-----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, RJbsHJ7C0LheV+spc7K9reIPnCQ6aCMwcRfca4Fjwit9ZmybWKNuhzU0JtlO5Su0 F6ZJchnHoh6hjNAtnZJEyg== 0000950168-98-001161.txt : 19980413 0000950168-98-001161.hdr.sgml : 19980413 ACCESSION NUMBER: 0000950168-98-001161 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19980410 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: 98591351 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 DESIGN, INC FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1998 REGISTRATION NO. 333-40617 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 3 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 this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. =============================================================================== 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 APRIL 10, 1998 PROSPECTUS 1,200,000 SHARES HLM DESIGN, INC. COMMON STOCK ------------------------ All of the 1,200,000 shares (the "Shares") of common stock, par value $.001 per share (the "Common Stock"), are offered hereby (the "Offering") by HLM Design, Inc. ("HLM Design"). Prior to the Offering, there has been no public market for the Common Stock. It is currently anticipated that the public offering price will be between $6.00 and $7.50 per share. See "Underwriting" for information relating to factors to be considered in determining the initial public offering price. HLM Design has applied for quotation of the Common Stock on the Nasdaq SmallCap Market under the symbol "HLMD." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. THIS OFFERING INVOLVES A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. ------------------------ 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 $460,000. (3) HLM Design has granted to the Underwriters an option, exercisable within 45 days of the date hereof, to purchase up to an aggregate of 180,000 additional shares of Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to HLM Design will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The Shares are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Shares will be made in New York, New York on or about , 1998. BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. WESTPORT RESOURCES INVESTMENT SERVICES, INC. MARION BASS SECURITIES CORPORATION ------------------------ The date of this Prospectus is , 1998. [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." ALL BROKER-DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK IN THE STATE OF OKLAHOMA MUST COMPLY WITH THE REQUIREMENTS OF SECTION 660: 10-9-31 OF THE RULES OF THE OKLAHOMA SECURITIES COMMISSION AND THE ADMINISTRATOR OF THE DEPARTMENT OF SECURITIES TO DELIVER A PROSPECTUS PRIOR TO OR CONCURRENTLY WITH ANY TRANSACTION IN THE COMMON STOCK UNTIL 90 DAYS AFTER THE EFFECTIVE DATE OF THE REGISTRATION OF THE COMMON STOCK IN OKLAHOMA. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (A) GIVES RETROACTIVE EFFECT TO AN EFFECTIVE 12.75-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"), (B) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, AND (C) GIVES EFFECT TO THE EXERCISE OF THE WARRANTS, INCLUDING THE WARRANTS HELD BY PACIFIC (AS DEFINED HEREIN) TO BE EXERCISED IMMEDIATELY PRIOR TO THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. SEE "DESCRIPTION OF CAPITAL STOCK -- WARRANTS" AND "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. is a management company that enters into management and services relationships with full service AEP Firms. It was formed in March 1997 to pursue a strategy of consolidating non-professional operations and providing management expertise to individual AEP Firms. HLM Design believes it is the first company to pursue such a consolidation strategy in order to take advantage of operating efficiencies and provide geographic and service diversification for clients. Prior to March 1997, the current management team of HLM Design operated HLM Design of Northamerica, Inc. (formerly named Hansen Lind Meyer Inc.), an Iowa corporation ("HLMI"), HLM Design of the Southeast, P.C. (formerly named HLM of North Carolina, P.C.) ("HLMNC") and HLM Design of the Northwest, Architecture, Engineering and Planning, P.C. (formerly named HLM of Oregon, Architecture and Planning, P.C.) ("HLMO"). HLMI has been in operation for over thirty years. HLMNC and HLMO were organized in 1996 but have had no operations to date. These three AEP Firms have each entered into a Management and Services Agreement with HLM Design. The Managed Firms operate offices in Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando, Florida, Bethesda, Maryland, Denver, Colorado, Sacramento, California, Philadelphia, Pennsylvania, Portland, Oregon and Charlotte, North Carolina. HLM DESIGN IS NOT ENGAGED IN THE PRACTICE OF ARCHITECTURE, ENGINEERING OR PLANNING. Joseph M. Harris and Vernon B. Brannon, executive officers and principal stockholders of HLM Design, are also the principal stockholders and officers of the Managed Firms, HLMI, HLMNC and HLMO. As officers of the Managed Firms, they caused the Managed Firms to enter into Management and Services Agreements with HLM Design and as stockholders of each of the Managed Firms they entered into Stockholders' Agreements (as described below). See "Certain Transactions -- Relationships with Managed Firms." A full-service AEP Firm provides a spectrum of services in various specialties to customers through a broad range of professionals, including architects, mechanical, electrical, structural and civil engineers, landscape architects, interior designers and construction administration personnel. HLM Design has chosen to focus its effort on the management of full-service AEP Firms because it believes these firms offer a competitive advantage -- the ability to provide a full line of high-quality, cost effective services -- over firms that provide a more narrow range of services. HLM Design believes that its consolidation strategy will assist in attracting new AEP Firms as a result of two major trends: (1) the increasing complexity, cost and competitiveness of the design practice conducted by AEP Firms requiring operating and cost efficiencies, and (2) AEP Firms' need for access to a wider pool of geographically dispersed professionals in order to provide solutions for the evolving needs of their clients. 