the execution, delivery and performance of this Guaranty will not violate any judicial or administrative order or governmental law or regulation, and that this Guaranty is valid, binding and enforceable in every respect according to its terms. (26) No Consent Required. Guarantor warrants that Guarantor's execution, delivery and performance of this Guaranty do not require the consent of or the giving of notice to any third party including, but not limited to, any other lender, governmental body or regulatory authority. (27) Consent to Jurisdiction and Venue. Guarantor hereby irrevocably consents to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Guaranty or the Secured Indebtedness. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in writing. (28) WAIVER OF RIGHT TO TRIAL BY JURY. GUARANTOR HEREBY KNOWINGLY AND VOLUNTARILY WAIVES THE RIGHT TO TRIAL BY JURY OF ANY ISSUE ARISING FROM THE LENDING RELATIONSHIP OF LENDER, GUARANTOR AND BORROWER. GUARANTOR ACKNOWLEDGES THAT THE EFFECT OF THIS WAIVER IS THAT ISSUES OF FACT IN ANY SUCH DISPUTE WILL BE DETERMINED BY A JUDGE RATHER THAN BY A JURY. GUARANTOR ACKNOWLEDGES THAT THERE HAVE BEEN NO ORAL REPRESENTA TIONS TO GUARANTOR LIMITING THE ENFORCEMENT OF THIS WAIVER, AND GUARANTOR AGREES THAT THE EFFECT OF THIS WAIVER OF RIGHT TO JURY TRIAL MAY BE HEREAFTER LIMITED ONLY UPON THE SPECIFIC WRITTEN ACTION OF LENDER. (29) Not Partners; No Third Party Beneficiaries. Nothing contained herein or in any related document shall be deemed to render Lender a partner of Guarantor for any purpose. This Guaranty has been executed for the sole benefit of Lender, and no third party is authorized to rely upon Lender's rights - 5 - hereunder or to rely upon an assumption that Lender has or will exercise its rights under this Guaranty or under any document referred to herein. (30) Notices. Any communications concerning this Guaranty or the credit described herein shall be addressed as follows: As to Guarantor: Hansen Lind Meyer Inc. Suite 2950 121 West Trade Street Charlotte, North Carolina 28202 Attn: Vernon Brannon BBH Corp. Suite 2950 121 West Trade Street Charlotte, North Carolina 28202 Attn: Vernon Brannon With a copy to: Underwood Kinsey Warren & Tucker PA Charlotte Plaza Building Suite 2020 201 South College Street Charlotte, NC 28244-2020 Attention: Shirley Linn As to Lender: Pacific Capital, L.P. Suite 1070 3100 West End Avenue Nashville, Tennessee 37203 Attention: Clay R. Caroland III Equitas, L.P. 2000 Glen Echo Road Suite 101 Nashville, Tennessee 37215 Attn: Shannon LeRoy - 6 - With a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street Suite 1600 Nashville, Tennessee 37219 Attention: John W. Titus Communications to be given to Lender shall only be effective when set forth in writing and actually received by an officer of Lender at the address indicated above. Communications to be given to Guarantor shall be effective when actually or constructively received by Guarantor or when set forth in writing and mailed or delivered to Guarantor's address stated above. Lender or Guarantor may change its address for receipt of notices by submitting the change in writing to the other party. (31) Indulgence Not Waiver. Lender's indulgence in any departure from the terms of this Guaranty or any other document shall not prejudice Lender's rights to make demand and recover from Guarantor in accordance with this Guaranty, or otherwise demand strict compliance with this Guaranty. (32) Cumulative Remedies. The remedies provided Lender in this Guaranty are not exclusive of any other remedies that may be available to Lender under any other document or at law or equity. (33) Amendment and Waiver in Writing. No provision of this Guaranty can be amended or waived except by a statement in writing signed by the party against which enforcement of the amendment or waiver is sought. (34) Assignment. This Guaranty shall be binding upon and inure to the benefit of the respective heirs, successors and assigns of Guarantor and Lender, except that Guarantor shall not assign any rights or delegate any obligations arising hereunder without the prior written consent of Lender. Any attempted assignment or delegation by Guarantor without the required prior consent shall be void. (35) Severability. Should any provision of this Guaranty be invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect. (36) Applicable Law. The validity, construction and enforcement of this Guaranty and all other documents executed with respect to the Obligations shall be determined according to the laws of Tennessee applicable to contracts, in which state this Guaranty has been executed and delivered. (37) Gender and Number. Words used herein indicating gender or number shall be read as context may require. (38) Captions Not Controlling. Captions and headings have been included in this Guaranty for the convenience of the parties, and shall not be construed as affecting the content of the respective paragraphs. (39) NOTICE TO LENDER UPON PERCEIVED BREACH. GUARANTOR AGREES TO GIVE LENDER WRITTEN NOTICE OF ANY ACTION OR INACTION BY LENDER IN CONNECTION WITH THE OBLIGATIONS THAT GUARANTOR BELIEVES MAY BE ACTIONABLE AGAINST LENDER OR A DEFENSE TO PAYMENT FOR ANY REASON, INCLUDING, BUT NOT - 7 - LIMITED TO, COMMISSION OF A TORT OR VIOLATION OF ANY CONTRACTUAL DUTY OR DUTY IMPLIED BY LAW. GUARANTOR AGREES THAT UNLESS SUCH NOTICE IS DULY GIVEN AS PROMPTLY AS POSSIBLE (AND IN ANY EVENT WITHIN TEN (10) DAYS) AFTER GUARANTOR LEARNS OF ANY SUCH ACTION OR INACTION, GUARANTOR SHALL NOT ASSERT AGAINST LENDER, AND GUARANTOR SHALL BE DEEMED TO HAVE WAIVED, ANY CLAIM OR DEFENSE ARISING THEREFROM. (40) NO ORAL REPRESENTATIONS LIMITING ENFORCEMENT. GUARANTOR ACKNOWLEDGES LENDER'S INTENTION TO ENFORCE THIS GUARANTY TO THE FULLEST EXTENT POSSIBLE AND GUARANTOR ACKNOWL EDGES THAT LENDER HAS MADE NO ORAL STATEMENTS TO GUARANTOR THAT COULD BE CONSTRUED AS A WAIVER OF LENDER'S RIGHT TO ENFORCE THIS GUARANTY BY ALL AVAILABLE LEGAL MEANS. - 8 - Executed the date first written above. THE UNDERSIGNED ACKNOWLEDGES A THOROUGH UNDERSTANDING OF THE TERMS OF THIS GUARANTY AND AGREES TO BE BOUND THEREBY: GUARANTOR: HANSEN LIND MEYER INC. By: /s/ Joseph M. Harris Title: President BBH CORP. By: /s/ Joseph M. Harris Title: President - 9 - EX-10 12 EXHIBIT 10.16 GUARANTY THIS GUARANTY ("Guaranty") is executed as of the 30th day of May, 1997, by JOE HARRIS ("Guarantor"), resident of the state of North Carolina, in favor of PACIFIC CAPITAL, L.P. ("Pacific"), a Delaware limited partnership, and EQUITAS, L.P. ("Equitas"), a Delaware limited partnership (Pacific and Equitas being sometimes referred to herein collectively as "Lender"). W I T N E S S E T H: WHEREAS, Lender has agreed to extend credit to HLM Design, Inc. ("Borrower"), a Delaware corporation, on certain terms and conditions; and WHEREAS, one condition to Lender's agreement to extend credit to Borrower is that Guarantor must unconditionally guarantee the obligations of Borrower to Lender; NOW, THEREFORE, as an inducement to cause Lender to extend credit to Borrower, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: 1. Definition of Guaranteed Obligations. As used herein, the "Guaranteed Obligations" shall mean all obligations of Guarantor under this Guaranty and all obligations and indebtedness of Borrower, BBH Corp. and/or Hansen Lind Meyer Inc. under that certain Note Purchase Agreement of even date herewith by and between Borrower, BBH Corp., Hansen Lind Meyer Inc. ("HLM"), and Lender (the "Note Purchase Agreement") and under those certain Promissory Notes of even date herewith in the aggregate original principal amount of $2,000,000.00 made by Borrower payable to the order of Lender, or each of them as the case may be, together with all modifications, extensions and renewals thereof. 2. Guaranty of Payment. Guarantor hereby guarantees to Lender the timely payment and performance of the Guaranteed Obligations. 3. Solvency of Guarantor. Guarantor warrants to Lender that Guarantor is not insolvent and that Guarantor's execution hereof does not render Guarantor insolvent, either before or after the consummation of the Merger, for the purpose of state or federal fraudulent transfer laws, other avoidance laws or any other law. 4. Guaranty Unconditional. Guarantor's guarantee of the Guaranteed Obligations is absolute and unconditional, provided that this Guaranty shall only become effective in the event that Guarantor ceases to be employed by Borrower or HLM, whether voluntarily or involuntarily, except if such cessation of employment is due to death, continued disability for a period of at least six (6) months or involuntary termination by the Borrower or HLM without "cause". For purposes of this Agreement, "cause" shall include (i) commission of a fraud or other act of dishonesty by the Guarantor that is likely to have a material adverse effect on the Borrower or HLM, (ii) instigation of a criminal charge against the Guarantor that is likely to have a material adverse effect on the Borrower or HLM, (iii) the failure of Guarantor to faithfully perform the duties and responsibilities assigned to him from time to time by the boards of directors of the Borrower and HLM, after notice and failure of Guarantor to cure within twenty (20) days, (iv) the commission of any acts, or failure to perform any acts, by the Guarantor that cause material disruption to the Borrower's or HLM's business, after notice and failure of Guarantor to cure within twenty (20) days, (v) the failure of Guarantor to adhere to any written employee policies or procedures of Borrower or HLM in any material respect, after notice and failure of Guarantor to cure within twenty (20) days, (vi) the appropriation (or attempted appropriation) by Guarantor of a material business opportunity of the Borrower, including attempting to secure or securing any material personal profit in connection with any transaction entered into on behalf of the Borrower without the prior consent of Borrower's board of directors, or (vii) the occurrence of an event of default under that certain Noncompetition Agreement of even date herewith between Guarantor and Borrower. Except as otherwise provided herein, the validity of this Guaranty shall not be impaired by any event whatsoever, including, but not limited to, the death, disability, or incompetence of Borrower, if Borrower is an individual; the merger, consolidation, dissolution, cessation of business or liquidation of Borrower, if Borrower is a business entity; the financial decline or bankruptcy of Borrower; the failure of any other party to guarantee the Guaranteed Obligations or to provide collateral therefor; Lender's compromise or settlement with or without release of any other party liable for the Guaranteed Obligations; Lender's release of any collateral for the Guaranteed Obligations; Lender's failure to file suit against Borrower (regardless of whether Borrower is becoming insolvent, is believed to be about to leave the state or any other circumstance); Lender's failure to give Guarantor notice of default by Borrower; the unenforceability of the Guaranteed Obligations against Borrower, due to bankruptcy discharge or otherwise; the availability to Borrower of any setoff, counterclaim or defense against Lender; Lender's acceleration of the Guaranteed Obligations at any time; the extension, modification or renewal of the Guaranteed Obligations; Lender's failure to exercise diligence in collection; the termination of any relationship of Guarantor with Borrower, including, but not limited to, any relationship of employment, ownership, commerce, or marriage; Borrower's change of name or use of any name other than the name used to identify Borrower in this Guaranty; or Borrower's use of the credit extended for any purpose whatsoever. Each advance of credit by Lender to Borrower following the execution hereof shall be deemed made in reliance upon the continued operation of this Guaranty and shall constitute additional consideration for Guarantor's execution of this Guaranty. Guarantor agrees that this Guaranty shall be valid and binding upon Guarantor upon the delivery of this executed Guaranty to Lender by any party whomsoever. 5. Guaranty Irrevocable. Guarantor's guarantee of the Guaranteed Obligations is irrevocable; provided, however, Guarantor may at any time by written notice to Lender prospectively terminate Guarantor's liability for any advances made by Lender subsequent to Lender's receipt of the termination notice, except for any advance that Lender had previously committed to make. After the delivery of such notice to Lender, Guarantor shall remain fully liable for all principal, interest and expenses outstanding as of the time of Lender's receipt of the cancellation hereof; for all interest subsequently accruing thereon and for all expenses subsequently incurred by Lender with respect thereto; and for all subsequent principal advances that Lender may have previously committed to make (regardless of whether Lender waived any default or condition precedent in actually making the advance(s)), together with all interest thereon and expenses related thereto. The renewal or extension of the maturity of obligations covered by this paragraph shall not relieve Guarantor of continuing liability therefor. 6. Primary Liability of Guarantor. This Guaranty constitutes a guarantee of payment and performance and not of collection. Accordingly, Lender may enforce this Guaranty against Guarantor without first making demand upon or instituting collection proceedings against Borrower. Guarantor's liability for the Guaranteed Obligations is hereby declared to be primary, and not secondary, and Guarantor may be called upon hereunder to make any payment when due under the Guaranteed Obligations irrespective of the existence of any default thereunder. Each document presently or hereafter executed by Borrower to evidence or secure an obligation to Lender is incorporated herein by reference and shall be fully enforceable against Guarantor. - 2 - 7. No Marshalling of Assets. Lender may proceed against any collateral securing the Guaranteed Obligations and against parties liable therefor in such order as it may elect, and Guarantor shall not be entitled to require Lender to marshall assets. The benefit of any rule of law or equity to the contrary is hereby expressly waived. 8. Impairment of Collateral; Release of Liable Parties. Lender may, in its sole discretion and with or without consideration, release any collateral securing the Guaranteed Obligations or release any party liable therefor. The defenses of impairment of collateral and impairment of recourse and any requirement of diligence on Lender's part in collecting the Guaranteed Obligations are hereby waived. 9. Amendment of Guaranteed Obligations. Lender may, without notice to or the joinder of Guarantor and without affecting Guarantor's liability hereunder, modify, extend, accelerate, reinstate, refinance, or renew the Guaranteed Obligations (with or without the execution of new Promissory Notes) and grant any consent or indulgence with respect thereto. 10. Waivers of Notice. Guarantor hereby waives any requirement of presentment, protest, notice of dishonor, notice of default, demand, and all other actions or notices that may be required on Lender's part in connection with the Guaranteed Obligations. 11. Subordination. Guarantor agrees that any existing or future loan made by Guarantor to Borrower and any other existing or future obligation of Borrower to Guarantor shall be subordinate to the Guaranteed Obligations as to both payment and collection. Accordingly, Guarantor agrees not to accept any payment whatsoever from Borrower (except for reasonable salary, bonus approved by the board of directors of Borrower, and reimbursement of necessary and reasonable business expenses, unless Lender notifies Guarantor to the contrary) or to allow any payment by Borrower on Guarantor's behalf until this Guaranty has been terminated in full. Guarantor hereby grants Lender a security interest in all accounts owed Guarantor by Borrower and in all instruments, chattel paper and other property now or hereafter evidencing obligations of Borrower to Guarantor, together with all collateral therefor. Lender may file this Guaranty (or a copy hereof) as a financing statement with respect thereto, or Lender may require Guarantor to execute a separate financing statement with respect thereto, or Lender may require Guarantor to take any other action necessary to perfect Lender's security interest therein, at Guarantor's expense. Without limiting the foregoing, all such property owned by Guarantor in which a security interest may be perfected by possession shall be delivered to Lender immediately as made available to Guarantor. Guarantor agrees that, in the event of a bankruptcy or other insolvency proceeding involving Borrower, Guarantor will timely file a claim for the amount of the subordinated debt, in form approved by Lender. Guarantor agrees to pursue said claim with diligence and to comply with any instructions from Lender pertaining to the pursuit of the claim. The proceeds of any such claim shall be delivered to Lender. 12. Subrogation of Guarantor. Guarantor shall not be subrogated to any rights of Lender against Borrower until the Guaranteed Obligations have been paid in full. 13. Statute of Limitations. Guarantor acknowledges that the statute of limitation applicable to this Guaranty shall begin to run only upon Lender's accrual of a cause of action against Guarantor hereunder caused by Guarantor's refusal to honor a demand for performance hereunder made by Lender in writing; provided, however, if, subsequent to the demand upon Guarantor, Lender reaches an agreement with Borrower on any terms causing Lender to forbear in the enforcement of its demand upon Guarantor, the statute of limitation shall be reinstated for its full duration until Lender subsequently again makes demand upon Guarantor. - 3 - 14. Death of Guarantor. In the event of the death of Guarantor and provided that this Guaranty has become effective in accordance with section 4 hereof prior to the date of death, the obligation of Guarantor shall continue in full force and effect against Guarantor's estate, and the executor or administrator of such estate shall be obligated and authorized to pay such debt and otherwise honor this Guaranty, and, if acceptable to Lender, to execute renewal Guaranties or endorsements or notes or other evidences of indebtedness, from time to time, with respect to any unpaid obligations hereunder. In the event of the death of Guarantor and provided that this Guaranty has not become effective in accordance with section 4 hereof prior to the date of death, Guarantor's obligations pursuant to this Guaranty shall be cancelled. 15. Cancellation by Lender. Lender may evidence its cancellation of this Guaranty and the release of Guarantor from liability hereunder by delivering to Guarantor an instrument of release, or by delivering this Guaranty to Guarantor, or both. Unless Lender delivers this original Guaranty to Guarantor with a notation on its face signed and dated by an authorized officer of Lender stating "Cancelled in Full As To All Guaranteed Obligations," however, the purported cancellation hereof and release of Guarantor shall not impair Guarantor's continuing liability for (a) any amount of principal, interest, or expenses that was mistakenly omitted by Lender in calculating the final payment due under the Guaranteed Obligations, if the release of Guarantor was based upon Lender's belief that it had been paid in full; (b) any surviving liability of Borrower to reimburse Lender for expenses or to indemnify Lender provided for in any document executed prior to the purported cancellation hereof evidencing or securing the Guaranteed Obligations; and (c) liability for avoided payments and expenses related thereto (as provided in detail below). Lender shall not be obligated to release any collateral securing this Guaranty until after all applicable time periods have expired regarding bankruptcy preferences or other avoidance actions that may be applicable to the circumstances of payment of any or all of the Guaranteed Obligations. 16. Recovery of Avoided Payments. If any amount applied by Lender to the Guaranteed Obligations is subsequently challenged by a bankruptcy trustee or debtor-in-possession as an avoidable transfer on the grounds that the payment constituted a preferential payment or a fraudulent conveyance under state law or the Bankruptcy Code or any successor statute thereto or on any other grounds, Lender may, at its option and in its sole discretion, elect whether to contest such challenge. If Lender contests the avoidance action, all costs of the proceeding, including Lender's attorneys fees, will become part of the Guaranteed Obligations. If the contested amount is successfully avoided, the avoided amount will become part of the Guaranteed Obligations hereunder. If Lender elects not to contest the avoidance action, Lender may tender the amount subject to the avoidance action to the bankruptcy court, trustee or debtor-in-possession and the amount so advanced shall become part of the Guaranteed Obligations hereunder. Guarantor's obligation to reimburse Lender for amounts due under this paragraph shall survive the purported cancellation hereof except as otherwise provided above. 17. Disclosure of Litigation. Guarantor warrants that, except as disclosed to Lender in writing, Guarantor is not presently a defendant in any pending litigation, arbitration or administrative proceeding or the subject of any investigation; that there is no arbitration, administrative proceeding or investigation threatened against Guarantor; and that Guarantor is not subject to any outstanding court or administrative order. Guarantor covenants to give Lender prompt written notice of any litigation, administrative proceeding or investigation that may hereafter be instituted or threatened against Guarantor, whether or not Guarantor's liability under such proceeding would be covered by insurance. 18. Financial Statements. Guarantor warrants that, except as disclosed to Lender in writing, Guarantor's financial statements delivered to Lender in connection with the Guaranteed Obligations have been prepared in accordance with generally accepted accounting principles, consistently applied, and are true, accurate and complete in every respect. Guarantor acknowledges that Lender has advanced (or committed - 4 - to advance) the Guaranteed Obligations in reliance upon such financial statements, and Guarantor warrants that no material change has occurred in Guarantor's financial condition as set forth in such financial statements. Guarantor covenants to furnish to Lender, upon demand, copies of Guarantor's tax returns and additional financial statements in form and substance acceptable to Lender. 