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. 3 HLM Design's principal executive office is located at 121 West Trade Street, Suite 2950, Charlotte, North Carolina and its telephone number is (704) 358-0779. OPERATING STRATEGY The Company provides, primarily through HLMI, a complement of architectural, engineering and planning services to a variety of clients in several industries. These services include, in addition to the provision of architectural and engineering services, all phases of a construction project starting with assistance in the funding process, development of a master plan, and construction oversight. 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 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. Management believes it is 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 its growth strategy can be achieved at less cost than that which would be incurred by AEP firms operating on a stand alone basis. CERTAIN RISK FACTORS The Common Stock offered hereby involves a high degree of risk. Prospective purchasers should consider that: (Bullet) HLM Design's operating and growth strategies are predicated upon its ability to achieve significant consolidation of AEP Firm operations and to generate profits from those firms; (Bullet) Conflicts of interest could arise between HLM Design and Joseph Harris and Vernon Brannon, the President and Chief Financial Officer, respectively, of HLM Design, in connection with the operation and enforcement of the provisions of Stockholders' Agreements and the Management and Services Agreements; 4 (Bullet) HLM Design's revenues are currently derived from Management and Services Agreements with three firms, only one of which had active operations at October 31, 1997 and all of which are related to each other, and to HLM Design, by common and principal stockholders, Messrs. Harris and Brannon; (Bullet) HLM Design's operating and growth strategies require substantial capital resources resulting in the incurrence of long-term and short-term indebtedness and may result in the public or private issuance from time to time of additional debt or equity securities, including the issuance of such securities in connection with the execution of new Management and Services Agreements; (Bullet) AEP Firms that have entered into Management and Services Agreements with HLM Design have the right to terminate such agreements upon the filing by HLM Design of a petition of involuntary bankruptcy and assignment for the benefit of creditors, or upon other action taken voluntarily or involuntarily under any federal or state law for the benefit of debtors; (Bullet) Because of the unique structure of the relationship between HLM Design and its Managed Firms, many aspects of these relationships have not been the subject of prior regulatory interpretations and there can be no assurance that a review of the Company's business by applicable regulatory authorities will not result in determinations that may adversely affect the operations of the Company or prevent its continued operations; (Bullet) The Company's success depends to a significant degree upon the continued contributions of Messrs. Harris and Brannon; and (Bullet) There is no existing market for the Common Stock and no assurance can be given that one will develop following the Offering. PROSPECTIVE INVESTORS SHOULD ALSO BE AWARE THAT AS OF THE DATE HEREOF, HLM DESIGN HAS ENTERED INTO MANAGEMENT AND SERVICES AGREEMENTS ONLY 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.................... 1,200,000 shares (1) Common Stock to be outstanding after the Offering..... 2,075,087 shares (1)(2)(3) Total............................................ 2,075,087 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 entering into new Management and Services Agreements. See "Use of Proceeds." Trading............................................... The Company has applied for quotation of the Common Stock on the Nasdaq SmallCap Market ("Nasdaq"), under the symbol "HLMD."
- --------------- (1) Does not include up to an aggregate of 180,000 shares that may be sold by HLM Design upon exercise of the over-allotment option granted to the Underwriters. See "Underwriting." (2) Excludes (i) 159,955 shares of Common Stock reserved for future issuance under HLM Design's Stock Option Plan (as defined herein), including options to purchase an aggregate of 115,908 shares of Common Stock that will be granted immediately before the completion of the Offering, and (ii) 57,954 shares of Common Stock reserved for future issuance under HLM Design's ESPP (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 nine months ended January 24, 1997 are derived from the unaudited financial statements of HLMI, which are included elsewhere in this Prospectus. The selected financial data for the nine months ended January 30, 1998 are derived from the unaudited combined financial statements of HLM Design and, for the eight months ended January 30, 1998, of 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.
PREDECESSOR COMPANY (1) ----------------------------------------------------------------------- NINE FOR THE YEAR ENDED MONTHS ONE MONTH ----------------------------------------- ENDED ENDED APRIL 30, APRIL 26, APRIL 25, JANUARY 24, MAY 30, 1995 1996 1997 1997 1997 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA: Revenue........................................ $29,122,557 $28,554,424 $26,754,710 $19,442,280 $2,233,036 ----------- ----------- ----------- ----------- ----------- Costs and Expenses: Direct cost of revenue......................... 15,685,671 14,261,952 13,376,251 9,917,627 898,979 Operating costs................................ 14,098,729 13,104,278 12,414,739 9,359,733 1,163,141 ESOP expenses.................................. 573,837 584,202 408,765 406,652 Amortization on intangible assets.............. 5,952 99,145 107,670 81,807 9,571 ----------- ----------- ----------- ----------- ----------- Total costs and expenses....................... 30,364,189 28,049,577 26,307,425 19,765,819 2,071,691 ----------- ----------- ----------- ----------- ----------- Income (loss) from operations.................. (1,241,632) 504,847 447,285 (323,539) 161,345 ----------- ----------- ----------- ----------- ----------- Other income (expense): Net interest................................... (142,744) (383,552) (396,007) (280,027) (36,951) Non-operating income........................... 428,475 850,273 285,635 ----------- ----------- ----------- ----------- ----------- Total other income (expense)............... 285,731 466,721 (110,372) (280,027) (36,951) ----------- ----------- ----------- ----------- ----------- Income (Loss) Before Income Taxes.............. (955,901) 971,568 336,913 (603,566) 124,394 Income tax expense (benefit)................... (360,080) 435,459 219,799 (143,517) 43,000 ----------- ----------- ----------- ----------- ----------- Net income (loss) (3).......................... $ (595,821) $ 536,109 $ 117,114 $ (460,049) $ 81,394 =========== =========== =========== =========== =========== BALANCE SHEET DATA: Working capital(deficiency).................... $(1,029,547) $(1,620,488) $(1,902,363) $ (686,632) $(2,238,531) Total assets................................... 10,519,859 12,577,992 12,874,503 13,402,269 17,639,673 Long-term debt................................. 840,302 564,577 103,792 769,742 2,476,008 Total liabilities.............................. 10,690,072 11,819,796 11,670,962 11,811,214 16,354,738 Warrants outstanding (4)....................... Stockholders' equity (deficiency) (5).......... (170,213) 758,196 1,203,541 1,098,829 1,284,935 HLM DESIGN (COMBINED) NINE MONTHS ENDED JANUARY 30, 1998 (2) ----------- INCOME STATEMENT DATA: Revenue........................................ $21,543,416 ----------- Costs and Expenses: Direct cost of revenue......................... 9,979,581 Operating costs................................ 9,629,991 ESOP expenses.................................. Amortization on intangible assets.............. 114,549 ----------- Total costs and expenses....................... 19,724,121 ----------- Income (loss) from operations.................. 1,819,295 ----------- Other income (expense): Net interest................................... (748,621) Non-operating income........................... ----------- Total other income (expense)............... (748,621) ----------- Income (Loss) Before Income Taxes.............. 1,070,674 Income tax expense (benefit)................... 514,063 ----------- Net income (loss) (3).......................... $ 556,611 ========== BALANCE SHEET DATA: Working capital(deficiency).................... $ (432,870) Total assets................................... 18,043,555 Long-term debt................................. 4,357,057 Total liabilities.............................. 17,194,658 Warrants outstanding (4)....................... 200,068 Stockholders' equity (deficiency) (5).......... 648,829
- --------------- (1) The "Predecessor Company" is HLMI. (2) Includes information for HLM Design and for the Managed Firms for the eight months from May 31, 1997 to January 30, 1998 on a combined basis. HLM Design's operations for the month ended May 30, 1997 reflected herein include no revenues or expenses. (3) Historical net income per share is not presented, as the historical capital structure prior to the Offering is not comparable with the capital structure of the Company that will exist after the Offering. (4) Reflects Warrants held by Pacific and Equitas as of January 30, 1998. Equitas exercised its Warrants in February 1998 and Pacific will exercise its Warrants immediately prior to the effective date of the Registration Statement of which this Prospectus is a part. (5) Neither HLM Design nor the Predecessor Company has paid cash dividends from May 1, 1994 to January 30, 1998. 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. Messrs. Harris and Brannon and Berthel Fisher Company Leasing, Inc. ("Berthel Leasing") have, however, agreed to escrow Common Stock owned by each of them pursuant to the requirements of the various state securities commissions. For a description of restrictions on current stockholders' ability to freely transfer Common Stock outstanding on the date hereof and not sold in the Offering, see "Shares Eligible for Future Sale." Additionally, in connection with the consummation of the Offering, Messrs. Harris and Brannon have entered into Employment Agreements with HLM Design whereby each will receive compensation and other benefits as well as options to purchase 57,954 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 (for whom, as indicated below, HLM Design also provides required financing). Currently, HLM Design has Management and Services Agreements with three firms, only one (HLMI) of which had active operations at January 30, 1998. 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, particularly since HLM Design, as the management company will be responsible for the financing of working capital growth, capital growth and other cash needs of the Managed Firms. See "Business -- HLM Design Operating -- Management and Services Agreements." These requirements will result in HLM Design incurring long-term and short-term indebtedness and may result in the public or private issuance, from time to time, of additional debt or equity securities, including the issuance of such securities in connection with the execution of Management and Services Agreements. There can be no assurance that any such financing will be 7 obtainable on terms acceptable to HLM Design. If HLM Design is unable to obtain a new revolving line of credit following the Offering, its ability to implement its growth strategy will be adversely affected. Additionally, issuing securities in connection with the execution of Management and Services Agreements will dilute the percentage of Common Stock owned by stockholders prior to such issuance. There is also no assurance that such financings will not cause dilution in the book value per share of the Common Stock. EFFECT OF BANKRUPTCY AEP Firms that have entered into Management and Services Agreements with HLM Design have the right to terminate such agreements upon the filing by HLM Design of a petition in voluntary bankruptcy, an assignment for the benefit of creditors, or upon other action taken voluntarily or involuntarily under any federal or state law for the benefit of debtors. Because the substantial majority of the assets of the Company are owned by the Managed Firms, if such agreements are terminated, HLM Design would proceed through bankruptcy without any meaningful assets. In such circumstances, it is likely that no significant assets would be available for distribution to stockholders upon a liquidation. GOVERNMENT REGULATION The architectural and engineering industries are regulated at the state level. The Company believes its operations are in material compliance with applicable