19. Changes in Financial Condition. Guarantor covenants to give Lender prompt written notice of the creation or discovery of any additional contingent liability or the occurrence of any other material adverse change in the financial condition of Guarantor. 20. No Unpaid Taxes. Guarantor warrants that Guarantor is not presently delinquent in the payment of any taxes imposed by any governmental authority or in the filing of any tax return and that Guarantor is not involved in a dispute with any taxing authority over tax amounts due. Guarantor covenants that all future taxes assessed against Guarantor shall be timely paid and that all tax returns required of Guarantor shall be timely filed. 21. Compliance with Law. Guarantor warrants that Guarantor's business activities are conducted in accordance with all applicable laws and regulations, and Guarantor covenants that such activities shall continue to be so conducted. 22. Assistance in Litigation. Guarantor covenants to, upon request, cooperatively participate in any proceeding in which Guarantor is not an adverse party to Lender and which concerns Lender's rights regarding the Guaranteed Obligations or any collateral securing its payment. 23. Solvency of Guarantor. Guarantor warrants to Lender that Guarantor is not insolvent and that Guarantor's execution hereof does not render Guarantor insolvent. 24. Security Interest; Setoff. In order to further secure the payment of the Guaranteed Obligations, Guarantor hereby grants to Lender a security interest and right of setoff against all of Guarantor's presently owned or hereafter acquired monies, items, credits, deposits and instruments (including certificates of deposit) presently or hereafter in the possession of Lender. By maintaining any such accounts or other property at Lender, Guarantor acknowledges that Guarantor voluntarily subjects the property to Lender's rights hereunder. 25. Recitals. Guarantor warrants and agrees that the recitals set forth at the beginning of this Guaranty are true. 26. No Burdensome Agreements. Guarantor warrants that the execution and performance of this Guaranty will not cause a default under any other contract or agreement to which Guarantor or any property of Guarantor is subject. 27. Legal and Binding Agreement. Guarantor warrants that the execution and performance of this Guaranty will not violate any judicial or administrative order or governmental law or regulation, and that this Guaranty is valid and binding in every respect according to its terms. 28. No Consent Required. Guarantor warrants that Guarantor's execution and performance of this Guaranty do not require the consent of or the giving of notice to any third party including, but not limited to, any other lender, governmental body or regulatory authority. - 5 - 29. Consent to Jurisdiction and Venue. Guarantor hereby irrevocably consents to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Guaranty or the Guaranteed Obligations. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in writing. 30. Not Partners; No Third Party Beneficiaries. Nothing contained herein or in any related document shall be deemed to render Lender a partner of Borrower or Guarantor for any purpose. This Guaranty and any documents securing the Guaranteed Obligations has been executed for the sole benefit of Lender as an inducement to cause it to extend credit to Borrower, and neither Guarantor nor any other third party is authorized to rely upon Lender's rights hereunder or to rely upon an assumption that Lender has or will exercise its rights under any document. 31. Costs of Collection Against Guarantor. Guarantor agrees to pay all costs of collection, including, without limitation, court costs, attorney's fees and compensation for time spent by Lender employees, that Lender may incur in enforcing the terms of this Guaranty against Guarantor. 32. Notices. Any communications concerning this Guaranty or the credit described herein shall be addressed as follows: As to Guarantor: Joe Harris Suite 2950 121 West Trade Street Charlotte, North Carolina 28202 With a copy to: Underwood Kinsey Warren & Tucker, P.A. Charlotte Plaza Building Suite 2020 201 South College Street Charlotte, NC 28244-2020 Attention: Shirley Linn As to Lender: Pacific Capital, L.P. Suite 1070 3100 West End Avenue Nashville, Tennessee 37203 Attention: Clay R. Caroland III Equitas, L.P. 2000 Glen Echo Road - 6 - Suite 101 Nashville, Tennessee 37215 Attn: Shannon LeRoy With a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street Suite 1600 Nashville, Tennessee 37219 Attention: John W. Titus Communications to be given to Lender shall only be effective when set forth in writing and actually received by an officer of Lender at the address indicated above. Communications to be given to Guarantor shall be effective when actually or constructively received by Guarantor or when set forth in writing and mailed or delivered to Guarantor's address stated above. Any party may change its address for receipt of notices by submitting the change in writing to the other party. 33. Indulgence Not Waiver. Lender's indulgence in the existence of a default under the Guaranteed Obligations or any departure from the terms of this Guaranty or any other document shall not prejudice Lender's rights to make demand and recover from Guarantor in accordance with this Guaranty. 34. Cumulative Remedies. The remedies provided Lender in this Guaranty are not exclusive of any other remedies that may be available to Lender under any other document or at law or equity. 35. Amendment and Waiver in Writing. No provision of this Guaranty can be amended or waived, except by a statement in writing signed by the party against which enforcement of the amendment or waiver is sought. 36. Assignment. This Guaranty shall be binding upon heirs, successors and assigns of Guarantor and Lender, except that Guarantor shall not assign any rights or delegate any obligations arising hereunder without the prior written consent of Lender. Any attempted assignment or delegation by Guarantor without the required prior consent shall be void. 37. Severability. Should any provision of this Guaranty be invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect. 38. Applicable Law. The validity, construction and enforcement of this Guaranty and all other documents executed with respect to the Guaranteed Obligations shall be determined according to the laws of Tennessee, in which state this Guaranty has been executed and delivered. 39. Gender and Number. Words used herein indicating gender or number shall be read as context may require. 40. Captions Not Controlling. Captions and headings have been included in this Guaranty for the convenience of the parties, and shall not be construed as affecting the content of the respective paragraphs. - 7 - 41. Commercial Obligations. Guarantor acknowledges that this Guaranty secures commercial, rather than personal, obligations. 42. Entire Agreement; No Oral Representations Limiting Enforcement. This Guaranty represents the entire agreement between the parties concerning the liability of Guarantor for the Guaranteed Obligations, and any oral statements regarding Guarantor's liability for the Guaranteed Obligations are merged herein. Without limiting the foregoing, Guarantor acknowledges Lender's intention to enforce this Guaranty to the fullest extent possible and Guarantor acknowledges that Lender has made no oral statements to Guarantor that could be construed as a waiver of Lender's right to enforce this Guaranty by all available legal means. Executed the date first written above. THE UNDERSIGNED ACKNOWLEDGES A THOROUGH UNDERSTANDING OF THE TERMS OF THIS GUARANTY AND AGREES TO BE BOUND THEREBY: /s/ Joseph M. Harris - ---------------------------- -------------------------------------------- Witness JOE HARRIS ###-##-#### Guarantor's Social Security or Taxpayer I.D. No. _______________________________ - 8 - STATE OF NORTH CAROLINA) COUNTY OF GASTON) Personally appeared before me, the undersigned, a Notary Public in and for said County and State, the within named Joe Harris, the bargainor, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who upon oath acknowledged that he executed the within instrument for the purposes therein contained. Witness my hand and seal, at office in Charlotte, North Carolina, this the 30th day of May, 1997. /s/ Doris F. Pearson --------------------------------------- NOTARY PUBLIC My Commission Expires: 7-4-99 - 9 - EX-10 13 EXHIBIT 10.17 GUARANTY THIS GUARANTY ("Guaranty") is executed as of the 30th day of May, 1997, by VERNON BRANNON ("Guarantor"), resident of the state of North Carolina, in favor of PACIFIC CAPITAL, L.P. ("Pacific"), a Delaware limited partnership, and EQUITAS, L.P. ("Equitas"), a Delaware limited partnership (Pacific and Equitas being sometimes referred to herein collectively as "Lender"). W I T N E S S E T H: WHEREAS, Lender has agreed to extend credit to HLM Design, Inc. ("Borrower"), a Delaware corporation, on certain terms and conditions; and WHEREAS, one condition to Lender's agreement to extend credit to Borrower is that Guarantor must unconditionally guarantee the obligations of Borrower to Lender; NOW, THEREFORE, as an inducement to cause Lender to extend credit to Borrower, and for other valuable consideration, the receipt and sufficiency of which are acknowledged, it is agreed as follows: 1. Definition of Guaranteed Obligations. As used herein, the "Guaranteed Obligations" shall mean all obligations of Guarantor under this Guaranty and all obligations and indebtedness of Borrower, BBH Corp. and/or Hansen Lind Meyer Inc. under that certain Note Purchase Agreement of even date herewith by and between Borrower, BBH Corp., Hansen Lind Meyer Inc. ("HLM"), and Lender (the "Note Purchase Agreement") and under those certain Promissory Notes of even date herewith in the aggregate original principal amount of $2,000,000.00 made by Borrower payable to the order of Lender, or each of them as the case may be, together with all modifications, extensions and renewals thereof. 2. Guaranty of Payment. Guarantor hereby guarantees to Lender the timely payment and performance of the Guaranteed Obligations. 3. Solvency of Guarantor. Guarantor warrants to Lender that Guarantor is not insolvent and that Guarantor's execution hereof does not render Guarantor insolvent, either before or after the consummation of the Merger, for the purpose of state or federal fraudulent transfer laws, other avoidance laws or any other law. 4. Guaranty Unconditional. Guarantor's guarantee of the Guaranteed Obligations is absolute and unconditional, provided that this Guaranty shall only become effective in the event that Guarantor ceases to be employed by Borrower or HLM, whether voluntarily or involuntarily, except if such cessation of employment is due to death, continued disability for a period of at least six (6) months or involuntary termination by the Borrower or HLM without "cause". For purposes of this Agreement, "cause" shall include (i) commission of a fraud or other act of dishonesty by the Guarantor that is likely to have a material adverse effect on the Borrower or HLM, (ii) instigation of a criminal charge against the Guarantor that is likely to have a material adverse effect on the Borrower or HLM, (iii) the failure of Guarantor to faithfully perform the duties and responsibilities assigned to him from time to time by the boards of directors of the Borrower and HLM, after notice and failure of Guarantor to cure within twenty (20) days, (iv) the commission of any acts, or failure to perform any acts, by the Guarantor that cause material disruption to the Borrower's or HLM's business, after notice and failure of Guarantor to cure within twenty (20) days, (v) the failure of Guarantor to adhere to any written employee policies or procedures of Borrower or HLM in any material respect, after notice and failure of Guarantor to cure within twenty (20) days, (vi) the appropriation (or attempted appropriation) by Guarantor of a material business opportunity of the Borrower, including attempting to secure or securing any material personal profit in connection with any transaction entered into on behalf of the Borrower without the prior consent of Borrower's board of directors, or (vii) the occurrence of an event of default under that certain Noncompetition Agreement of even date herewith between Guarantor and Borrower. Except as otherwise provided herein, the validity of this Guaranty shall not be impaired by any event whatsoever, including, but not limited to, the death, disability, or incompetence of Borrower, if Borrower is an individual; the merger, consolidation, dissolution, cessation of business or liquidation of Borrower, if Borrower is a business entity; the financial decline or bankruptcy of Borrower; the failure of any other party to guarantee the Guaranteed Obligations or to provide collateral therefor; Lender's compromise or settlement with or without release of any other party liable for the Guaranteed Obligations; Lender's release of any collateral for the Guaranteed Obligations; Lender's failure to file suit against Borrower (regardless of whether Borrower is becoming insolvent, is believed to be about to leave the state or any other circumstance); Lender's failure to give Guarantor notice of default by Borrower; the unenforceability of the Guaranteed Obligations against Borrower, due to bankruptcy discharge or otherwise; the availability to Borrower of any setoff, counterclaim or defense against Lender; Lender's acceleration of the Guaranteed Obligations at any time; the extension, modification or renewal of the Guaranteed Obligations; Lender's failure to exercise diligence in collection; the termination of any relationship of Guarantor with Borrower, including, but not limited to, any relationship of employment, ownership, commerce, or marriage; Borrower's change of name or use of any name other than the name used to identify Borrower in this Guaranty; or Borrower's use of the credit extended for any purpose whatsoever. Each advance of credit by Lender to Borrower following the execution hereof shall be deemed made in reliance upon the continued operation of this Guaranty and shall constitute additional consideration for Guarantor's execution of this Guaranty. Guarantor agrees that this Guaranty shall be valid and binding upon Guarantor upon the delivery of this executed Guaranty to Lender by any party whomsoever. 5. Guaranty Irrevocable. Guarantor's guarantee of the Guaranteed Obligations is irrevocable; provided, however, Guarantor may at any time by written notice to Lender prospectively terminate Guarantor's liability for any advances made by Lender subsequent to Lender's receipt of the termination notice, except for any advance that Lender had previously committed to make. After the delivery of such notice to Lender, Guarantor shall remain fully liable for all principal, interest and expenses outstanding as of the time of Lender's receipt of the cancellation hereof; for all interest subsequently accruing thereon and for all expenses subsequently incurred by Lender with respect thereto; and for all subsequent principal advances that Lender may have previously committed to make (regardless of whether Lender waived any default or condition precedent in actually making the advance(s)), together with all interest thereon and expenses related thereto. The renewal or extension of the maturity of obligations covered by this paragraph shall not relieve Guarantor of continuing liability therefor. 6. Primary Liability of Guarantor. This Guaranty constitutes a guarantee of payment and performance and not of collection. Accordingly, Lender may enforce this Guaranty against Guarantor without first making demand upon or instituting collection proceedings against Borrower. Guarantor's liability for the Guaranteed Obligations is hereby declared to be primary, and not secondary, and Guarantor may be called upon hereunder to make any payment when due under the Guaranteed Obligations irrespective of the existence of any default thereunder. Each document presently or hereafter executed by Borrower to evidence or secure an obligation to Lender is incorporated herein by reference and shall be fully enforceable against Guarantor. - 2 - 7. No Marshalling of Assets. Lender may proceed against any collateral securing the Guaranteed Obligations and against parties liable therefor in such order as it may elect, and Guarantor shall not be entitled to require Lender to marshall assets. The benefit of any rule of law or equity to the contrary is hereby expressly waived. 8. Impairment of Collateral; Release of Liable Parties. Lender may, in its sole discretion and with or without consideration, release any collateral securing the Guaranteed Obligations or release any party liable therefor. The defenses of impairment of collateral and impairment of recourse and any requirement of diligence on Lender's part in collecting the Guaranteed Obligations are hereby waived. 9. Amendment of Guaranteed Obligations. Lender may, without notice to or the joinder of Guarantor and without affecting Guarantor's liability hereunder, modify, extend, accelerate, reinstate, refinance, or renew the Guaranteed Obligations (with or without the execution of new Promissory Notes) and grant any consent or indulgence with respect thereto. 10. Waivers of Notice. Guarantor hereby waives any requirement of presentment, protest, notice of dishonor, notice of default, demand, and all other actions or notices that may be required on Lender's part in connection with the Guaranteed Obligations. 11. Subordination. Guarantor agrees that any existing or future loan made by Guarantor to Borrower and any other existing or future obligation of Borrower to Guarantor shall be subordinate to the Guaranteed Obligations as to both payment and collection. Accordingly, Guarantor agrees not to accept any payment whatsoever from Borrower (except for reasonable salary, bonus approved by the board of directors of Borrower, and reimbursement of necessary and reasonable business expenses, unless Lender notifies Guarantor to the contrary) or to allow any payment by Borrower on Guarantor's behalf until this Guaranty has been terminated in full. Guarantor hereby grants Lender a security interest in all accounts owed Guarantor by Borrower and in all instruments, chattel paper and other property now or hereafter evidencing obligations of Borrower to Guarantor, together with all collateral therefor. Lender may file this Guaranty (or a copy hereof) as a financing statement with respect thereto, or Lender may require Guarantor to execute a separate financing statement with respect thereto, or Lender may require Guarantor to take any other action necessary to perfect Lender's security interest therein, at Guarantor's expense. Without limiting the foregoing, all such property owned by Guarantor in which a security interest may be perfected by possession shall be delivered to Lender immediately as made available to Guarantor. Guarantor agrees that, in the event of a bankruptcy or other insolvency proceeding involving Borrower, Guarantor will timely file a claim for the amount of the subordinated debt, in form approved by Lender. Guarantor agrees to pursue said claim with diligence and to comply with any instructions from Lender pertaining to the pursuit of the claim. The proceeds of any such claim shall be delivered to Lender. 12. Subrogation of Guarantor. Guarantor shall not be subrogated to any rights of Lender against Borrower until the Guaranteed Obligations have been paid in full. 13. Statute of Limitations. Guarantor acknowledges that the statute of limitation applicable to this Guaranty shall begin to run only upon Lender's accrual of a cause of action against Guarantor hereunder caused by Guarantor's refusal to honor a demand for performance hereunder made by Lender in writing; provided, however, if, subsequent to the demand upon Guarantor, Lender reaches an agreement with Borrower on any terms causing Lender to forbear in the enforcement of its demand upon Guarantor, the statute of limitation shall be reinstated for its full duration until Lender subsequently again makes demand upon Guarantor. - 3 - 14. Death of Guarantor. In the event of the death of Guarantor and provided that this Guaranty has become effective in accordance with section 4 hereof prior to the date of death, the obligation of Guarantor shall continue in full force and effect against Guarantor's estate, and the executor or administrator of such estate shall be obligated and authorized to pay such debt and otherwise honor this Guaranty, and, if acceptable to Lender, to execute renewal Guaranties or endorsements or notes or other evidences of indebtedness, from time to time, with respect to any unpaid obligations hereunder. In the event of the death of Guarantor and provided that this Guaranty has not become effective in accordance with section 4 hereof prior to the date of death, Guarantor's obligations pursuant to this Guaranty shall be cancelled. 15. Cancellation by Lender. Lender may evidence its cancellation of this Guaranty and the release of Guarantor from liability hereunder by delivering to Guarantor an instrument of release, or by delivering this Guaranty to Guarantor, or both. Unless Lender delivers this original Guaranty to Guarantor with a notation on its face signed and dated by an authorized officer of Lender stating "Cancelled in Full As To All Guaranteed Obligations," however, the purported cancellation hereof and release of Guarantor shall not impair Guarantor's continuing liability for (a) any amount of principal, interest, or expenses that was mistakenly omitted by Lender in calculating the final payment due under the Guaranteed Obligations, if the release of Guarantor was based upon Lender's belief that it had been paid in full; (b) any surviving liability of Borrower to reimburse Lender for expenses or to indemnify Lender provided for in any document executed prior to the purported cancellation hereof evidencing or securing the Guaranteed Obligations; and (c) liability for avoided payments and expenses related thereto (as provided in detail below). Lender shall not be obligated to release any collateral securing this Guaranty until after all applicable time periods have expired regarding bankruptcy preferences or other avoidance actions that may be applicable to the circumstances of payment of any or all of the Guaranteed Obligations. 16. Recovery of Avoided Payments. If any amount applied by Lender to the Guaranteed Obligations is subsequently challenged by a bankruptcy trustee or debtor-in-possession as an avoidable transfer on the grounds that the payment constituted a preferential payment or a fraudulent conveyance under state law or the Bankruptcy Code or any successor statute thereto or on any other grounds, Lender may, at its option and in its sole discretion, elect whether to contest such challenge. If Lender contests the avoidance action, all costs of the proceeding, including Lender's attorneys fees, will become part of the Guaranteed Obligations. If the contested amount is successfully avoided, the avoided amount will become part of the Guaranteed Obligations hereunder. If Lender elects not to contest the avoidance action, Lender may tender the amount subject to the avoidance action to the bankruptcy court, trustee or debtor-in-possession and the amount so advanced shall become part of the Guaranteed Obligations hereunder. Guarantor's obligation to reimburse Lender for amounts due under this paragraph shall survive the purported cancellation hereof except as otherwise provided above. 17. Disclosure of Litigation. Guarantor warrants that, except as disclosed to Lender in writing, Guarantor is not presently a defendant in any pending litigation, arbitration or administrative proceeding or the subject of any investigation; that there is no arbitration, administrative proceeding or investigation threatened against Guarantor; and that Guarantor is not subject to any outstanding court or administrative order. Guarantor covenants to give Lender prompt written notice of any litigation, administrative proceeding or investigation that may hereafter be instituted or threatened against Guarantor, whether or not Guarantor's liability under such proceeding would be covered by insurance. 18. Financial Statements. Guarantor warrants that, except as disclosed to Lender in writing, Guarantor's financial statements delivered to Lender in connection with the Guaranteed Obligations have been prepared in accordance with generally accepted accounting principles, consistently applied, and are true, accurate and complete in every respect. Guarantor acknowledges that Lender has advanced (or committed - 4 - to advance) the Guaranteed Obligations in reliance upon such financial statements, and Guarantor warrants that no material change has occurred in Guarantor's financial condition as set forth in such financial statements. Guarantor covenants to furnish to Lender, upon demand, copies of Guarantor's tax returns and additional financial statements in form and substance acceptable to Lender. 19. Changes in Financial Condition. Guarantor covenants to give Lender prompt written notice of the creation or discovery of any additional contingent liability or the occurrence of any other material adverse change in the financial condition of Guarantor. 20. No Unpaid Taxes. Guarantor warrants that Guarantor is not presently delinquent in the payment of any taxes imposed by any governmental authority or in the filing of any tax return and that Guarantor is not involved in a dispute with any taxing authority over tax amounts due. Guarantor covenants that all future taxes assessed against Guarantor shall be timely paid and that all tax returns required of Guarantor shall be timely filed. 21. Compliance with Law. Guarantor warrants that Guarantor's business activities are conducted in accordance with all applicable laws and regulations, and Guarantor covenants that such activities shall continue to be so conducted. 22. Assistance in Litigation. Guarantor covenants to, upon request, cooperatively participate in any proceeding in which Guarantor is not an adverse party to Lender and which concerns Lender's rights regarding the Guaranteed Obligations or any collateral securing its payment. 23. Solvency of Guarantor. Guarantor warrants to Lender that Guarantor is not insolvent and that Guarantor's execution hereof does not render Guarantor insolvent. 24. Security Interest; Setoff. In order to further secure the payment of the Guaranteed Obligations, Guarantor hereby grants to Lender a security interest and right of setoff against all of Guarantor's presently owned or hereafter acquired monies, items, credits, deposits and instruments (including certificates of deposit) presently or hereafter in the possession of Lender. By maintaining any such accounts or other property at Lender, Guarantor acknowledges that Guarantor voluntarily subjects the property to Lender's rights hereunder. 25. Recitals. Guarantor warrants and agrees that the recitals set forth at the beginning of this Guaranty are true. 26. No Burdensome Agreements. Guarantor warrants that the execution and performance of this Guaranty will not cause a default under any other contract or agreement to which Guarantor or any property of Guarantor is subject. 27. Legal and Binding Agreement. Guarantor warrants that the execution and performance of this Guaranty will not violate any judicial or administrative order or governmental law or regulation, and that this Guaranty is valid and binding in every respect according to its terms. 28. No Consent Required. Guarantor warrants that Guarantor's execution and performance of this Guaranty do not require the consent of or the giving of notice to any third party including, but not limited to, any other lender, governmental body or regulatory authority. - 5 - 29. Consent to Jurisdiction and Venue. Guarantor hereby irrevocably consents to the jurisdiction of the United States District Court for the Middle District of Tennessee and of all Tennessee state courts sitting in Davidson County, Tennessee, for the purpose of any litigation to which Lender may be a party and which concerns this Guaranty or the Guaranteed Obligations. It is further agreed that venue for any such action shall lie exclusively with courts sitting in Davidson County, Tennessee, unless Lender agrees to the contrary in writing. 30. Not Partners; No Third Party Beneficiaries. Nothing contained herein or in any related document shall be deemed to render Lender a partner of Borrower or Guarantor for any purpose. This Guaranty and any documents securing the Guaranteed Obligations has been executed for the sole benefit of Lender as an inducement to cause it to extend credit to Borrower, and neither Guarantor nor any other third party is authorized to rely upon Lender's rights hereunder or to rely upon an assumption that Lender has or will exercise its rights under any document. 31. Costs of Collection Against Guarantor. Guarantor agrees to pay all costs of collection, including, without limitation, court costs, attorney's fees and compensation for time spent by Lender employees, that Lender may incur in enforcing the terms of this Guaranty against Guarantor. 32. Notices. Any communications concerning this Guaranty or the credit described herein shall be addressed as follows: As to Guarantor: Vernon Brannon Suite 2950 121 West Trade Street Charlotte, North Carolina 28202 With a copy to: Underwood Kinsey Warren & Tucker, P.A. Charlotte Plaza Building Suite 2020 201 South College Street Charlotte, NC 28244-2020 Attention: Shirley Linn As to Lender: Pacific Capital, L.P. Suite 1070 3100 West End Avenue Nashville, Tennessee 37203 Attention: Clay R. Caroland III Equitas, L.P. 2000 Glen Echo Road - 6 - Suite 101 Nashville, Tennessee 37215 Attn: Shannon LeRoy With a copy to: Boult, Cummings, Conners & Berry, PLC 414 Union Street Suite 1600 Nashville, Tennessee 37219 Attention: John W. Titus Communications to be given to Lender shall only be effective when set forth in writing and actually received by an officer of Lender at the address indicated above. Communications to be given to Guarantor shall be effective when actually or constructively received by Guarantor or when set forth in writing and mailed or delivered to Guarantor's address stated above. Any party may change its address for receipt of notices by submitting the change in writing to the other party. 33. Indulgence Not Waiver. Lender's indulgence in the existence of a default under the Guaranteed Obligations or any departure from the terms of this Guaranty or any other document shall not prejudice Lender's rights to make demand and recover from Guarantor in accordance with this Guaranty. 34. Cumulative Remedies. The remedies provided Lender in this Guaranty are not exclusive of any other remedies that may be available to Lender under any other document or at law or equity. 35. Amendment and Waiver in Writing. No provision of this Guaranty can be amended or waived, except by a statement in writing signed by the party against which enforcement of the amendment or waiver is sought. 36. Assignment. This Guaranty shall be binding upon heirs, successors and assigns of Guarantor and Lender, except that Guarantor shall not assign any rights or delegate any obligations arising hereunder without the prior written consent of Lender. Any attempted assignment or delegation by Guarantor without the required prior consent shall be void. 37. Severability. Should any provision of this Guaranty be invalid or unenforceable for any reason, the remaining provisions hereof shall remain in full effect. 38. Applicable Law. The validity, construction and enforcement of this Guaranty and all other documents executed with respect to the Guaranteed Obligations shall be determined according to the laws of Tennessee, in which state this Guaranty has been executed and delivered. 39. Gender and Number. Words used herein indicating gender or number shall be read as context may require. 40. Captions Not Controlling. Captions and headings have been included in this Guaranty for the convenience of the parties, and shall not be construed as affecting the content of the respective paragraphs. - 7 - 41. Commercial Obligations. Guarantor acknowledges that this Guaranty secures commercial, rather than personal, obligations. 42. Entire Agreement; No Oral Representations Limiting Enforcement. This Guaranty represents the entire agreement between the parties concerning the liability of Guarantor for the Guaranteed Obligations, and any oral statements regarding Guarantor's liability for the Guaranteed Obligations are merged herein. Without limiting the foregoing, Guarantor acknowledges Lender's intention to enforce this Guaranty to the fullest extent possible and Guarantor acknowledges that Lender has made no oral statements to Guarantor that could be construed as a waiver of Lender's right to enforce this Guaranty by all available legal means. Executed the date first written above. THE UNDERSIGNED ACKNOWLEDGES A THOROUGH UNDERSTANDING OF THE TERMS OF THIS GUARANTY AND AGREES TO BE BOUND THEREBY: /s/ Vernon B. Brannon - ---------------------------- -------------------------------------------- Witness VERNON BRANNON ###-##-#### Guarantor's Social Security or Taxpayer I.D. No. _______________________________ - 8 - STATE OF NORTH CAROLINA) COUNTY OF GASTON) Personally appeared before me, the undersigned, a Notary Public in and for said County and State, the within named Vernon Brannon, the bargainor, with whom I am personally acquainted (or proved to me on the basis of satisfactory evidence), and who upon oath acknowledged that he executed the within instrument for the purposes therein contained. Witness my hand and seal, at office in Charlotte, North Carolina, this the 30th day of May, 1997. /s/ Doris F. Pearson -------------------------- NOTARY PUBLIC My Commission Expires: 7-4-99 - 9 - EX-10 14 EXHIBIT 10.18 NONCOMPETITION AGREEMENT This Noncompetition Agreement (this "Agreement") is made as of May 30, 1997, by and between, HLM Design, Inc., a Delaware corporation (the "Company"), Hansen Lind Meyer, Inc., an Iowa corporation ("HLM") and Joe Harris, an individual residing at _____________________________________ ("Harris"). WITNESSETH: WHEREAS, Harris is an employee of the Company and HLM and as such has access to confidential information about the Company and HLM and their businesses; and WHEREAS, the Company has negotiated with Pacific Capital, L.P. and Equitas, L.P. (the "Lenders") to borrow the sum of $2,000,000, all or a portion of which will be lent by the Company to BBH Corp., a company that has entered into a Merger Agreement to merge with and into HLM, and such Lenders have required as a condition to such loan that Harris enter into a Noncompetition Agreement with the Company and HLM; and WHEREAS, in order to protect the Company, HLM, their shareholders and creditors, Harris has agreed not to compete with the Company or HLM pursuant to and in accordance with the terms of this Noncompetition Agreement. NOW, THEREFORE, for and in consideration of the premises set forth above and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. ACKNOWLEDGMENTS BY Harris Harris acknowledges that (a) Harris has occupied a position of trust and confidence with the Company and HLM prior to the date hereof and has become familiar with the following, any and all of which constitute confidential information of the Company and HLM, (collectively the "Confidential Information"): (i) any and all trade secrets concerning the business and affairs of the Company and HLM, product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current and planned research and development, current and planned manufacturing and distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures and architectures (and related processes, formulae, compositions, improvements, devices, know-how, inventions, discoveries, concepts, ideas, 1 designs, methods and any other information, however documented, of the Company or HLM that is a trade secret under any applicable law; (ii) any and all information concerning the business and affairs of the Company or HLM (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials) however documented; and (iii) any and all notes, analysis, compilations, studies, summaries, and other material prepared by or for the Company or HLM containing or based, in whole or in part, on any information included in the foregoing, (b) the business of the Company and HLM is national in scope, (c) their products and services are marketed throughout the United States; (d) the Company and HLM compete with other businesses that are or could be located in any part of the United States; (e) the Company and HLM have required that Harris make the covenants set forth in Sections 3 and 4 of this Agreement as a condition to Harris's continued employment with the Company and HLM and the Lenders have required that Harris make the covenants set forth in Sections 3 and 4 of this Agreement as a condition to making the loan to the Company; (f) the provisions of Sections 3 and 4 of this Agreement are reasonable and necessary to protect and preserve the business of the Company and HLM, and (g) the Company and HLM would be irreparably damaged if Harris were to breach the covenants set forth in Sections 3 and 4 of this Agreement. 3. CONFIDENTIAL INFORMATION Harris acknowledges and agrees that all Confidential Information known or obtained by Harris, whether before or after the date hereof, is the property of the Company and HLM. Therefore, Harris agrees that Harris will not, at any time, disclose to any unauthorized Persons or use for his own account or for the benefit of any third party any Confidential Information, whether Harris has such information in Harris's memory or embodied in writing or other physical form, without written consent from the Company or HLM, as applicable, unless and to the extent that the Confidential Information is or becomes generally known to and available for use by the public other than as a result of Harris's fault or the fault of any other person bound by a duty of confidentiality to the Company or HLM. 4. NONCOMPETITION As an inducement for the Company and HLM to continue to employee Harris and as an inducement for the Lenders to extend credit to the Company, Harris agrees that: (a) During the period of Harris's continued employment by the Company and HLM or any company that the Company owns or manages, and for a period of three years thereafter (or until his death if the earlier to occur): (i) Harris will not, directly or indirectly, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend Harris's name or 2 any similar name to, lend Harris's credit to, or render services or advice to, any business which provides architectural or engineering services to persons who were clients of, or directly identified as prospective clients of, the Company or HLM at any time during the twelve (12) month period immediately prior to such business providing such architectural or engineering services, anywhere within the United States; provided, however, that Harris may purchase or otherwise acquire up to (but not more than) one percent of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934. Harris agrees that this covenant is reasonable with respect to its duration, geographical area, and scope. (ii) Harris will not, directly or indirectly, either for himself or any other Person, (A) induce or attempt to induce any employee of the Company of HLM to leave the employ of the Company or HLM, as applicable, (B) in any way interfere with the relationship between the Company or HLM and any of their respective employees, (C) employ, or otherwise engage as an employee, independent contractor, or otherwise, any employee of the Company or HLM, or (D) induce or attempt to induce any customer, supplier, licensee, or business relation of the Company or HLM to cease doing business with the Company or HLM, as applicable, or in any way interfere with the relationship between any customer, supplier, licensee, or business relation of the Company or HLM. (iii) Harris will not, directly or indirectly, either for himself or any other person, solicit the business of any person known to Harris to be a customer of the Company or HLM, whether or not Harris had personal contact with such person, with respect to products, services or activities which compete in whole or in part with the products, services or activities of the Company or HLM; (b) In the event of a breach by Harris of any covenant set forth in Subsection 4(a) of this Agreement, the term of such covenant will be extended by the period of the duration of such breach; (c) Harris will not, at any time during or after the period of the noncompetition provided in Subsection 4(a) of this Agreement, disparage the Company or HLM, or any of their shareholders, directors, officers, employees, or agents; and (d) Harris will, for a period of three years after Harris's termination as an employee of the Company and any company that the Company owns or manages, within ten days after accepting any employment, advise the Company of the identity of any employer of Harris. The Company may serve notice upon each such employer that Harris is bound by this Agreement and furnish each such employer with a copy of this Agreement or relevant portions thereof. 5. REMEDIES 3 Harris shall be considered to be in "default" and an "event of default" shall be considered to have occurred hereunder if a period of thirty (30) days has passed since Harris has been notified that he has breached his obligations under this Agreement, and Harris has failed to cure such breach within such period of time. If Harris breaches the covenants set forth in Sections 3 or 4 of this Agreement and the applicable cure period as set forth above has expired, the Company and HLM will be entitled to the following remedies: (a) Damages from Harris; and (b) In addition to its right to damages and any other rights it may have, the right to obtain injunctive or other equitable relief to restrain any breach or threatened breach or otherwise to specifically enforce the provisions of Sections 3 and 4 of this Agreement, it being agreed that money damages alone would be inadequate to compensate the Buyer and the Company and would be an inadequate remedy for such breach. (c) The rights and remedies of the parties to this Agreement are cumulative and not alternative. In addition to the remedies set forth above, if Harris breaches the covenants set forth in Sections 3 or 4 of this Agreement and the applicable cure period as set forth above has expired, the Lenders may assert their rights pursuant to that certain Guaranty Agreement of even date herewith executed by Harris. 6. SUCCESSORS AND ASSIGNS This Agreement will be binding upon the Company and HLM and Harris and will inure to the benefit of the Company and HLM and their affiliates, successors and assigns and Harris and Harris's assigns, heirs and legal representatives. 7. WAIVER The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a 4 waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement. 8. GOVERNING LAW This Agreement will be governed by the laws of the State of North Carolina without regard to conflicts of laws principles. 9. SEVERABILITY Whenever possible each provision and term of this Agreement will be interpreted in a manner to be effective and valid but if any provision or term of this Agreement is held to be prohibited by or invalid, then such provision or term will be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting in any manner whatsoever the remainder of such provision or term or the remaining provisions or terms of this Agreement. If any of the covenants set forth in Sections 3 or 4 of this Agreement are held to be unreasonable, arbitrary, against public policy or otherwise invalid, such covenants will be considered divisible with respect to scope, time, and geographic area, and in such lesser scope, time and geographic area, will be effective, binding and enforceable against Harris. 10. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 11. SECTION HEADINGS, CONSTRUCTION The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 12. NOTICES All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the 5 appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): Harris: Joe Harris __________________ __________________ The Company: HLM Design, Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 HLM: Hansen Lind Meyer Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 13. ENTIRE AGREEMENT This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior written and oral agreements and understandings between the Company, HLM and Harris with respect to the subject matter of this Agreement. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. 