law. Nevertheless, because of the unique structure of the relationships between HLM Design and its Managed Firms, many aspects of these relationships have not been the subject of prior regulatory interpretation. The Company has not discussed its structure with or received approvals from any regulatory authorities, and is unaware of its business being reviewed by any such regulatory authorities. There can be no assurance that a review of the Company's business by applicable regulatory authorities will not result in determinations that may adversely affect the operations of the Company or prevent its continued operation. There also can be no assurance that the regulatory environment will not change so as to restrict the Company's existing operations or limit the expansion of the Company's business. Expansion of the operations of the Company to certain jurisdictions could require structural and organizational modifications of HLM Design's relationships with its Managed Firms. Consequently, if the Company is unable or unwilling to undertake such modifications, it may be limited in its ability to expand into certain jurisdictions. As of the date hereof, the Company has not determined which jurisdictions would require structural or organizational modifications of HLM Design's relationships with the Managed Firms. Although the Company believes its operations are in material compliance with existing applicable law, there can be no assurance that the Company's existing Management and Services Agreements could 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 therein, 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 key 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 agreements or, in some cases, refuse to enforce any provisions thereof. If courts refuse to enforce the noncompetition agreements of HLM Design or the Managed Firms, such refusals 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." 8 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 and the professionals employed by its Managed Firms. Successful malpractice claims asserted against the Managed Firms, their employees or HLM Design could have an adverse effect on the Company's profitability. DEPENDENCE ON MANAGED FIRMS HLM Design's revenues depend on fees and revenues generated by various AEP Firms managed by HLM Design. Any material loss of revenue by such firms, whether as a result of the loss of professionals or otherwise, could have a material adverse effect on HLM Design. HLM Design 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 has applied for quotation of its Common Stock on the Nasdaq SmallCap Market. The initial public offering price of the Common Stock will be determined by negotiations among the Company and representatives of the Underwriters. See "Underwriting." There can be no assurance that the market price of the Common Stock prevailing at any time after this Offering will equal or exceed the initial 9 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 of HLM Design or representatives of holders of Common Stock. Although HLM Design intends to maintain at least two independent directors on its Board following completion of the Offering, such directors will not constitute a majority of the Board, and HLM Design's Board may not have a majority of independent directors at any time in the future. In the absence of a majority of independent directors, HLM Design's executive officers, who also are principal stockholders and directors, could establish policies and enter into transactions without independent review and approval thereof, subject to certain restrictions under HLM Design's Certificate of Incorporation and other undertakings by HLM Design. In addition, although HLM Design intends to establish audit and compensation committees which will consist entirely of outside directors, and has undertaken that all transactions between the Company and any of its officers, directors and employees will be approved by the outside directors. See "Management." DILUTION Purchasers of Common Stock in the Offering will experience immediate and substantial dilution in the amount of $3.48 per share, or 58% of the initial public offering price ($3.69 per share, or 62% of the initial public offering price, giving effect to the Common Stock issuance and exercise of Warrants subsequent to January 30, 1998), in net tangible book value per share from the initial offering price, assuming an initial offering price of $6.00 per share (the low point of the range of the initial offering price set forth on the cover page of this Prospectus). See "Dilution." POTENTIAL ADVERSE MARKET PRICE EFFECT OF ADDITIONAL SHARES ELIGIBLE FOR FUTURE SALE 256,712 of the 875,087 shares of Common Stock owned beneficially by existing stockholders of HLM Design and the 159,955 shares of Common Stock reserved for future issuance under the Stock Option Plan are "restricted securities" as defined in Rule 144 under the Securities Act of 1933, as amended (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." Additionally, Messrs. Harris and Brannon and Berthel Leasing have agreed to escrow Common Stock owned by each of them pursuant to the requirements of the various state securities commissions. 10 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 $6.02 million ($6.99 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $6.00 per share (the low point of the range of the initial public offering price set forth on the cover page of this 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 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 23%. (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 $2 million to Pacific Capital, L.P. ("Pacific") and Equitas, L.P. ("Equitas") (the "Pacific/Equitas Loan") and assumed the above-referenced notes payable to employee stockholders. The Berthel Leasing proceeds were used for working capital.) See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." HLM Design intends to use the remaining expected net proceeds of the Offering for working capital and other general corporate purposes, including payments made by HLM Design in connection with the execution of new Management and Services Agreements. Until utilized, the Company will invest the net proceeds in short-term, interest bearing, investment grade instruments. The following table illustrates HLM Design's intended use of proceeds in order of priority:
DOLLARS PERCENTAGE OF USE OF PROCEEDS ($) PROCEEDS (%) - ------------------------------------------------------------------------------------------------- ---------- ------------- Underwriting Discount............................................................................ $ 720,000 10.00% Payment of Expenses.............................................................................. 460,000 6.38% Repayment of Pacific/Equitas Loan................................................................ 2,000,000 27.78% Repayment of Berthel Leasing Loan................................................................ 800,000 11.12% Repayment of notes payable to employee stockholders.............................................. 200,000 2.78% Working Capital.................................................................................. 3,020,000 41.94% ---------- ------------- Estimated Net Proceeds to HLM Design........................................................... $7,200,000 100.00% ========== ============
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." 11 CAPITALIZATION The following table sets forth, as of January 30, 1998, the combined capitalization of HLM Design and Affiliates (a) on an actual basis (giving effect to the Stock Split), 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, and the Common Stock issuance and exercise of Warrants subsequent to January 30, 1998. See "Use of Proceeds", "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 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.