6 IN WITNESS WHEREOF, the parties have executed and delivered this Noncompetition Agreement as of the date first above written. /s/ Joseph Harris JOE HARRIS HLM DESIGN, INC. By: /s/ Vernon B. Brannon Its: Vice President HANSEN LIND MEYER INC. By: /s/ Vernon B. Brannon Its: Vice President 7 EX-10 15 EXHIBIT 10.19 NONCOMPETITION AGREEMENT This Noncompetition Agreement (this "Agreement") is made as of May 30, 1997, by and between, HLM Design, Inc., a Delaware corporation (the "Company"), Hansen Lind Meyer, Inc., an Iowa corporation ("HLM") and Vernon Brannon, an individual residing at 5301 Mirabell Road, Charlotte, North Carolina ("Brannon"). WITNESSETH: WHEREAS, Brannon is an employee of the Company and HLM and as such has access to confidential information about the Company and HLM and their businesses; and WHEREAS, the Company has negotiated with Pacific Capital, L.P. and Equitas, L.P. (the "Lenders") to borrow the sum of $2,000,000, all or a portion of which will be lent by the Company to BBH Corp., a company that has entered into a Merger Agreement to merge with and into HLM, and such Lenders have required as a condition to such loan that Brannon enter into a Noncompetition Agreement with the Company and HLM; and WHEREAS, in order to protect the Company, HLM, their shareholders and creditors, Brannon has agreed not to compete with the Company or HLM pursuant to and in accordance with the terms of this Noncompetition Agreement. NOW, THEREFORE, for and in consideration of the premises set forth above and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. ACKNOWLEDGMENTS BY BRANNON Brannon acknowledges that (a) Brannon has occupied a position of trust and confidence with the Company and HLM prior to the date hereof and has become familiar with the following, any and all of which constitute confidential information of the Company and HLM, (collectively the "Confidential Information"): (i) any and all trade secrets concerning the business and affairs of the Company and HLM, product specifications, data, know-how, formulae, compositions, processes, designs, sketches, photographs, graphs, drawings, samples, inventions and ideas, past, current and planned research and development, current and planned manufacturing and distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer software and programs (including object code and source code), computer software and database technologies, systems, structures and architectures (and related processes, formulae, compositions, improvements, devices, know-how, inventions, discoveries, concepts, ideas, 1 designs, methods and any other information, however documented, of the Company or HLM that is a trade secret under any applicable law; (ii) any and all information concerning the business and affairs of the Company or HLM (which includes historical financial statements, financial projections and budgets, historical and projected sales, capital spending budgets and plans, the names and backgrounds of key personnel, personnel training and techniques and materials) however documented; and (iii) any and all notes, analysis, compilations, studies, summaries, and other material prepared by or for the Company or HLM containing or based, in whole or in part, on any information included in the foregoing, (b) the business of the Company and HLM is national in scope, (c) their products and services are marketed throughout the United States; (d) the Company and HLM compete with other businesses that are or could be located in any part of the United States; (e) the Company and HLM have required that Brannon make the covenants set forth in Sections 3 and 4 of this Agreement as a condition to Brannon's continued employment with the Company and HLM and the Lenders have required that Brannon make the covenants set forth in Sections 3 and 4 of this Agreement as a condition to making the loan to the Company; (f) the provisions of Sections 3 and 4 of this Agreement are reasonable and necessary to protect and preserve the business of the Company and HLM, and (g) the Company and HLM would be irreparably damaged if Brannon were to breach the covenants set forth in Sections 3 and 4 of this Agreement. 3. CONFIDENTIAL INFORMATION Brannon acknowledges and agrees that all Confidential Information known or obtained by Brannon, whether before or after the date hereof, is the property of the Company and HLM. Therefore, Brannon agrees that Brannon will not, at any time, disclose to any unauthorized Persons or use for his own account or for the benefit of any third party any Confidential Information, whether Brannon has such information in Brannon's memory or embodied in writing or other physical form, without written consent from the Company or HLM, as applicable, unless and to the extent that the Confidential Information is or becomes generally known to and available for use by the public other than as a result of Brannon's fault or the fault of any other person bound by a duty of confidentiality to the Company or HLM. 4. NONCOMPETITION As an inducement for the Company and HLM to continue to employee Brannon and as an inducement for the Lenders to extend credit to the Company, Brannon agrees that: (a) During the period of Brannon's continued employment by the Company and HLM or any company that the Company owns or manages, and for a period of three years thereafter (or until his death if the earlier to occur): (i) Brannon will not, directly or indirectly, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend Brannon's name 2 or any similar name to, lend Brannon's credit to, or render services or advice to, any business which provides architectural or engineering services to persons who were clients of, or directly identified as prospective clients of, the Company or HLM at any time during the twelve (12) month period immediately prior to such business providing such architectural or engineering services, anywhere within the United States; provided, however, that Brannon may purchase or otherwise acquire up to (but not more than) one percent of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934. Brannon agrees that this covenant is reasonable with respect to its duration, geographical area, and scope. (ii) Brannon will not, directly or indirectly, either for himself or any other Person, (A) induce or attempt to induce any employee of the Company of HLM to leave the employ of the Company or HLM, as applicable, (B) in any way interfere with the relationship between the Company or HLM and any of their respective employees, (C) employ, or otherwise engage as an employee, independent contractor, or otherwise, any employee of the Company or HLM, or (D) induce or attempt to induce any customer, supplier, licensee, or business relation of the Company or HLM to cease doing business with the Company or HLM, as applicable, or in any way interfere with the relationship between any customer, supplier, licensee, or business relation of the Company or HLM. (iii) Brannon will not, directly or indirectly, either for himself or any other person, solicit the business of any person known to Brannon to be a customer of the Company or HLM, whether or not Brannon had personal contact with such person, with respect to products, services or activities which compete in whole or in part with the products, services or activities of the Company or HLM; (b) In the event of a breach by Brannon of any covenant set forth in Subsection 4(a) of this Agreement, the term of such covenant will be extended by the period of the duration of such breach; (c) Brannon will not, at any time during or after the period of the noncompetition provided in Subsection 4(a) of this Agreement, disparage the Company or HLM, or any of their shareholders, directors, officers, employees, or agents; and (d) Brannon will, for a period of three years after Brannon's termination as an employee of the Company and any company that the Company owns or manages, within ten days after accepting any employment, advise the Company of the identity of any employer of Brannon. The Company may serve notice upon each such employer that Brannon is bound by this Agreement and furnish each such employer with a copy of this Agreement or relevant portions thereof. 5. REMEDIES 3 Brannon shall be considered to be in "default" and an "event of default" shall be considered to have occurred hereunder if a period of thirty (30) days has passed since Brannon has been notified that he has breached his obligations under this Agreement, and Brannon has failed to cure such breach within such period of time. If Brannon breaches the covenants set forth in Sections 3 or 4 of this Agreement and the applicable cure period as set forth above has expired, the Company and HLM will be entitled to the following remedies: (a) Damages from Brannon; and (b) In addition to its right to damages and any other rights it may have, the right to obtain injunctive or other equitable relief to restrain any breach or threatened breach or otherwise to specifically enforce the provisions of Sections 3 and 4 of this Agreement, it being agreed that money damages alone would be inadequate to compensate the Buyer and the Company and would be an inadequate remedy for such breach. (c) The rights and remedies of the parties to this Agreement are cumulative and not alternative. In addition to the remedies set forth above, if Brannon breaches the covenants set forth in Sections 3 or 4 of this Agreement and the applicable cure period as set forth above has expired, the Lenders may assert their rights pursuant to that certain Guaranty Agreement of even date herewith executed by Brannon. 6. SUCCESSORS AND ASSIGNS This Agreement will be binding upon the Company and HLM and Brannon and will inure to the benefit of the Company and HLM and their affiliates, successors and assigns and Brannon and Brannon's assigns, heirs and legal representatives. 7. WAIVER The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by any party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a 4 waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement. 8. GOVERNING LAW This Agreement will be governed by the laws of the State of North Carolina without regard to conflicts of laws principles. 9. SEVERABILITY Whenever possible each provision and term of this Agreement will be interpreted in a manner to be effective and valid but if any provision or term of this Agreement is held to be prohibited by or invalid, then such provision or term will be ineffective only to the extent of such prohibition or invalidity, without invalidating or affecting in any manner whatsoever the remainder of such provision or term or the remaining provisions or terms of this Agreement. If any of the covenants set forth in Sections 3 or 4 of this Agreement are held to be unreasonable, arbitrary, against public policy or otherwise invalid, such covenants will be considered divisible with respect to scope, time, and geographic area, and in such lesser scope, time and geographic area, will be effective, binding and enforceable against Brannon. 10. COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 11. SECTION HEADINGS, CONSTRUCTION The headings of Sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "Section" or "Sections" refer to the corresponding Section or Sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 12. NOTICES All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the 5 appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): Brannon: Vernon Brannon 5301 Mirabell Road Charlotte, NC 28226 The Company: HLM Design, Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 HLM: Hansen Lind Meyer Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 13. ENTIRE AGREEMENT This Agreement constitutes the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior written and oral agreements and understandings between the Company, HLM and Brannon with respect to the subject matter of this Agreement. This Agreement may not be amended except by a written agreement executed by the party to be charged with the amendment. 6 IN WITNESS WHEREOF, the parties have executed and delivered this Noncompetition Agreement as of the date first above written. /s/ Vernon B. Brannon --------------------- VERNON BRANNON HLM DESIGN, INC. By: /s/ Joseph Harris Its: President HANSEN LIND MEYER INC. By: /s/ Joseph Harris Its: President 7 EX-10 16 EXHIBIT 10.23 HLM DESIGN, INC. 1998 STOCK OPTION PLAN ----------------------- 1. PURPOSES OF PLAN. The purposes of the Plan, which shall be known as the HLM Design, Inc. 1998 Stock Option Plan and is hereinafter referred to as the "Plan", are (i) to provide incentives for key employees, directors, consultants and other individuals providing services to HLM Design, Inc. (the "Company") and its subsidiaries (within the meaning of Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"), each of which is referred to herein as a "Subsidiary") by encouraging their ownership of the Common Stock, $.01 par value, of the Company (the "Stock") and (ii) to aid the Company in retaining such key employees, directors, consultants and other individuals upon whose efforts the Company's success and future growth depends, and attracting other such employees, directors, consultants and other individuals. 2. ADMINISTRATION. The Plan shall be administered by a committee of the Board of Directors of the Company (the "Committee"). The Committee shall be appointed from time to time by the Board of Directors of the Company (the "Board of Directors") and shall consist of not fewer than two of its members. Each Committee member shall be a "non-employee director" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Act"). In the event that no such Committee exists or is appointed, the powers to be exercised by the Committee hereunder shall be exercised by the Board of Directors. For purposes of administration, the Committee, subject to the terms of the Plan, shall have plenary authority to establish such rules and procedures, to make such determinations and interpretations, and to take such other administrative actions, as it deems necessary or advisable. All determinations and interpretations made by the Committee shall be final, conclusive and binding on all persons, including those granted options hereunder ("Optionees") and their legal representatives and beneficiaries. Notwithstanding any other provisions of the Plan, the Committee may impose such conditions on any options as may be required to satisfy the requirements of Rule 16b-3 of the Act or Section 162(m) of the Code. The Committee shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by all members shall be as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary (who need not be a member of the Committee). No member of the Committee shall be liable for any act or omission with respect to such member's service on the Committee, if such member acts in good faith and in a manner he or she reasonably believes to be in or not opposed to the best interests of the Company. 3. STOCK AVAILABLE FOR OPTIONS. There shall be available for options under the Plan a total of 138,000 shares of Stock, subject to any adjustments which may be made pursuant to Section 5(f) hereof. Shares of Stock used for purposes of the Plan may be either authorized and unissued shares, or previously issued shares held in the treasury of the Company, or both. Shares of Stock covered by options which have 1 terminated or expired prior to exercise or which have been tendered as payment upon exercise of other options pursuant to Section 5(c) shall be available for further option grants hereunder. 4. ELIGIBILITY. Options under the Plan may be granted to key employees of the Company or any Subsidiary, including officers or directors of the Company or any Subsidiary, and to directors, consultants and other individuals providing services to the Company or any Subsidiary. Options may be granted to eligible employees whether or not they hold or have held options previously granted under the Plan or otherwise granted or assumed by the Company. In selecting employees for options, the Committee may take into consideration any factors it may deem relevant, including its estimate of the employee's present and potential contributions to the success of the Company and its Subsidiaries. Service as a director, officer or consultant of or to the Company or any Subsidiary shall be considered employment for purposes of the Plan (and the period of such service shall be considered the period of employment for purposes of Section 5(d) of the Plan); provided, however, that incentive stock options may be granted under the Plan only to an individual who is an "employee" (as such term is used in Section 422 of the Code) of the Company or any Subsidiary. 5. TERMS AND CONDITIONS OF OPTIONS. The Committee shall, in its discretion, prescribe the terms and conditions of the options to be granted hereunder, which terms and conditions need not be the same in each case, subject to the following: (a) OPTION PRICE. The price at which each share of Stock covered by an incentive stock option granted under the Plan may be purchased shall not be less than the market value per share of Stock on the date of grant of the option. In the case of any option intended to be an incentive stock option granted to an individual owning (directly or by attribution as provided in Section 424(d) of the Code), on the date of grant, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary (which individual shall hereinafter be referred to as a "10% Stockholder"), the price at which each share of Stock covered by the option may be purchased shall not be less than 110% of the market value per share of Stock on the date of grant of the option. The date of the grant of an option shall be the date specified by the Committee in its grant of the option. The price at which each share of Stock covered by an option granted under the Plan (but not as an incentive stock option) may be purchased shall be the price determined by the Committee, in its absolute discretion, to be suitable to attain the purposes of this Plan. (b) OPTION PERIOD. The period for exercise of an option shall in no event be more than ten years from the date of grant, or in the case of an option intended to be an incentive stock option granted to a 10% Stockholder, more than five years from the date of grant. Options may, in the discretion of the Committee, be made exercisable in installments during the option period. Any shares not purchased on any applicable installment date may be purchased thereafter at any time before the expiration of the option period. (c) EXERCISE OF OPTIONS. In order to exercise an option, the Optionee shall deliver to the Company written notice specifying the number of shares of Stock to be purchased, together with cash or a certified or bank cashier's check payable to the order of the Company in the full amount of the purchase price therefor; provided that, for the purpose of assisting an Optionee to exercise an option, the Company may make loans to the Optionee or guarantee loans made by third parties to the Optionee, on such terms and conditions as the Board of Directors may authorize; and provided further that such purchase price may be paid in shares of Stock, or in nonstatutory options granted under the Plan (provided, however, that the purchase price of Stock acquired under an incentive 2 stock option may not be paid in options), in either case owned by the Optionee and having a market value on the date of exercise not less than the aggregate purchase price, or in any combination of cash, Stock and such options. For purposes of this Section 5(c), the market value per share of Stock shall be the last sale price regular way on the date of reference, or, in case no sales take place on such date, the average of the closing high bid and low asked prices regular way, in either case on the principal national securities exchange on which the Stock is listed or admitted to trading, or if the Stock is not listed or admitted to trading on any national securities exchange, the last sale price reported on the National Market System of the National Association of Securities Dealers Automated Quotation system ("NASDAQ") on such date, or the average of the closing high bid and low asked prices of the Stock in the over-the-counter market reported on NASDAQ on such date, as furnished to the Committee by any New York Stock Exchange member selected from time to time by the Committee for such purpose. If there is no bid or asked price reported on any such date, the market value shall be determined by the Committee in accordance with the regulations promulgated under Section 2031 of the Code, or by any other appropriate method selected by the Committee. For purposes of this Section 5(c), the market value of an option granted under the Plan shall be the market value of the underlying Stock, determined as aforesaid, less the exercise price of the option. If the Optionee so requests, shares of Stock purchased upon exercise of an option may be issued in the name of the Optionee or another person. An Optionee shall have none of the rights of a stockholder until the shares of Stock are issued to him. (d) EFFECT OF TERMINATION OF EMPLOYMENT. (i) An option may not be exercised after the Optionee has ceased to be in the employ of the Company or any Subsidiary for any reason other than the Optionee's death, Disability or Involuntary Termination Without Cause. Any cessation of employment, for purposes of incentive stock options only, shall include any leave of absence in excess of 90 days unless the Optionee's reemployment rights are guaranteed by law or by contract. "CAUSE" shall mean any act, action or series of acts or actions or any omission, omissions, or series of omissions which result in, or which have the effect of resulting in, (i) the commission of a crime by the Optionee involving moral turpitude, which crime has a material adverse impact on the Company or any Subsidiary, (ii) gross negligence or willful misconduct which is continuous and results in material damage to the Company or any Subsidiary, or (iii) the continuous, willful failure of the person in question to follow the reasonable directives of the Board of Directors. "DISABILITY" shall mean the inability or failure of a person to perform those duties for the Company or any Subsidiary traditionally assigned to and performed by such person because of the person's then-existing physical or mental condition, impairment or incapacity. The fact of disability shall be determined by the Committee, which may consider such evidence as it considers desirable under the circumstances, the determination of which shall be final and binding upon all parties. "INVOLUNTARY TERMINATION WITHOUT CAUSE" shall mean either (i) the dismissal of, or the request for the resignation of, a person, by court order, order of any court-appointed liquidator or trustee of the Company, or the order or request of any creditors' committee of the Company constituted under the federal bankruptcy laws, provided that such order or request contains no specific reference to Cause; or (ii) the dismissal of, or the request for the resignation of, a person, by a duly constituted corporate officer of the Company or any Subsidiary, or by the Board, for any reason other than for Cause. 