JANUARY 30, 1998 ------------------------------- PRO FORMA FOR THE COMMON STOCK ISSUANCE AND EXERCISE OF WARRANTS SUBSEQUENT TO JANUARY 30, 1998 AND FOR THE ACTUAL OFFERING(1) ---------- ----------------- Short-term debt: Notes payable.............................................................................. $2,250,000 $ 1,500,000 Current maturities of long-term debt....................................................... 743,311 743,311 ---------- ----------------- Total short-term debt................................................................... $2,993,311 $ 2,243,311 ---------- ----------------- ---------- ----------------- Long-term debt, excluding current maturities................................................. $4,357,057 $ 2,194,749 ---------- ----------------- Warrants outstanding......................................................................... 200,068 0 ---------- ----------------- Stockholders' equity: Preferred Stock of HLM Design, $.10 par value, 1,000,000 shares authorized; no shares issued and outstanding.................................................................. 0 0 Common Stock of HLM Design, $.001 par value, 9,000,000 shares authorized; 702,834 shares issued and outstanding, actual; 2,075,087 shares issued and outstanding, as adjusted (2)..................................................................................... 703 2,075 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................................................................. 101,031 6,319,726 Retained earnings.......................................................................... 556,611 556,611 Stock subscription receivable -- HLM Design, HLMNC, HLMO (3)............................... (9,524) (9,524) ---------- ----------------- Total stockholders' equity.............................................................. 648,829 6,868,896 ---------- ----------------- Total capitalization.................................................................. $5,205,954 $ 9,063,645 ========== ===============
- --------------- (1) Adjusted to give effect to the Offering and the application of the net proceeds thereof, the exercise by Equitas of Warrants to purchase 5,749 shares of Common Stock (73,300 shares after giving effect to the Stock Split) at an exercise price of $0.01 per share and the exercise by Pacific of Warrants to purchase 7,761 shares of Common Stock (98,953 shares after giving effect to the Stock Split) at an exercise price of $0.01 per share. See "Use of Proceeds", "Dilution", "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Certain Transactions." (2) 2,255,087 shares if the Underwriters' over-allotment option is exercised in full. See "Underwriting" and "Principal Stockholders." Excludes (i) 159,955 shares of Common Stock reserved for future issuance under HLM Design's Stock Option Plan (including up to 115,908 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), and (ii) 57,954 shares of Common Stock reserved for issuance under HLM Design's ESPP. 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 January 30, 1998. 12 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 January 30, 1998 was $1,618,616, or $2.30 per share of Common Stock. Net tangible book value (deficit) per share is determined by dividing the tangible net worth of the Company by the total number of outstanding shares of Common Stock. After giving effect to the sale of the 1,200,000 shares of Common Stock offered hereby and the receipt of an assumed $6.02 million of net proceeds from the Offering (based on an assumed initial public offering price of $6.00 per share and net of underwriting discounts and estimated offering expenses), net tangible book value of the Company at January 30, 1998 would have been $2.52 per share. This represents an immediate increase in the net tangible book value of $4.82 per share to existing stockholders and an immediate dilution of $3.48 per share to new investors purchasing Common Stock in the Offering. The following table illustrates this per share dilution (as of January 30, 1998 and without giving effect to the Common Stock issuance or exercise of Warrants subsequent to January 30, 1998): Assumed initial public offering price per share...................................................................... $ 6.00 Net tangible book value per share (deficit) before giving effect to the Offering................................... (2.30) Increase in net tangible book value per share attributable to the Offering......................................... 4.82 Pro forma net tangible book value per share after giving effect to the Offering...................................... 2.52 Dilution per share to new investors(1)(2)............................................................................ $ 3.48 Dilution per share as a percentage of the assumed initial public offering price(2)................................. 58%
- --------------- (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. (2) Giving effect to the Common Stock issuance and exercise of Warrants subsequent to January 30, 1998 the dilution per share to new investors would be $3.69 and the dilution per share as a percentage of the assumed initial public offering price would be 62%. The following table sets forth the issuance of Common Stock to current stockholders of HLM Design (giving effect to the Stock Split):
NUMBER OF STOCKHOLDER(4) DATE ISSUED SHARES ISSUED PRICE - -------------------------------- ---------------------------------- ------------- -------------------------- Joseph Harris March 20, 1997 261,375 an aggregate of $1,000 March 2, 1998 47,813 $4.00 per share (1) Vernon Brannon March 20, 1997 261,375 an aggregate of $1,000 March 2, 1998 47,812 $4.00 per share (1) Equitas February 12, 1998 73,300 an aggregate of $57.49 (2) Pacific (4) 98,953 an aggregate of $77.61 (2) Berthel Leasing December 26, 1997 43,631 an aggregate of $34.22 (2) Clay R. Caroland November 10, 1997 7,166 an aggregate of $8.62 (2) Other employee stockholders (3) May 16, 1997-November 1, 1997 29,835 an aggregate of $34,655.40