3 (ii) During the three months after the date of the Optionee's Involuntary Termination Without Cause, the Optionee shall have the right to exercise the options granted under the Plan, but only to the extent the options were exercisable on the date of the cessation of the Optionee's employment. (iii) During the twelve months after termination of the Optionee's employment with the Company or any Subsidiary as a result of the Optionee's Disability, the Optionee shall have the right to exercise the options granted under the Plan, but only to the extent the options were exercisable on the date of the cessation of the Optionee's employment. (iv) In the event of the death of the Optionee while employed or, in the event of the death of the Optionee after cessation of employment described in subparagraph (ii) or (iii) above, but within the three-month or twelve-month period described in subparagraph (ii) or (iii) above, the option shall thereupon become exercisable in full until the expiration of twelve months following the Optionee's death. During such extended period, the option may be exercised by the person or persons to whom the deceased Optionee's rights under the option agreement shall pass by will or by the laws of descent and distribution, but only to the extent the option was exercisable on the date of the cessation of the Optionee's employment. The provisions of the foregoing sentence shall apply to any outstanding options which are incentive stock options to the extent permitted by Section 422(d) of the Code and such outstanding options in excess thereof shall, immediately upon the occurrence of the event described in the preceding sentence, be treated for all purposes of the Plan as nonstatutory stock options and shall be immediately exercisable as such as provided in the foregoing sentence. In no event shall any option be exercisable beyond the applicable exercise period provided in Section 5(b) of the Plan. Nothing in the Plan or in any option granted pursuant to the Plan (in the absence of an express provision to the contrary) shall confer on any individual any right to continue in the employ of the Company or any Subsidiary or interfere in any way with the right of the Company or Subsidiary to terminate the individual's employment at any time. (e) NONTRANSFERABILITY OF OPTIONS. Except as otherwise set forth herein, during the lifetime of an Optionee, options held by the Optionee shall be exercisable only by the Optionee, and no option shall be transferable other than by will or by the laws of descent and distribution. Notwithstanding the foregoing, the Committee may, in its absolute discretion, grant nonstatutory stock options that are transferable, subject to applicable law and the terms and restrictions imposed by the option agreement or otherwise by the Committee. (f) ADJUSTMENTS FOR CHANGE IN STOCK SUBJECT TO PLAN. In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure or shares of the Company, corresponding adjustments automatically shall be made to the number and kind of shares available for issuance under this Plan and the number and kind of shares and option price thereof covered by outstanding options under this Plan. (g) ACCELERATION OF EXERCISABILITY OF OPTIONS UPON OCCURRENCE OF CERTAIN EVENTS. In connection with any merger or consolidation in which the Company is not the surviving corporation and which results in the holders of the outstanding voting securities of the Company 4 (determined immediately prior to such merger or consolidation) owning less than a majority of the outstanding voting securities of the surviving corporation (determined immediately following such merger or consolidation), or any sale or transfer by the Company of all or substantially all of its assets or any tender offer or exchange offer for or the acquisition, directly or indirectly, by any person or group of all or a majority of the then-outstanding voting securities of the Company, all outstanding options under the Plan shall become exercisable in full, notwithstanding any other provision of the Plan or of any outstanding options granted thereunder, on and after (i) the fifteenth day prior to the effective date of such merger, consolidation, sale, transfer or acquisition or (ii) the date of commencement of such tender offer or exchange offer, as the case may be. The provisions of the foregoing sentence shall apply to any outstanding options which are incentive stock options to the extent permitted by Section 422(d) of the Code and such outstanding options in excess thereof shall, immediately upon the occurrence of the event described in clause (i) or (ii) of the foregoing sentence, be treated for all purposes of the Plan as nonstatutory stock options and shall be immediately exercisable as such as provided in the foregoing sentence. Notwithstanding the foregoing, in no event shall any option be exercisable beyond the applicable period of such option specified in Sections 5(b) and 5(d). (h) REGISTRATION, LISTING AND QUALIFICATION OF SHARES OF STOCK. Each option shall be subject to the requirement that if at any time the Board of Directors shall determine that the registration, listing or qualification of shares of Stock covered thereby upon any securities exchange or under any federal or state law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the purchase of shares of Stock thereunder, no such option may be exercised unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. The Company may require that any person exercising an option shall make such representations and agreements and furnish such information as it deems appropriate to assure compliance with the foregoing or any other applicable legal requirement. (i) OTHER TERMS AND CONDITIONS. The Committee may impose such other terms and conditions, not inconsistent with the terms hereof, on the grant or exercise of options, as it deems advisable. (j) RELOAD OPTIONS. If upon the exercise of an option granted under the Plan (the "Original Option") the Optionee pays the purchase price for the Original Option pursuant to Section 5(c) in whole or in part in shares of Stock owned by the Optionee for at least six months, the Company shall grant to the Optionee on the date of such exercise an additional option under the Plan (the "Reload Option") to purchase that number of shares of Stock equal to the number of shares of Stock so held for at least six months transferred to the Company in payment of the purchase price in the exercise of the Original Option. The price at which each share of Stock covered by the Reload Option may be purchased shall be the market value per share of Stock (as specified in Section 5(c)) on the date of exercise of the Original Option. The Reload Option shall not be exercisable until one year after the date the Reload Option is granted or after the expiration date of the Original Option. Upon the payment of the purchase price for a Reload Option granted hereunder in whole or in part in shares of Stock held for more than six months pursuant to Section 5(c), the Optionee is entitled to receive a further Reload Option in accordance with this Section 5(j). Shares of Stock covered by a Reload Option shall not reduce the number of shares of Stock available under the Plan pursuant to Section 3. 5 6. ADDITIONAL PROVISIONS APPLICABLE TO INCENTIVE STOCK OPTIONS. The Committee may, in its discretion, grant options under the Plan to eligible employees which constitute "incentive stock options" within the meaning of Section 422 of the Code, provided, however, that (a) the aggregate market value of the Stock with respect to which incentive stock options are exercisable for the first time by the Optionee during any calendar year shall not exceed the limitation set forth in Section 422(d) of the Code and (b) Section 5(d)(ii) hereof shall not apply to any incentive stock option. 7. EFFECTIVENESS OF PLAN. The Plan shall be effective when it is adopted and approved by the Board of Directors, provided that the Plan is approved within twelve months before or after such adoption by a majority of the votes cast thereon by the stockholders of the Company at a meeting of stockholders duly called and held for such purpose or by unanimous written consent of such stockholders, and no option granted hereunder shall be exercisable prior to such approval. 8. AMENDMENT AND TERMINATION. The Board of Directors may at any time amend the Plan or the term of any option outstanding under the Plan; provided, however, that, except as contemplated in Section 5(f), the Board of Directors shall not, without approval by a majority of the votes cast by the stockholders of the Company at a meeting of stockholders at which a proposal to amend the Plan is voted upon, (i) increase the maximum number of shares of Stock for which options may be granted under the Plan, or (ii) except as otherwise provided in the Plan, amend the requirements as to the class of employees eligible to receive options. Unless the Plan shall theretofore have been terminated as hereinafter provided, the Plan shall terminate, and no option shall be granted hereunder, after ten years from the date the Plan is adopted by the Board of Directors or approved by the stockholders as described in Section 7, whichever first occurs; provided, however, that the Board of Directors may at any time prior to that date terminate the Plan. No amendment or termination of the Plan or any option outstanding under the Plan may, without the consent of an Optionee, adversely affect the rights of such Optionee under any option held by such Optionee. 9. WITHHOLDING. It shall be a condition to the obligation of the Company to issue shares of Stock upon exercise of an option that the Optionee (or any beneficiary or person entitled to act under Section 5(d) hereof) pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying any taxes. If the amount requested is not paid, the Company may refuse to issue such shares of Stock. 10. OTHER ACTIONS. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including, but not by way of limitation, the right of the Company to grant or assume options for proper corporate purposes other than under the Plan with respect to any employee or other person, firm, corporation or association. 6 EX-10 17 EXHIBIT 10.24 HLM DESIGN, INC. EMPLOYEE STOCK PURCHASE PLAN HLM DESIGN, INC. EMPLOYEE STOCK PURCHASE PLAN TABLE OF CONTENTS Page ARTICLE I PURPOSE; DEFINITIONS; CONSTRUCTION...........1 1.1 Purpose of Plan.......................1 1.2 Definitions...........................1 (a) "Account"..................1 (b) "Base Pay".................1 (c) "Board of Directors".......1 (d) "Business Day".............1 (e) "Cause"....................1 (f) "Code".....................1 (g) "Committee"................1 (h) "Company"..................2 (i) "Company Stock"............2 (j) "Contributions"............2 (k) "Employee".................2 (l) "Employer".................2 (m) "Exercise Date"............2 (n) "Grant Date"...............2 (o) "Option"...................2 (p) "Participant"..............2 (q) "Plan".....................2 1.3 Construction.............................2 ARTICLE II ADMINISTRATION...............................3 2.1 Appointment and Procedures of Committee..3 2.2 Authority of Committee...................3 ARTICLE III PARTICIPATION..............................3 3.1 Eligibility to Participat................3 3.2 Restrictions on Participation............3 3.3 Leave of Absence.........................4 ARTICLE IV CONTRIBUTIONS...............................4 4.1 Payroll Deductions........................4 4.2 Contributions to Accounts.................4 4.3 Leave of Absence..........................4 4.4 Withdrawal of Contributions from Plan.....5 4.5 Termination of Employment.................5 ii ARTICLE V OPTIONS.......................................5 5.1 Company Stock Available for Options.........5 5.2 Granting of Options.........................5 5.3 Option Price................................5 5.4 Option Period...............................6 5.5 Exercise of Options.........................6 (a) Automatic Exercise...............6 (b) Nontransferability of Options....6 (c) Effect of Termination of Employment.......................6 (i) Termination of Employment Related to Cause........6 (ii) Termination of Employment Due to Death...6 (iii) Other Termination of Employment............7 (d) Leave of Absence..................7 (e) Delivery of Stock.................8 (f) Acceleration of Exercisability of Options Upon Occurrence of Certain Events.............8 (g) Registration, Listing and Qualification of Shares of Stock...............8 ARTICLE VI MISCELLANEOUS................................8 6.1 Adjustments Upon Changes in Capitalization.........................8 6.2 Approval of Shareholders...................8 6.3 Amendment, Suspension and Termination......9 6.4 Intent to Comply With Code Section 423.....9 6.5 Equal Rights and Privileges................9 6.6 Use of Funds...............................9 6.7 Withholding................................9 6.8 Effect of Plan.............................9 6.9 No Employment Rights.......................9 6.10 Governing Law.............................10 6.11 Other Actions.............................10 iii HLM DESIGN, INC. EMPLOYEE STOCK PURCHASE PLAN ARTICLE I PURPOSE; DEFINITIONS; CONSTRUCTION 1.1 Purpose of Plan. The purpose of the Plan, which shall be known as the HLM Design, Inc. Employee Stock Purchase Plan (the "Plan"), is to provide employees of HLM Design, Inc. (the "Company") and its participating subsidiaries (which hereinafter shall be referred to collectively with the Company as the "Employer") an opportunity to acquire a proprietary interest in the Company through the purchase of the Common Stock, $.01 par value, of the Company. This Plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). 1.2 Definitions. Throughout this Plan, the following terms shall have the meanings indicated: (a) "Account" shall mean a memorandum account maintained to record each Participant's Contributions pending purchase of Company Stock. (b) "Base Pay" shall mean the Participant's regular base salary (excluding overtime pay, bonuses, shift premiums, commissions, fringe benefits, other special payments and imputed income) determined without reduction for Contributions made under this Plan or contributions to any Code Section 401(k) or Section 125 Plan. The Committee may establish additional rules for determining a Participant's Base Pay for purposes of this Plan. (c) "Board of Directors" shall mean the Board of Directors of the Company. (d) "Business Day" shall mean any day other than a Saturday, Sunday or holiday. (e) "Cause" shall mean any act, action or series of acts or actions or any omission, omissions or series of omissions which, in the opinion of the Committee, result in, or which have the effect of resulting in, (i) the commission of a crime by the Participant involving moral turpitude, which crime has a material adverse impact on the Employer, (ii) gross negligence or willful misconduct which is continuous and results in material damage to the Employer, or (iii) the continuous, willful failure of the person in question to follow the reasonable directives of the Employer. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended, any successor revenue laws of the United States, and the rules and regulations promulgated thereunder. (g) "Committee" shall mean the committee of directors of the Company appointed by the Board of Directors in accordance with Section 2.1 to administer this Plan, or in the event that no such committee exists or is appointed, "Committee" shall mean the Board of Directors. (h) "Company" shall mean HLM Design, Inc., a company organized and existing under the laws of the State of Delaware. (i) "Company Stock" shall mean the Common Stock, $.01 par value, of the Company. (j) "Contributions" shall mean the after-tax payroll deductions contributed to the Plan by Participants pursuant to Article IV. (k) "Effective Date" shall mean the date of the closing of the Company's initial public offering. (l) "Employee" shall mean any person who (i) is employed on a full-time or part-time basis by a participating Employer, (ii) is regularly scheduled to work more than twenty hours per week, and (iii) is customarily employed more than five months in any calendar year. Independent contractors and outside directors shall not be included in the definition of Employee for purposes of this Plan. (m) "Employer" shall mean the Company and any of its present or future subsidiaries (within the meaning of Section 424(f) of the Code) which the Committee may designate from time to time as participating Employers under this Plan. (n) "Exercise Date" shall mean the last Business Day of March, June, September and December on which the principal trading market for Company Stock is open for trading, plus any other interim dates during the year which the Committee designates as Exercise Dates. (o) "Grant Date" shall mean (i) the date initial grants are made pursuant to this Plan, which date shall be as soon as administratively practicable following the Effective Date; and (ii) on or about each January 1 thereafter. (p) "Option" shall mean an option to purchase shares of Company Stock granted by the Committee to a Participant pursuant to this Plan. (q) "Participant" shall mean an Employee participating in this Plan in accordance with Article III. (r) "Plan" shall mean this HLM Design, Inc. Employee Stock Purchase Plan, as amended from time to time. 1.3 Construction. The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary. The words "hereof," "herein," "hereunder" and other similar compounds of the word "here" shall mean and refer to the entire Plan and not to any particular provision or Section. 2 ARTICLE II ADMINISTRATION 2.1 Appointment and Procedures of Committee. The Plan shall be administered by the Committee as appointed from time to time by the Board of Directors. The Committee shall consist of not fewer than two members of the Board of Directors. Each Committee member shall be a "non- employee director" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. No member of the Board of Directors who serves on the Committee shall be eligible to participate in the Plan. The Committee shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by all members shall be as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary (who need not be a member of the Committee). 2.2 Authority of Committee. The Committee, subject to the terms of the Plan, shall have plenary authority in its discretion to interpret and construe the Plan (including, without limitation, any of its terms which are uncertain, doubtful or disputed); to decide all questions of Employee eligibility hereunder; to determine the amount, manner and timing of all Options and purchases of Company Stock hereunder; to establish, amend and rescind rules and regulations pertaining to the administration of the Plan; and to make determinations and interpretations and take such other administrative actions as it deems necessary or advisable for the administration of this Plan. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. No member of the Committee shall be liable for any act, determination or omission with respect to his service on the Committee, if he acts in good faith and in a manner he reasonably believes to be in or not opposed to the best interest of the Employer. All expenses of administering this Plan shall be borne by the Employer. ARTICLE III PARTICIPATION 3.1 Eligibility to Participate. Subject to the restrictions of Section 3.2 below, any Employee employed on the Effective Date shall be eligible to participate in this Plan as of the initial Grant Date under the Plan (provided that the Employee is still employed on such Grant Date). Each other Employee shall be eligible to participate in the Plan as of the Grant Date coincident with or next following his date of employment with the Employer (provided that the Employee is still employed on such Grant Date). 3.2 Restrictions on Participation. Notwithstanding the foregoing Section 3.1, no Employee shall be eligible to participate in the Plan if such Employee owns or holds options to purchase (or upon participation in this Plan would own or hold options to purchase) stock possessing an aggregate of 5% or more of the total combined voting power or value of all classes of stock of the Company or any other Employer (as determined in accordance with the rules of Section 424(d) of the Code relating to attribution of stock ownership). 3 3.3 Leave of Absence. For purposes of becoming a participant in the Plan, a person on a leave of absence shall be deemed to be an Employee for the first ninety days of such leave of absence and such Employee's employment shall be deemed to have terminated at the close of business on the ninetieth day of such leave of absence unless such Employee shall have returned to regular full- time or part-time employment prior to the close of business on such ninetieth day. Termination by the Company of any Employee's leave of absence, other than termination of such leave of absence on return to regular full-time or part-time employment, shall terminate an Employee's employment for all purposes of the Plan. ARTICLE IV CONTRIBUTIONS 4.1 Payroll Deductions. By written election, made and filed with the Committee pursuant to the Committee's rules and procedures, a Participant may elect to designate a whole percentage between one percent and ten percent (or such higher or lower percentage as may be allowed by the Committee's rules and procedures) of his Base Pay to be deferred by payroll deduction as a Contribution to the Plan. Payroll deductions shall commence as soon as administratively practicable following the filing of such written election with the Committee. The Committee in its discretion may develop additional rules and procedures regarding payroll deduction elections. A Participant may change or revoke his payroll deduction amount by filing, on such forms and in accordance with such rules and procedures as the Committee in its discretion may prescribe, a revised written election with the Committee. Such modification or revocation shall take effect as soon as administratively practicable after the Committee's receipt of such revised election. Notwithstanding the foregoing, a Participant may change his payroll deduction election only once each calendar quarter, or as otherwise specifically allowed by the Committee's rules and procedures. If payroll deductions are discontinued, payroll deductions may not be resumed by the Participant until the payroll period which begins on or after the next Exercise Date, or as otherwise specifically allowed by the Committee's rules and procedures. Under no circumstances may a Participant's payroll deduction election be made, modified or revoked retroactively. 