- --------------- (1) Represents price paid by Messrs. Harris and Brannon in purchase of shares from a former director. (2) Represents the exercise price of Warrants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (3) Each of such employees owns less than 1% of the Common Stock outstanding. (4) Warrants to be exercised and shares issued immediately prior to the effective date of the Registration Statement of which this Prospectus is a part. 13 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 nine months ended January 24, 1997 are derived from the unaudited financial statements of HLMI, which are included elsewhere in this Prospectus. The selected financial data for the nine months ended January 30, 1998 are derived from the unaudited combined financial statements of HLM Design and, for the eight months ended January 30, 1998, of 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) ------------------------------------------------------------------------------------------------- NINE FOR THE YEAR ENDED MONTHS ONE MONTH ------------------------------------------------------------------- ENDED ENDED APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 25, JANUARY 24, MAY 30, 1993 1994 1995 1996 1997 1997 1997 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Revenue.......................... $33,464,656 $27,841,902 $29,122,557 $28,554,424 $26,754,710 $19,442,280 $ 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 9,917,627 898,979 Operating costs.................. 15,376,045 13,516,392 14,098,729 13,104,278 12,414,739 9,359,733 1,163,141 ESOP expenses.................... 474,403 564,918 573,837 584,202 408,765 406,652 Amortization on intangible assets......................... 4,464 5,952 5,952 99,145 107,670 81,807 9,571 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Total costs and expenses......... 34,226,788 30,012,696 30,364,189 28,049,577 26,307,425 19,765,819 2,071,691 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Income (loss) from operations.... (762,132) (2,170,794) (1,241,632) 504,847 447,285 (323,539) 161,345 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Other income (expense): Net interest..................... (18,438) (43,058) (142,744) (383,552) (396,007) (280,027) (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) (280,027) (36,951) ----------- ----------- ----------- ----------- ----------- ------------ ------------ Income (loss) before income taxes.......................... (780,570) (2,213,852) (955,901) 971,568 336,913 (603,566) 124,394 Income tax expense (benefit)..... (260,000) (779,000) (360,080) 435,459 219,799 (143,517) 43,000 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Net income (loss) (3)............ $ (520,570) $(1,434,852) $ (595,821) $ 536,109 $ 117,114 $ (460,049) $ 81,394 =========== =========== =========== =========== =========== =========== =========== BALANCE SHEET DATA: Working capital(deficiency)...... $2,059,840 $1,229,211 $(1,029,547) $(1,620,488) $(1,902,363) (686,632) (2,238,531) Total assets..................... 11,586,309 10,147,420 10,519,859 12,577,992 12,874,503 13,402,269 17,639,673 Long-term debt................... 1,598,727 1,050,330 840,302 564,577 103,792 769,742 2,476,008 Total liabilities................ 10,020,182 9,713,789 10,690,072 11,819,796 11,670,962 11,811,214 16,354,738 Warrants outstanding (4)......... Stockholders' equity (deficiency) (5)............................ 1,566,127 433,631 (170,213) 758,196 1,203,541 1,098,829 1,284,935 HLM DESIGN (COMBINED) NINE MONTHS ENDED JANUARY 30, 1998 (2) ----------- Revenue.......................... $21,543,416 ----------- Costs and Expenses: Direct cost of revenue........... 9,979,581 Operating costs.................. 9,629,991 ESOP expenses.................... Amortization on intangible assets......................... 114,549 ----------- Total costs and expenses......... 19,724,121 ----------- Income (loss) from operations.... 1,819,295 ----------- Other income (expense): Net interest..................... (748,621) Non-operating income............. ----------- Total other income (expense)................... (748,621) ----------- Income (loss) before income taxes.......................... 1,070,674 Income tax expense (benefit)..... 514,063 ----------- Net income (loss) (3)............ $ 556,611 =========== BALANCE SHEET DATA: Working capital(deficiency)...... (432,870) Total assets..................... 18,043,555 Long-term debt................... 4,357,057 Total liabilities................ 17,194,658 Warrants outstanding (4)......... 200,068 Stockholders' equity (deficiency) (5)............................ 648,829
- --------------- (1) The "Predecessor Company" is HLMI. (2) Includes information for HLM Design and for the Managed Firms for the eight months from May 31, 1997 to January 30, 1998 on a combined basis. HLM Design's operations for the month ended May 30, 1997 reflected herein include no revenues or expenses. (3) Historical net income per share is not presented, as the historical capital structure prior to the Offering is not comparable with the capital structure of the Company that will exist after the Offering. (4) Reflects Warrants held by Pacific and Equitas as of January 30, 1998. Equitas exercised its Warrants in February 1998 and Pacific will exercise its Warrants immediately prior to the effective date of the Registration Statement of which this Prospectus in a part. (5) Neither HLM Design nor the Predecessor Company has paid cash dividends from May 1, 1992 to January 30, 1998. 14 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 that 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 that 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 pro forma 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.
(PREDECESSOR HLM DESIGN (COMBINED) COMPANY) (COMBINED) PRO FORMA ONE MONTH NINE MONTHS PRO FORMA FOR THE NINE ENDED ENDED ADJUSTMENTS MONTHS ENDED MAY 30, JANUARY 30, PRO FORMA FOR THE JANUARY 30, 1997 1998 ADJUSTMENTS(1) OFFERING 1998 ----------- ----------- ------------- ------------- ------------ Revenue................................... $ 2,233,036 $21,543,416 $23,776,452 Costs and expenses: Direct cost of revenue.................... 898,979 9,979,581 10,878,560 Operating costs........................... 1,163,141 9,629,991 $ (3,800)(7) 10,761,332 (28,000)(3) Amortization of intangible assets......... 9,571 114,549 4,800(2) 128,920 ----------- ----------- ------------- ------------- ------------ Total costs and expenses.................. 2,071,691 19,724,121 (27,000) 21,768,812 ----------- ----------- ------------- ------------- ------------ Income from operations.................... 161,345 1,819,295 27,000 2,007,640 Other income (expense) Interest expense.......................... (36,951) (748,621) 26,000(4) $ (298,000)(6) (994,572 ) (35,000)(4) 355,000(6) (48,000)(5) (209,000)(12) ----------- ----------- ------------- ------------- ------------ Total other expense..................... (36,951) (748,621) (57,000) (152,000) (994,572 ) ----------- ----------- ------------- ------------- ------------ Income before income taxes................ 124,394 1,070,674 (30,000) (152,000) 1,013,068 Income tax expense........................ 43,000 514,063 (9,650)(9) (58,140)(8) 489,273 ----------- ----------- ------------- ------------- ------------ Net income................................ $ 81,394 $ 556,611 $ (20,350) $ (93,860) $ 523,795 ============ =========== ============= ============= ============ Pro forma net income per share (11)(14)... $ .25 ------------ Weighted average shares outstanding (000s).................................. 2,060 ============
(FOOTNOTES ON FOLLOWING PAGE) 15 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....................................... 219,799 78,579(9) (8,415)(8) 289,963 -------------- ----------- ----------- -------------- Net income............................................... $ 117,114 $ (41,144) $ (13,585) $ 62,385 ============== =========== =========== ============== Pro forma net income per share (13)(14).................. $ .03 -------------- Weighted average shares outstanding (000s)............... 2,033 ==============
- --------------- (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 a total of $64 a share. As a result, there was a 90% change in voting control of HLMI. The assets and liabilities of HLMI were restated to fair value as of May 31, 1997. Purchase accounting was effected May 31, 1997 because (i) it was not materially different than May 23, 1997, (ii) May 30, 1997 was the normal accounting close for HLMI and (iii) a portion of the acquisition funding commitment for the transaction 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 Corp. 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 for the HLMI acquisition, 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 through the proceeds of the Offering which is offset by an increase in deferred fee expense associated with the pay off of such indebtedness. See "Use of Proceeds". 16 (7) Reflects the adjustment necessary to record decreased depreciation expense due to the reduction to fair value of certain leasehold improvements in connection with the HLMI transaction. (8) Reflects the change in provision for income taxes resulting from adjustment (5) above. (9) Reflects the change in provision for income taxes resulting from adjustments above. (10) Reflects the elimination of ESOP expenses as a result of the acquisition of HLMI by BBH Corp. through the merger of BBH Corp. into HLMI. (11) Pro forma net income per share is based upon the assumption that 2,075,087 shares of Common Stock are outstanding after the Offering. This amount represents 1,200,000 shares of Common Stock to be issued in the Offering, 702,834 shares of Common Stock owned by the Company's stockholders prior to the Offering, and the inclusion of Common Stock equivalents of 172,253 related to Warrants. (12) Reflects the increase in interest expense resulting from the write-off of deferred loan costs relating to Warrants attached to certain indebtedness which was repaid with proceeds of the Offering. See "Use of Proceeds". (13) Pro forma net income per share is based upon the assumption that 2,033,685 shares of Common Stock are outstanding after the Offering. This amount represents 1,200,000 shares of Common Stock to be issued in the Offering, 618,375 shares of Common Stock owned by the Company's stockholders prior to the Offering, and the inclusion of Common Stock equivalents of 215,310 related to Warrants. (14) Fully diluted earnings per share are not materially different. 17 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 the Predecessor Company'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 for 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 nine months ended January 30, 1998 compared to nine months ended January 24, 1997 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. NINE MONTHS ENDED JANUARY 30, 1998 COMPARED WITH NINE MONTHS ENDED JANUARY 24, 1997 -- PRO FORMA This pro forma financial data does not give effect to the Offering.