4.2 Contributions to Accounts. A memorandum Account shall be established by the Committee for each Participant for the purpose of accounting for Contributions. Contributions shall be credited to Accounts as soon as administratively practicable following payroll withholding. Amounts credited to Accounts will not accrue interest. 4.3 Leave of Absence. If a Participant is on a leave of absence, such Participant shall have the right to elect to (a) withdraw from the Plan and receive a distribution of the balance in his Account pursuant to Section 4.4, (b) discontinue Contributions to the Plan but remain a Participant in the Plan, or (c) remain a Participant in the Plan during such leave of absence, authorizing deductions to be made from payments by the Company to the Participant during such leave of absence. 4 4.4 Withdrawal of Contributions from Plan. Prior to the end of a calendar quarter, a Participant may elect to withdraw the Contributions credited to his Account for that quarter by filing written notice thereof with the Committee on such forms and in accordance with such procedures as the Committee may prescribe. The Participant's Contributions shall be distributed to him as soon as administratively practicable after the Committee's receipt of his notice of withdrawal and no further payroll deductions shall be made from his Base Pay. 4.5 Termination of Employment. Upon termination of a Participant's employment for any reason, such Participant may no longer make Contributions to the Plan or be granted Options under the Plan. A Participant's right, if any, to exercise any unexpired Option he holds as of his termination of employment shall be determined in accordance with Section 5.5(c). ARTICLE V OPTIONS 5.1 Company Stock Available for Options. There shall be available for Options under the Plan an aggregate maximum of 50,000 shares of Company Stock, subject to any adjustments which may be made pursuant to Section 6.1 of the Plan in connection with changes in capitalization of the Company. Shares of Company Stock used for purposes of the Plan may be either authorized and unissued shares, or previously issued shares held in the treasury of the Company, or both. Shares of Company Stock covered by Options which have expired prior to exercise shall be available for further Options granted hereunder. 5.2 Granting of Options. The Plan shall be implemented by annual offerings of approximately twelve months duration (except for the initial offering or as otherwise provided in Section 5.4). On each Grant Date, each eligible Participant shall be deemed to have been granted an Option to purchase that number of shares of Company Stock that equals: (i) the Participant's Base Pay as of the Grant Date divided by 1000, with fractional amounts of .50 or more rounded up to the next dollar and fractional amounts of less than .50 disregarded, multiplied by (ii) two. Notwithstanding the foregoing, no Participant may be granted an Option which permits his rights to purchase stock under this Plan and all other employee stock purchase plans of the Company or Employer to accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time such Option is granted) for each calendar year in which such Option is outstanding at any time. 5.3 Option Price. The purchase price at which shares of Company Stock may be acquired pursuant to the exercise of all or any portion of an Option granted under this Plan shall be eighty-five percent of the lesser of (i) the fair market value of the Company Stock on the applicable Grant Date, and (ii) the fair market value of the Company Stock on the applicable Exercise Date. For purposes of this Section 5.3, the fair market value per share of Company Stock shall be the closing price on the last Business Day prior to the date of reference, or in the event that no sales take place on such date, the average of the closing high bid and low asked prices, in either case on the principal national securities exchange on which the Company Stock is listed or admitted to trading, or if the Company Stock is not listed or admitted to trading on any national securities exchange, the last sale price reported on the National Market System of the National Association of Securities Dealers Automated 5 Quotation system ("NASDAQ") on such date, or the average of the closing high bid and low asked prices of the Company Stock in the over-the-counter market reported on NASDAQ on such date, as furnished to the Committee by any New York Stock Exchange member selected from time to time by the Committee for such purposes. If there is no bid or asked price reported on any such date, the market value shall be determined by the Committee in accordance with the regulations promulgated under Section 2031 of the Code, or by any other appropriate method selected by the Committee. 5.4 Option Period. Each Option granted to a Participant under the Plan shall expire on the earliest of (a) the last Exercise Date of the calendar year in which the Option was granted, (b) the Participant's voluntary withdrawal from the Plan following termination of employment, and (c) the date of the Participant's termination of employment related to Cause, or the Exercise Date immediately following the Participant's termination of employment for any reason unrelated to Cause. In no event will the duration of an Option period exceed twenty-seven months (or such other applicable period permitted under Section 423(b)(7) of the Code) from the date on which such Option is granted. 5.5 Exercise of Options. (a) Automatic Exercise. Any Option granted to a Participant shall be exercised automatically on each Exercise Date during the calendar year of the Option's Grant Date in whole or in part such that the Participant's accumulated Contributions as of such Exercise Date shall be applied to the purchase of the maximum number of whole shares of Company Stock that his Contributions will allow at the applicable Option price (determined in accordance with Section 5.3), limited to the number of shares subject to such Option. In the event that the number of shares of Company Stock that may be purchased by all Participants in the Plan exceeds the number of shares then available for issuance under the Plan, the Committee shall make a pro rata allocation of the available shares in as uniform a manner as it determines to be practicable and equitable. Any remaining Contributions in the Participant's Account amounting to less than the Option price of a whole share of Company Stock shall be carried forward and applied on the next Exercise Date; provided that, Contributions remaining after the last Exercise Date of the calendar year may be distributed to the Participant at his election. (b) Nontransferability of Options. During a Participant's lifetime, Options held by such Participant shall be exercisable only by that Participant. No Option shall be transferable other than by will or by the laws of descent and distribution. (c) Effect of Termination of Employment. (i) Termination of Employment Related to Cause. Upon termination of a Participant's employment related to Cause, the Participant's participation in the Plan also shall terminate. Any unexpired Option he holds will expire as of the date of his termination of employment. Remaining contributions credited to his Account shall be distributed to the Participant as soon as administratively practicable following termination of employment. (ii) Termination of Employment Due to Death. In the event of the death of the Participant while employed, or during the period following his termination of employment for 6 any reason unrelated to Cause but prior to the next Exercise Date, the Participant's estate shall have the right to elect by written notice to the Committee prior to the earlier of the expiration of sixty days commencing with the date of the Participant's death and the Exercise Date next following the date of the Participant's death: (A) To withdraw all of the Contributions credited to the Participant's Account under the Plan, or (B) To exercise any unexercised Option held by the Participant as of the date of his death for the purchase of Company Stock on the Exercise Date next following the date of the Participant's death in accordance with Section 5.5(a) but only to the extent such Option was exercisable on the date of the Participant's death, with any remaining Contributions credited to the Participant's Account being distributed to the Participant's estate as soon as administratively practicable after such Exercise Date. In the event that no such written election is timely and properly received by the Committee, all Contributions credited to the Participant's Account shall be distributed to the Participant's estate. In no event shall any Option be exercisable beyond the applicable exercise period specified in Section 5.4 of the Plan. (iii) Other Termination of Employment. Upon termination of a Participant's employment for any reason unrelated to Cause or death, the Participant may at his election: (A) Withdraw from the Plan pursuant to Section 4.4 and request the return of the remaining Contributions then credited to his Account, or (B) Continue participation in the Plan until the Exercise Date next following his date of termination of employment for the limited purpose of allowing any unexpired Option he holds as of his termination of employment to be exercised automatically in accordance with Section 5.5(a) on the Exercise Date next following his termination of employment but only to the extent such Option was exercisable on the date of the Participant's termination of employment, with any remaining Contributions credited to the Participant's Account being distributed to the Participant as soon as administratively practicable after such Exercise Date. (d) Leave of Absence. A Participant on a leave of absence shall, subject to the election made by such Participant pursuant to Section 4.3, continue to be a Participant in the Plan so long as such Participant is on continuous leave of absence. A Participant who has been on leave of absence for more than ninety days and who therefore is not an Employee for the purpose of the Plan shall not be entitled to participate in any offering commencing on any Grant Date following the ninetieth day of such leave of absence. Notwithstanding any other provisions of the Plan, unless a Participant on a leave of absence returns to eligible regular full-time or part-time employment with the Employer at the earlier of (i) the termination of such leave of absence, or (ii) three months from the ninetieth day of such leave of absence, such Participant's participation in the Plan shall terminate on whichever of such dates first occurs. 7 (e) Delivery of Stock. As soon as administratively practicable after each Exercise Date, the Company or the Committee will deliver to each Participant, as applicable, certificates evidencing shares of Company Stock purchased under this Plan. (f) Acceleration of Exercisability of Options Upon Occurrence of Certain Events. In connection with any merger or consolidation in which the Company is not the surviving corporation and which results in the holders of the outstanding voting securities of the Company (determined immediately prior to such merger or consolidation) owning less than a majority of the outstanding voting securities of the surviving corporation (determined immediately following such merger or consolidation), or any sale or transfer by the Company of all or substantially all of its assets or any tender offer or exchange offer for or the acquisition, directly or indirectly, by any person or group of all or a majority of the then-outstanding voting securities of the Company, all outstanding Options under the Plan shall become exercisable in full, notwithstanding any other provision of the Plan or of any outstanding Options granted hereunder, on and after (i) the fifteenth day prior to the effective date of such merger, consolidation, sale, transfer or acquisition or (ii) the date of commencement of such tender offer or exchange offer, as the case may be. Notwithstanding the foregoing, in no event shall any Option be exercisable beyond the applicable exercise period of such Option specified in Section 5.4. (g) Registration, Listing and Qualification of Shares of Stock. Each Option shall be subject to the requirement that if at any time the Board of Directors shall determine that the registration, listing or qualification of shares of Company Stock covered thereby upon any securities exchange or under any federal or state law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the purchase of shares of Company Stock thereunder, no such Option may be exercised unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors. The Employer may require that any person exercising an Option shall make such representations and agreements and furnish such information as it deems appropriate to assure compliance with the foregoing or any other applicable legal requirement. ARTICLE VI MISCELLANEOUS 6.1 Adjustments Upon Changes in Capitalization. In the event of a reorganization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure of shares of the Company, corresponding adjustments shall be made to the number and kind of shares of Company Stock available for issuance under this Plan and the number and kind of shares of Company Stock covered by outstanding Options under this Plan. Any adjustments made pursuant to this Section 6.1 remain subject to the limitations of Section 423 of the Code (including its $25,000 annual limitation). 6.2 Approval of Shareholders. Within twelve months before or after the Plan is adopted by the Board of Directors, this Plan must be approved by a majority of the votes cast thereon by the stockholders of the Company at a meeting of stockholders duly called and held for such purpose or 8 by unanimous written consent of such stockholders, and no Option granted hereunder shall be exercisable prior to such approval. 6.3 Amendment, Suspension and Termination. The Board of Directors may at any time amend, suspend or terminate this Plan; provided, however, that the Board of Directors shall not increase the maximum number of shares of Company Stock for which Options may be granted under the Plan, except as provided in Section 6.1, without obtaining approval of the stockholders in the manner described in Section 6.2. The Plan will continue until terminated by the Board of Directors or until all of the shares of Company Stock reserved for issuance under the Plan have been issued, whichever first occurs. No amendment, suspension or termination of the Plan may, without the consent of the Participants then holding Options to purchase Company Stock, adversely affect the rights of such Participants under such Options. 6.4 Intent to Comply With Code Section 423. It is intended that this Plan qualify as an "employee stock purchase plan" under Section 423 of the Code. The provisions of this Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that Section of the Code. In the event of an inconsistency between the Plan and Section 423 of the Code, the Plan shall be interpreted in a manner which complies with the requirements of Section 423 of the Code and the regulations thereunder, without further act or amendment by the Company or the Board of Directors unless otherwise required pursuant to Section 6.3 of this Plan. 6.5 Equal Rights and Privileges. All Participants granted Options under this Plan shall have equal rights and privileges within the meaning of Section 423(b)(5) of the Code and the regulations thereunder. 6.6 Use of Funds. All Contributions received and held by the Employer under this Plan may be used by the Employer for any corporate purpose and the Employer shall not be obligated to segregate such Contributions. 6.7 Withholding. It shall be a condition to the obligation of the Company to issue shares of Company Stock upon exercise of an Option that the Participant (or his estate pursuant to Section 5.5(c)(ii)) pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying taxes, including taxes owed by the Participant due to the disposition of Company Stock by the Participant prior to the expiration of the holding periods described in Section 423(a) of the Code. 6.8 Effect of Plan. This Plan shall be binding upon each Participant and his successors, including, without limitation, such Participant's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Participant. 6.9 No Employment Rights. Nothing in this Plan or in any Option granted pursuant to the Plan shall be construed as a contract of employment between the Employer and any employee, or as a right of any employee to continue in the employ of the Employer, or as a limitation of the right of the Employer to discharge any of its employees, with or without cause. 9 6.10 Governing Law. This Plan and all rights and obligations hereunder shall be construed in accordance with and governed by the laws of the State of North Carolina, except to the extent such laws are preempted by the laws of the United States. 6.11 Other Actions. Nothing contained in the Plan shall be construed to limit the authority of the Company to exercise its corporate rights and powers, including, but not by way of limitation, the right of the Company to grant or assume options for proper corporate purposes other than under the Plan with respect to any employee or other person, firm, corporation or association. 10 EX-10 18 EXHIBIT 10.25 EMPLOYMENT AGREEMENT HLM DESIGN, INC. THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into by and between HLM DESIGN, INC. (the "Company") and JOSEPH M. HARRIS, an individual residing at 21120 Blakely Shores Drive, Cornelius, North Carolina, 28031 (the "Employee"). In consideration of the grant of options for the purchase of 50,000 shares of the Company's capital stock and the acceptance thereof by the Employee (the "Stock Options"), and in further consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Employee agree as follows: 1. Employment. The Employee shall perform such duties and responsibilities and shall serve in such capacities as may be assigned to him from time to time by the Company's Board of Directors. The Employee agrees to perform his duties and discharge his responsibilities, as assigned to him from time to time, faithfully, diligently and in a timely manner. 2. Compensation. All component parts and aspects of the Employee's compensation, including any salary, bonuses and any other form of compensation, shall be determined by the Board of Directors from time to time, and shall be paid to the Employee in accordance with the Company's standard policies and procedures. The Employee shall be paid an annual base salary in an amount no less than Three Hundred Thousand Dollars ($300,000) for each year that he remains an employee of the Company (the Employee's "Minimum Annual Salary"). 3. Benefits. The Company shall pay the Employee a monthly automobile allowance of $2,500 per month, from which the Employee shall pay all expenses of providing his own automobile for business purposes, including but not limited to, fuel, maintenance, repairs, taxes and insurance. The Company agrees to reimburse the Employee for other reasonable business expenses which are incurred by the Employee, in compliance with the Company's policies with respect to incurring business expenses, in the performance of his duties hereunder. The Employee shall submit expense reports to the Company as required by Section 274 of the Internal Revenue Code. In addition, subject to and contingent upon the Employee meeting and complying with, and continuing to comply with, all eligibility and participation conditions and requirements, the Employee shall receive all hospitalization, major medical, and disability insurance benefits, as well as all other fringe benefits provided to or made available by the Company for its employees generally, in accordance with the terms and provisions of such insurance and benefit programs as they may exist from time to time. 4. Term. The initial term of the Employee's employment shall be for a period of three (3) years, which term shall commence on the effective date of this Agreement. Thereafter, the term of the Employee's employment shall automatically renew for successive periods of one (1) year. Each party reserves the right to terminate the relationship for any reason upon the giving of written notice to the other party at least six (6) months prior to the expiration of the then applicable term of this Agreement. In the event the Board of Directors of the Company at any time elects to not renew this Agreement or terminates this Agreement without cause, then the Employee's termination compensation shall include the payment by the Company to the Employee of an amount equal to three (3) times the amount of the Employee's Minimum Annual Salary ("Termination Compensation"), payable to the Employee in the same manner and at the same times as he would have received payment of his regular annual salary payments. 5. Termination for Cause. The Board of Directors of the Company may terminate the Employee's employment hereunder immediately for cause only for following causes: (a) Failure of the Employee to be and remain duly and fully licensed and qualified as a practicing architect under the applicable laws, rules and regulations in the State of North Carolina or in another State so as to permit the Employee to perform his duties hereunder; or (b) Conviction of the Employee, including a plea of nolo contendere by the Employee, of a crime involving an act of moral turpitude. In the event the Board of Directors of the Company terminates the Employee's employment for cause, ninety (90) days' advance written notice shall be required to be given to the Employee and no Termination Compensation shall be due or owing to the Employee. In lieu of such advance written notice, the Board of Directors of the Company may terminate the Agreement immediately; provided, however, in that event, the Company shall pay to the Employee an amount equal to three (3) times the amount of the Employee's compensation then in effect as of the date of his termination. The Employee's employment shall continue until the effective date of termination set forth in the Company's written notice of termination, unless terminated prior thereto by the Company as provided above. In such event the Employee shall remain bound by the provisions of paragraphs 6 through 10 below. - 2 - 6. Nonpiracy of Clients and Covenant Not to Compete. (a) The Employee agrees that, during the term of the Employee's employment hereunder and for a period of three (3) years after the date of the termination of his employment hereunder for any or no reason, the Employee will not, directly or indirectly, as an individual or as an owner, agent, employee, independent contractor, consultant, officer, director, stockholder or partner of any architectural or engineering business or company, or of any partnership, corporation, association, or any other business organization or entity engaged in the business of providing architectural or engineering services: (i) sell, service, solicit, divert, take away, or attempt to sell, service, solicit, divert or take away the business of any person known to the Employee to be a client of the Company and for whom the Company has provided architectural or engineering services within three (3) years prior to the date of the termination of the Employee's employment; or (ii) refer or direct to or accept for himself or for any architectural or engineering company or business or to or for any partnership, corporation, association or any other business organization or entity engaged in the business of providing architectural or engineering services or to or for any person employed by or in any way affiliated with any of them, any inquiries or communications whatsoever about any business or services being provided by the Company at the date of any such inquiry or communication or which the Company had provided at any time during the one (1) year period immediately prior to the date of the termination of the Employee's employment (including, but not limited to, any requests for bids or proposals) from or by (a) any client of the Company during the one (1) year period immediately prior to the date of the termination of the Employee's employment or (b) any client which had been a client of the Company and for which the Company had provided services at any time during the one (1) year period immediately prior to the date of the termination of his employment (even though the Employee may have had a relationship with such client or may have considered such client to have been a potential or prospective client prior to the date of his employment by the Company; or (iii) lend his name to any business which provides architectural or engineering services to persons who were clients of the Company, or persons who were prospective clients of the Company for whom the - 3 - Company had prepared proposals or with whom the Company had entered into negotiations to provide architectural or engineering services, within the one (1) year period immediately prior to the termination of the Employee's employment with the Company. (b) The Employee acknowledges that the Company's clients are located throughout the United States and that the Company's business in this regard is typical of the nature of the architectural and engineering business in general. The Employee accordingly agrees that the geographic territory or scope of the nonpiracy provisions and restrictive covenants contained in paragraphs 6(a)(i), (ii) and (iii) above are reasonable in that they are limited to the specific locations (or addresses) of each of the Company's clients protected by such nonpiracy provisions and restrictive covenants. The Employee likewise acknowledges and agrees that the time period or duration of such nonpiracy provisions and restrictive covenants are reasonable and that the three (3) year period following the termination of the Employee's employment and the three (3) year period in subparagraph 6(a)(i) and the one (1) year period in subparagraphs 6(a)(ii) and 6(a)(iii) prior to the date of the termination of his employment are reasonably necessary for the Company to protect its continuing business relationship with regard to each of its clients protected by such nonpiracy provisions and restrictive covenants. The Employee further acknowledges and agrees that all of the Company's clients are the sole and exclusive property of the Company and that such nonpiracy provisions and restrictive covenants are necessary to protect the Company's property and its business relationships with its clients. The Employee also acknowledges that he has sufficient training and skills to obtain similar and comparable employment to that provided him by the Company with another business or company and that the enforcement of the nonpiracy provisions and restrictive covenants contained herein against him by way of injunctive relief would not prevent him from earning a satisfactory living. 7. Nonpiracy of Proprietary Information and Trade Secrets. The Employee acknowledges that, during his employment, he will continue to acquire, be exposed to, or have access to, material, data and information that constitute valuable, confidential and proprietary information and trade secrets of the Company, which may include, without limitation, client lists, prospect lists, client needs, client contacts, methods of pricing, costs and sales data, financial statements and data, Company policies and procedures, Company business plans, processes, market studies, methods of marketing, business opportunities, customized computer software and other aspects of the Company's business operations. During and after the termination of his employment with the Company, the - 4 - Employee shall not, directly or indirectly, use, misuse, misappropriate, disclose, divulge or make known to any architectural or engineering business or to any partnership, corporation, association, or any other business organization or entity engaged in the business of providing architectural or engineering services or to any person employed by or in any way affiliated with any of them, for any reason or purpose whatsoever, any of the Company's confidential and proprietary information and trade secrets, except as may be permitted by the Company in the course of the Employee's employment with the Company. In consideration of the unique nature of the confidential and proprietary information and trade secrets, all of the Employee's obligations pertaining to the confidentiality and non-disclosure thereof shall remain in effect in perpetuity or until the Company has released any such information into the public domain, in which case the Employee's obligations hereunder shall cease with respect only to such information so released. Provided, further, the Employee's obligations hereunder shall cease with respect to the Company's information relating to the identity of its clients (and their contacts, needs and projects) protected by the nonpiracy provisions and restrictive covenants contained in paragraphs 6(a)(i), (ii) and (iii) upon the expiration of the three (3) year restricted period following the date of the termination of the Employee's employment with the Company. 8. Nonpiracy of Employees. The Employee agrees that for a period of one (1) year after the termination of his employment with the Company he will not, either directly or indirectly, in any manner or by any guise, recruit, solicit, divert, or take away nor attempt to recruit, solicit, divert, or take away any employee(s) of the Company. 9. Remedies. The Employee hereby acknowledges that each and every violation by him of the provisions of paragraphs 6, 7 and 8 hereof will cause the Company irreparable harm and damage and agrees that the Company shall be entitled to injunctive relief, by way of a temporary restraining order and preliminary and permanent injunctions, to restrain the Employee from each and every violation then occurring and from each and every future violation or threatened violation of such provisions during the time then remaining in either the three (3) year restricted period set forth in paragraphs 6 and 7 or the one (1) year period set forth in paragraph 8, in addition to all other equitable and legal remedies available to the Company against him. 10. Miscellaneous. (a) For purposes of this Agreement, the following terms shall be defined as follows: - 5 - (i) The term "client" shall be defined to mean and shall include each individual, corporation, partnership, association, limited liability company or limited liability partnership or any other business organization or entity for which the Company has provided architectural or engineering services, consultation or assistance at any time during the term of the Employee's employment or at any time during the three (3) year restricted period provided for in paragraph 6 hereof. (ii) The term "business" shall include, but shall not be limited to, any and all kinds of architectural and engineering services and any other services or assistance provided by the Company to its clients at any time during the term of Employee's employment hereunder or at any time during the three (3) year restricted period provided for in paragraph 6 hereof. (iii) The terms "solicit" or "soliciting" or "solicited" or "solicitation" shall be defined to mean to endeavor to obtain the business of a client of the Company either by asking, requesting, persuading, imploring, courting, importuning or wooing the client orally or in writing in any manner whatsoever or by responding in any manner whatsoever to any inquiry or other communication whatsoever initiated by or on behalf of a client in any way relating to the architectural or engineering needs of the client (including, but not limited to, the submission of a formal bid or proposal for the business of the client). (iv) The term "Company," for purposes of paragraphs 6, 7 and 8 hereof, shall be defined to mean and include HLM Design, Inc. and any and all affiliated entities, whether owned by, controlled by or under common control with HLM Design, Inc., or for which HLM Design, Inc. performs managerial and/or administrative services pursuant to a written agreement. (b) The Employee acknowledges that prior to or as a part of receiving the Stock Options he was informed fully by the Company and he understood and agreed that he would be required to enter into this Agreement containing the nonpiracy provisions and restrictive covenants set forth herein in consideration of and as a condition precedent thereto. The Employee acknowledges he has executed this Agreement freely and voluntarily and that it is fully binding and enforceable and effective as of the effective date of the grant of the Stock Options, even though it may have been signed by him and/or the Company subsequent to such date. - 6 - (c) This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. Any litigation under this Agreement must be brought in the State of North Carolina notwithstanding that the Employee may not at that time be a resident of North Carolina and cannot be served with process within the State of North Carolina. The Employee hereby irrevocably consents to the jurisdiction of the courts of North Carolina (whether state or federal) over his person. (d) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. (e) This Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective representatives, successors and assigns; provided, however, this is an Agreement for the personal services of the Employee and these services may only be provided by the Employee. (f) The provisions of this Agreement shall be separable and a determination that any provision of this Agreement is either unenforceable or void shall not affect the validity of any other provision of this Agreement. 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 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, or for a shorter period of time, 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. (g) This Agreement sets forth the entire understanding between the parties and all prior or contemporaneous written or oral agreements with respect to the subject matter hereof are merged herein. This Agreement cannot be amended except by a writing signed by both parties hereto. No waiver of any term or provision shall be deemed to be a waiver of any subsequent breach of any term or provision hereof. (h) All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt); or (b) when received by the addressee if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses set forth below (or to such other - 7 - addresses as a party may designate by notice to the other party): Joseph M. Harris 21120 Blakely Shores Drive Cornelius, NC 28031 HLM Design, Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as by law provided, effective as of the day of January, 1998. HLM DESIGN, INC. By: Title:_____________________________ (SEAL) ------------------------------- JOSEPH M. HARRIS, Employee - 8 - EX-10 19 EXHIBT 10.26 EMPLOYMENT AGREEMENT HLM DESIGN, INC. THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into by and between HLM DESIGN, INC. (the "Company") and VERNON B. BRANNON, an individual residing at 5301 Mirabell Road, Charlotte, North Carolina, 28226 (the "Employee"). In consideration of the grant of options for the purchase of 50,000 shares of the Company's capital stock and the acceptance thereof by the Employee (the "Stock Options"), and in further consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Employee agree as follows: 1. Employment. The Employee shall perform such duties and responsibilities and shall serve in such capacities as may be assigned to him from time to time by the Company's Board of Directors. The Employee agrees to perform his duties and discharge his responsibilities, as assigned to him from time to time, faithfully, diligently and in a timely manner. 2. Compensation. All component parts and aspects of the Employee's compensation, including any salary, bonuses and any other form of compensation, shall be determined by the Board of Directors from time to time, and shall be paid to the Employee in accordance with the Company's standard policies and procedures. The Employee shall be paid an annual base salary in an amount no less than Two Hundred Fifty Thousand Dollars ($250,000) for each year that he remains an employee of the Company (the Employee's "Minimum Annual Salary"). 3. Benefits. The Company shall pay the Employee a monthly automobile allowance of $2,500 per month, from which the Employee shall pay all expenses of providing his own automobile for business purposes, including but not limited to, fuel, maintenance, repairs, taxes and insurance. The Company agrees to reimburse the Employee for other reasonable business expenses which are incurred by the Employee, in compliance with the Company's policies with respect to incurring business expenses, in the performance of his duties hereunder. The Employee shall submit expense reports to the Company as required by Section 274 of the Internal Revenue Code. In addition, subject to and contingent upon the Employee meeting and complying with, and continuing to comply with, all eligibility and participation conditions and requirements, the Employee shall receive all hospitalization, major medical, and disability insurance benefits, as well as all other fringe benefits provided to or made available by the Company for its employees generally, in accordance with the terms and provisions of such insurance and benefit programs as they may exist from time to time. 4. Term. The initial term of the Employee's employment shall be for a period of three (3) years, which term shall commence on the effective date of this Agreement. Thereafter, the term of the Employee's employment automatically shall automatically be renewed for successive periods of one (1) year. Each party reserves the right to terminate the relationship for any reason upon the giving of written notice to the other party at least six (6) months prior to the effective date of termination stated in the notice the expiration of the then applicable term of this Agreement. In the event the Company at any time elects not to renew this Agreement or terminates this Agreement the relationship without cause, then the Employee's termination compensation shall include the payment by the Company to the Employee of an amount equal to three (3) times the amount of the Employee's Minimum Annual Salary ("Termination Compensation"), payable to the Employee in the same manner and at the same times as he would have received payment of his regular annual salary payments. 5. Termination for Cause. The Company may terminate the Employee's employment hereunder immediately for cause only for the following causes: (a) A material breach of this Agreement arising from the Employee's material failure to substantially perform his employment duties and responsibilities, which determination of material breach may be made by the Company only after the Employee has been given specific written notice of such nonperformance and a ninety (90) day period in which to cure or correct or commence to cure or correct such nonperformance; or (b) Conviction of the Employee, including a plea of nolo contendere by the Employee, of a crime involving an act of moral turpitude. In the event the Company terminates the Employee's employment for cause, ninety (90) days' advance written notice shall be required to be given to the Employee and no Termination Compensation shall be due or owing to the Employee. In such event the Employee shall remain bound by the provisions of paragraphs 6 through 10 below. In lieu of such advance written notice, the Board of Directors of the Company may terminate the Agreement immediately; provided, however, in that event, the Company shall pay to the Employee an amount equal to three (3) times the amount of the Employee's compensation then in effect as of the date of his termination. The Employee's employment shall continue until the effective date of termination set forth in the Company's written - 2 - notice of termination, unless terminated prior thereto by the Company as provided above. 6. Nonpiracy of Clients and Covenant Not to Compete. (a) The Employee agrees that, during the term of the Employee's employment hereunder and for a period of three (3) years after the date of the termination of his employment hereunder for any or no reason, the Employee will not, directly or indirectly, as an individual or as an owner, agent, employee, independent contractor, consultant, officer, director, stockholder or partner of any architectural or engineering business or company, or of any partnership, corporation, association, or any other business organization or entity engaged in the business of providing architectural or engineering services: (i) sell, service, solicit, divert, take away, or attempt to sell, service, solicit, divert or take away the business of any person known to the Employee to be a client of the Company and for whom the Company has provided architectural or engineering services within three (3) years prior to the date of the termination of the Employee's employment; or (ii) refer or direct to or accept for himself or for any architectural or engineering company or business or to or for any partnership, corporation, association or any other business organization or entity engaged in the business of providing architectural or engineering services or to or for any person employed by or in any way affiliated with any of them, any inquiries or communications whatsoever about any business or services being provided by the Company at the date of any such inquiry or communication or which the Company had provided at any time during the one (1) year period immediately prior to the date of the termination of the Employee's employment (including, but not limited to, any requests for bids or proposals) from or by (a) any client of the Company during the one (1) year period immediately prior to the date of the termination of the Employee's employment or (b) any client which had been a client of the Company and for which the Company had provided services at any time during the one (1) year period immediately prior to the date of the termination of his employment (even though the Employee may have had a relationship with such client or may have considered such client to have been a potential or prospective client prior to the date of his employment by the Company. - 3 - (b) The Employee acknowledges that the Company's clients are located throughout the United States and that the Company's business in this regard is typical of the nature of the architectural and engineering business in general. The Employee accordingly agrees that the geographic territory or scope of the nonpiracy provisions and restrictive covenants contained in paragraphs 6(a)(i) and (ii) above are reasonable in that they are limited to the specific locations (or addresses) of each of the Company's clients protected by such nonpiracy provisions and restrictive covenants. The Employee likewise acknowledges and agrees that the time period or duration of such nonpiracy provisions and restrictive covenants are reasonable and that the three (3) year period following the termination of the Employee's employment and the three (3) year period in subparagraph 6(a)(i) and the one (1) year period in subparagraph 6(a)(ii) prior to the date of the termination of his employment are reasonably necessary for the Company to protect its continuing business relationship with regard to each of its clients protected by such nonpiracy provisions and restrictive covenants. The Employee further acknowledges and agrees that all of the Company's clients are the sole and exclusive property of the Company and that such nonpiracy provisions and restrictive covenants are necessary to protect the Company's property and its business relationships with its clients. The Employee also acknowledges that he has sufficient training and skills to obtain similar and comparable employment to that provided him by the Company with another business or company and that the enforcement of the nonpiracy provisions and restrictive covenants contained herein against him by way of injunctive relief would not prevent him from earning a satisfactory living. 7. Nonpiracy of Proprietary Information and Trade Secrets. The Employee acknowledges that, during his employment, he will continue to acquire, be exposed to, or have access to, material, data and information that constitute valuable, confidential and proprietary information and trade secrets of the Company, which may include, without limitation, client lists, prospect lists, client needs, client contacts, methods of pricing, costs and sales data, financial statements and data, Company policies and procedures, Company business plans, processes, market studies, methods of marketing, business opportunities, customized computer software and other aspects of the Company's business operations. During and after the termination of his employment with the Company, the Employee shall not, directly or indirectly, use, misuse, misappropriate, disclose, divulge or make known to any architectural or engineering business or to any partnership, corporation, association, or any other business organization or entity engaged in the business of providing architectural or engineering services or to any person employed by or in any way - 4 - affiliated with any of them, for any reason or purpose whatsoever, any of the Company's confidential and proprietary information and trade secrets, except as may be permitted by the Company in the course of the Employee's employment with the Company. In consideration of the unique nature of the confidential and proprietary information and trade secrets, all of the Employee's obligations pertaining to the confidentiality and non-disclosure thereof shall remain in effect in perpetuity or until the Company has released any such information into the public domain, in which case the Employee's obligations hereunder shall cease with respect only to such information so released. Provided, further, the Employee's obligations hereunder shall cease with respect to the Company's information relating to the identity of its clients (and their contacts, needs and projects) protected by the nonpiracy provisions and restrictive covenants contained in paragraphs 6(a)(i), (ii) and (iii) upon the expiration of the three (3) year restricted period following the date of the termination of the Employee's employment with the Company. 8. Nonpiracy of Employees. The Employee agrees that for a period of one (1) year after the termination of his employment with the Company he will not, either directly or indirectly, in any manner or by any guise, recruit, solicit, divert, or take away nor attempt to recruit, solicit, divert, or take away any employee(s) of the Company. 9. Remedies. The Employee hereby acknowledges that each and every violation by him of the provisions of paragraphs 6, 7 and 8 hereof will cause the Company irreparable harm and damage and agrees that the Company shall be entitled to injunctive relief, by way of a temporary restraining order and preliminary and permanent injunctions, to restrain the Employee from each and every violation then occurring and from each and every future violation or threatened violation of such provisions during the time then remaining in either the three (3) year restricted period set forth in paragraphs 6 and 7 or the one (1) year period set forth in paragraph 8, in addition to all other equitable and legal remedies available to the Company against him. 10. Miscellaneous. (a) For purposes of this Agreement, the following terms shall be defined as follows: (i) The term "client" shall be defined to mean and shall include each individual, corporation, partnership, association, limited liability company or limited liability partnership or any other business organization or entity for which the Company has provided architectural or engineering services, consultation or assistance at any time during the term of the Employee's - 5 - employment or at any time during the three (3) year restricted period provided for in paragraph 6 hereof. (ii) The term "business" shall include, but shall not be limited to, any and all kinds of architectural and engineering services and any other services or assistance provided by the Company to its clients at any time during the term of Employee's employment hereunder or at any time during the three (3) year restricted period provided for in paragraph 6 hereof. (iii) The terms "solicit" or "soliciting" or "solicited" or "solicitation" shall be defined to mean to endeavor to obtain the business of a client of the Company either by asking, requesting, persuading, imploring, courting, importuning or wooing the client orally or in writing in any manner whatsoever or by responding in any manner whatsoever to any inquiry or other communication whatsoever initiated by or on behalf of a client in any way relating to the architectural or engineering needs of the client (including, but not limited to, the submission of a formal bid or proposal for the business of the client). (iv) The term "Company," for purposes of paragraphs 6, 7 and 8 hereof, shall be defined to mean and include HLM Design, Inc. and any and all affiliated entities, whether owned by, controlled by or under common control with HLM Design, Inc., or for which HLM Design, Inc. performs managerial and/or administrative services pursuant to a written agreement. (b) The Employee acknowledges that prior to or as a part of receiving the Stock Options he was informed fully by the Company and he understood and agreed that he would be required to enter into this Agreement containing the nonpiracy provisions and restrictive covenants set forth herein in consideration of and as a condition precedent thereto. The Employee acknowledges he has executed this Agreement freely and voluntarily and that it is fully binding and enforceable and effective as of the effective date of the grant of the Stock Options, even though it may have been signed by him and/or the Company subsequent to such date. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. Any litigation under this Agreement must be brought in the State of North Carolina notwithstanding that the Employee may not at that time be a resident of North Carolina and cannot be served with process within the State of North Carolina. The Employee - 6 - hereby irrevocably consents to the jurisdiction of the courts of North Carolina (whether state or federal) over his person. (d) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. (e) This Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective representatives, successors and assigns; provided, however, this is an Agreement for the personal services of the Employee and these services may only be provided by the Employee. (f) The provisions of this Agreement shall be separable and a determination that any provision of this Agreement is either unenforceable or void shall not affect the validity of any other provision of this Agreement. 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 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, or for a shorter period of time, 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. (g) This Agreement sets forth the entire understanding between the parties and all prior or contemporaneous written or oral agreements with respect to the subject matter hereof are merged herein. This Agreement cannot be amended except by a writing signed by both parties hereto. No waiver of any term or provision shall be deemed to be a waiver of any subsequent breach of any term or provision hereof. (h) All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt); or (b) when received by the addressee if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses set forth below (or to such other addresses as a party may designate by notice to the other party): Vernon B. Brannon 5301 Mirabell Road Charlotte, NC 28226 - 7 - HLM Design, Inc. Suite 2950 121 West Trade Street Charlotte, NC 28202 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as by law provided, effective as of the day of January, 1998. HLM DESIGN, INC. By: Title:____________________________ (SEAL) --------------------------------- VERNON B. BRANNON, Employee - 8 - EX-10 20 EXHIBT 10.27 February 17, 1995 Mr. Joseph M. Harris Mr. Vernon B. Brannon Hansen Lind Meyer, Inc. Drawer 310 Plaza Centre One Iowa City, IA 52244-0310 Re: Engagement ---------- Gentlemen: This letter is to confirm our understanding that Hansen Lind Meyer, Inc. (the "Company") has engaged Blalock and Company as the Company's financial advisor (the "Engagement") in connection with the evaluation and structuring of any one or more potential transactions, including but not limited to a financing or financings through the issuance or debt and/or equity, a merger, divestiture or acquisition, or a joint venture (such a potential transaction being referred to herein as a "Transaction"). The structuring, negotiating and placing of any Transaction will be on a best efforts basin. Blalock and Company's services in connection with any Transaction will include assisting the Company, to the extent the Company so requests, in: (1) the preparation and distribution of a summary of materials describing the Company and, if appropriate, the terms of a proposed Transaction, (2) contacting potential financing sources, (3) coordinating the due diligence efforts of potential financing sources, (4) assisting the Company during negotiation of the financial terms of any Transaction and (5) assisting, where appropriate, in expediting the documentation for the closing of any Transaction. We understand that the Company reserves the right to reject any Transaction it deems unsuitable. The Company agrees to reimburse Blalock and Company promptly upon request, for all reasonable, actual out-of-pocket expenses incurred by Blalock and Company pursuant to its Engagement hereunder. Such reimbursable expenses shall include, but not be limited to, transportation, lodging, copying and printing costs and applicable professional fees (including, if necessary, legal, accounting, auditing, environmental and appraisal services) incurred in connection with the structuring, presentation to potential financing sources, and closing of any Transaction. If possible, any necessary transportation and lodging arrangements shall be made through the Company. Blalock and Company hereby agrees to work with the Company to establish a reasonable monthly cap on the amount of reimbursable out-of-pocket expenses. As compensation for the services to be provided hereunder, the Company agrees to pay Blalock and Company an initial, non-refundable retainer fee in the amount of $15,000 upon the execution of this letter agreement, and for an eleven (11) month period thereafter, additional equal monthly installments of $15,000. Messrs. Harris and Brannon Hansen Lind Meyer, Inc. Engagement February 17, 1995 Page 2 In addition to these up-front and on-going retainers, Blalock and Company would receive at the closing of a Transaction a fee (the "Fee") equal to 10% of the gross value of the proceeds of any financing provided by sources contacted on the Company's behalf by Blalock and Company. The term of the Engagement shall be for a period of twelve months from the date of this letter agreement, unless extended by mutual consent of Blalock and Company and the Company. Notwithstanding the expiration of the Engagement, the expense reimbursement provisions contained herein and the indemnification and contribution provisions set forth on Schedule I attached hereto and incorporated herein shall survive and remain in full force and effect. Blalock and Company will be entitled to the entire FEE referred to above if a transaction of the type contemplated by this letter agreement is consummated, directly or indirectly, with a party or parties contacted by Blalock and Company on the Company's behalf, the Fee being payable upon consummation of such transaction. In connection with Blalock and Company services, the Company will furnish or cause to be furnished to Blalock and Company such information and data (hereinafter referred to as the "Information") relating to the Company and such access to the Company's officers, directors and employees and independent contractors, as Blalock and Company deems necessary or as Blalock and Company reasonably requests. The Company will be solely responsible for the contents of any and all written or oral communications provided to any prospective financing source, all of which shall be subject to the approval of the Company. The Company represents and warrants that any such communications and all Information, including, but not limited to, financial information, will be complete and correct in all material respects and will not contain any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in light of the circumstance under which such statements are or will be made. The Company recognizes and confirms that in Blalock and Company's performance of its services hereunder, (a) Blalock and Company may rely upon the accuracy and completeness of the Information without independent verification and (b) Blalock and Company does not assume responsibility for the accuracy or completeness thereof whether or not it makes an independent verification. Any Information obtained by Blalock and Company pursuant to the Engagement may not be disclosed publicly in any manner without the Company's prior approval and will be treated by Blalock and Company as confidential. As Blalock and Company is acting on behalf of the Company, it is Blalock and Company's practice to receive indemnification. A copy of such indemnification (and contribution) provisions are set forth in Schedule I annexed hereto, which provisions are incorporated by reference herein Messrs. Harris and Brannon Hansen Lind Meyer, Inc. Engagement February 17, 1995 Page 3 and made a part hereof. The Company hereby irrevocably agrees to provide such indemnification as set forth in Schedule I to Blalock and Company and the other parties specified therein. This letter agreement shall be governed by, and construed in accordance with, the laws or the State of North Carolina without regard to principles of conflict of laws. This letter agreement may be executed in counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. This letter agreement has been and is made solely for the benefit of the Company and Blalock and Company and its agents, employees, officers, directors, stockholders and controlling persons and their respective successors and assigns and heirs, and no other person shall acquire or have any right under or by virtue of this letter agreement. Please confirm that the foregoing accurately reflects our understanding by signing and returning to us the attached copy of this letter agreement, whereupon this will become a binding agreement between us. We are enthusiastic about the prospect of working with you towards the successful completion of a Transaction. Very truly yours, BLALOCK AND COMPANY /s/ William J. Blalock ---------------------- William J. Blalock Agreed and Accepted as of the date written above: HANSEN LIND MEYER By: /s/ Joseph M. Harris ---------------------- Name: Joseph M. Harris ------------------ Title: President -------------- cc: Alan S. Hicks, Esq. Messrs. Harris and Brannon Hansen Lind Meyer, Inc. Engagement February 17, 1995 Page 4 SCHEDULE I TO ENGAGEMENT LETTER DATED FEBRUARY 17, 1995 BETWEEN BLALOCK AND COMPANY AND HANSEN LIND MEYER, INC. (a) The Company agrees to indemnify and hold Blalock and Company, its affiliates and any affiliated entities of Blalock and Company and their respective officers, directors, partners, employees, agents and controlling persons within the meaning of Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934 (Blalock and Company and each such entity and person being hereinafter called an "Indemnified Person") harmless from and against any and all claims, liabilities, losses, damages, costs and expenses incurred (including fees and disbursements of counsel) by them which are (A) caused by, related to or arise out of (i) actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by the Company or (ii) actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by an Indemnified Person with the Company's consent or in conformity with actions taken or omitted to be taken by the Company or (B) otherwise related to or arising out of Blalock and Company's activities performed pursuant to the accompanying letter agreement (including, without limitation, its role as financial advisor and agent), the transactions contemplated by the accompanying letter agreement or Blalock & Company's role in connection therewith. The Company will not, however, be responsible for any such claims, liabilities, losses, damages, costs or expenses pursuant to clause (B) of the preceding sentence which have been finally determined by a court of competent jurisdiction to have primarily and directly resulted from willful misconduct or gross negligence on the part of the Indemnified Person seeking indemnification hereunder. (b) Notwithstanding anything expressed or implied herein to the contrary, the indemnity provided for herein shall cover the amount of any settlements entered into by an Indemnified Person in connection with any claim for which an Indemnified Person may be indemnified hereunder; provided, however, that an Indemnified Person shall not enter into any such settlement unless the Company has consented thereto (which consent shall not be unreasonably withheld). No settlement binding on an Indemnified Person may be made without the consent of an Indemnified Person (which consent shall not be unreasonably withheld). (c) The Company and Blalock and Company agree that if any indemnification sought by an Indemnified Person pursuant to this paragraph is held by a court to be unavailable for any reason other than that specified in the second sentence of paragraph (a) above, then (whether or not Blalock and Company is the Indemnified Person), in order to provide just and equitable contribution, the Company and Blalock and Company shall contribute to the claims, liabilities, losses, damages, costs and expenses for which such indemnification is held unavailable in such proportion as is appropriate to reflect the relative benefits of the Company, on the one hand, and Blalock and Company on the other hand, in connection with the transaction or transactions contemplated by the accompanying letter agreement, and also relative fault of the Company, on the one hand, and Blalock and company, on the other hand, subject to the limitation that in any event Blalock and Company aggregate contribution to all claims, liabilities, losses, damages, costs and expenses with respect to which contribution is available hereunder shall not exceed the SCHEDULE I TO ENGAGEMENT LETTER DATED FEBRUARY 17, 1995 BETWEEN BLALOCK AND COMPANY AND HANSEN LIND MEYER, INC. PAGE 2 amount of fees (but not expenses) actually received by Blalock and Company pursuant to the accompanying letter agreement. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. You also agree that no Indemnified Person shall have any liability (whether direct or indirect in contract or tort or otherwise) to the Company for or in connection with the accompanying letter agreement, the transactions contemplated hereby or Blalock and Company's role in connection therewith, except for any such liability for losses, claims, damages, liabilities or expenses incurred by the Company that are determined by final judgment or a court of competent jurisdiction to have resulted primarily from actions taken or omitted to be taken by such Indemnified Person from willful misconduct or gross negligence. The provisions in this Schedule I shall remain operative and in full force and effect regardless of the termination or expiration of the Engagement pursuant to the accompanying letter agreement. EX-10 21 EXHIBIT 10.28 PROMISSORY NOTE
- -------------------- --------------- -------------- -------------- --------- ------------- ------------------- ---------- --------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $1,000,000.00 05-30-1997 05-30-1998 004A 905 GRS - -------------------- --------------- -------------- -------------- --------- ------------- ------------------- ---------- --------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ----------------------------------------------------------------------------------------------------------------------------------- Borrower: HLM DESIGN, INC. (TIN 562018819) Lender: FIRST CHARTER NATIONAL BANK 121 WEST TRADE STREET, SUITE 2950 COMMERCIAL CHARLOTTE, NC 28202 P.O. BOX 228 CONCORD, NC 28026-0228 - ----------------------------------------------------------------------------------------------------------------------------------- Principal Amount: $1,000,000.00 Initial Rate: 10.000% Date of Note: May 30, 1997
PROMISE TO PAY. HLM DESIGN, INC. ("Borrower") promises to pay to FIRST CHARTER NATIONAL BANK ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million & 00/100 Dollars ($1,000,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on May 30, 1998. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning July 1, 1997, and all subsequent interest payments are due on the same day of each month after that. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the Prime Rate as published in the Wall Street Journal. When a range of rates has been published, the higher of the rates will be used (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. THE INDEX CURRENTLY IS 8.500% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 1.500 PERCENTAGE POINTS OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 10.000% PER ANNUM. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owned earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 15 DAYS OR MORE LATE, Borrower will be charged 4.000% OF THE REGULARLY SCHEDULED PAYMENT. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender, after Borrower shall have received written notice of such default and not cured such default within thirty (30) days. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This include a garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies and a suitable replacement is not approved by Lender within ninety (90) days or any of the other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (h) Lender in good faith deems itself insecure. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's reasonable attorney's fees and Lender's legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF NORTH CAROLINA, OF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF CABARRUS COUNTY, THE STATE OF NORTH CAROLINA. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender whether checking, savings, or some other account), including without limitation ll accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorized Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights provided on this paragraph. COLLATERAL. This Note is secured by Secured by unconditional guaranty from Hansen, Lind, Meyer, Inc. which is secured by a security agreement on all accounts receivable of Hansen Lind Meyer, Inc. Personal guaranties of William J. Blalock, Joseph M. Harris, Vernon B. Brannon. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: HLM DESIGN, INC..
By:/s/ JOSEPH M. HARRIS (SEAL) By:/s/ KAREN A.KAPLAN (SEAL) -------------------------------------- -------------------------------- JOSEPH M. HARRIS, PRESIDENT Asst. Secretary
EX-23 22 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders We consent to the use in this Amendment No. 1 to the Registration Statement relating to the shares of Common Stock of HLM Design, Inc. on Form S-1 of our report dated (i) November 11, 1997 on the financial statements of HLM Design, Inc. as of April 25, 1997 and for the period ended April 25, 1997, (ii) our report dated October 31, 1997 on the financial statements of Hansen Lind Meyer, Inc. as of April 26, 1996 and April 25, 1997 and for each of the three years in the period ended April 25, 1997 appearing in the Prospectus, which is a part of this Amendment No. 1 to the Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Charlotte, North Carolina January 21, 1998 -----END PRIVACY-ENHANCED MESSAGE-----