COMBINED COMBINED PRO FORMA PRO FORMA JANUARY 24, JANUARY 30, 1997 1998 ----------- ----------- Revenue........................................................................................ $19,442,280 $23,776,452 Costs and expenses: Direct cost of revenue......................................................................... 9,917,627 10,878,560 Operating costs................................................................................ 9,072,733 10,761,332 Amortization of intangible assets.............................................................. 126,000 128,920 ----------- ----------- Total costs and expenses....................................................................... 19,116,360 21,768,812 ----------- ----------- Income from operations......................................................................... 325,920 2,007,640 Other income (expense) Interest expense............................................................................... (801,027) (842,572) ----------- ----------- Total other expense.......................................................................... (801,027) (842,572) ----------- ----------- Income (loss) before income taxes.............................................................. (475,107) 1,165,068 Income tax expense (benefit)................................................................... (77,517) 547,413 ----------- ----------- Net income (loss).............................................................................. $ (397,590) $ 617,655 =========== ===========
Revenues were $23.8 million for the nine months ended January 30, 1998 compared to $19.4 million for the nine months ended January 24, 1997, which is an increase of 22.3%. The increase in revenues is attributable to management's stronger focus on marketing efforts during the nine months ended January 30, 1998. 18 Direct costs primarily include, direct labor, subconsultant costs, and reimbursable expenses. Direct costs were $10.9 million, or 45.8% of revenues, for the nine months ended January 30, 1998, as compared to $9.9 million, or 51.0% of revenues, for the nine months ended January 24, 1997. 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 $10.8 million, or 45.3% of revenues, for the nine months ended January 30, 1998 as compared to $9.1 million, or 46.7% of revenues, for the nine months ended January 24, 1997. This decrease as a percentage of net sales was due principally to increased sales. Amortization of intangible assets were $0.1 million for both the nine months ended January 30, 1998 and January 24, 1997. 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 $0.8 million for the nine months ended January 30, 1998 as compared to $0.8 million for the nine months ended January 24, 1997. Income tax expense for the nine months ended January 30, 1998 was $0.5 million as compared to an income tax benefit of $0.1 million for the nine months ended January 24, 1997. The effective income tax rate was 48% for the nine months ended January 30, 1998 as compared to 16.3% for the nine months ended January 24, 1997. 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 and analysis and results of operations for the fiscal years ended April 25, 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, a 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 were related to health care projects and approximately 30% were 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 due to an increase in the use of subconsultants to meet project requirements (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 fiscal 1997 and 1996. The amortization relates to the goodwill arising from the acquisition of MPB Architects, Inc. in April 1995. See Note 2 to HLMI Financial Statements included elsewhere in this Prospectus. Interest expense was $0.4 million for both fiscal 1997 and fiscal 1996. 19 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 (17.4% 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 due to a decrease in the use of subconsultants to meet project requirements (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 ongoing basis. This was 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 MPB 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 20 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 January 30, 1998, the Company's current liabilities of $12.8 million exceeded current assets of $12.4 million resulting in a working capital deficiency of $.4 million. During the nine months ended January 30, 1998, the Company provided $0.2 million in cash for operating activities. The Company used $0.5 million for investing activities, primarily the purchase of equipment. The Company generated $0.4 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 a former director of HLM Design, partially guaranteed the amount due to Berthel Leasing. HLM Design also entered into an $0.8 million term loan, in September 1997, with Berthel Leasing for working capital purposes. In consideration for this borrowing, HLM Design sold Warrants to purchase 3,422 shares of Common Stock (43,630 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 (43,630 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 (183,242 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 (10,991 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 (10,991 shares after giving effect to the Stock Split) to Equitas. In February 1998, Equitas exercised its Warrants and purchased 5,749 shares of Common Stock (73,300 shares after giving effect to the Stock Split) at an exercise price of $.01 per share. Pacific will exercise its Warrants immediately prior to the effective date of the Registration Statement of which this Prospectus is a part. 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 a former director 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. (As the management company, HLM Design will be responsible for the financing of working capital growth, capital growth and other cash needs of the Managed Firms. See "Business -- HLM Design Operations -- Management and Services Agreements"). The Company has received commitments for a new revolving line of credit contingent upon the Offering and subject to other customary terms and conditions. The Company believes that the net proceeds from the Offering, the new revolving line of credit and anticipated funds from future operations will be sufficient to meet its working capital needs for at least the next twelve months. If HLM Design is unable to obtain a new revolving line of credit following the Offering, its ability to implement its growth strategy will be adversely affected. The Company's operations are professional services and as such are not capital intensive. However, in order to enhance productivity, the Company has increased its purchase of computer hardware and software. The Company currently has no material commitments for purchases of additional equipment. Capital expenditures during fiscal 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 Firm affiliations with proceeds from the Offering and future offerings. 21 SEASONALITY The Company's operations are not seasonal in nature. EFFECTS OF INFLATION Due to the relatively low levels of inflation in fiscal years 1995, 1996 and 1997, inflation did not have a significant effect on the Company's results of operations for those periods. NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Standards No. 128, "Earnings Per Share." This Statement specifies the computation, presentation and disclosure requirements for earnings per share. 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 HLM Design'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 those between 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 nine months ended January 30, 1998, the effect would have been a reduction to stockholder's equity by approximately $10,511, an increase in minority interest by approximately $10,511 and a decrease in net income of approximately $10,509. 22 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 service and geographic diversification for its 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 and 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 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 the 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 23 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 it is positioned to pursue larger, well established AEP Firms as a result of the depth of HLM Design's management team, its capital structure and the reputation of the management team in the design 24 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 earns 99% of the net income of the Managed Firms, as determined in accordance with generally accepted accounting principles. However, for cash management purposes, the Management and Services Agreements state that HLM Design is to receive all but 1% of the positive cash flow (calculated as the change in the cash balances from the beginning of the period to the end of the period for the Managed Firms). As the management company, HLM Design will be responsible for the financing of working capital growth, capital growth and other cash needs. The Management and Services Agreements are structured so as not to force the Managed Firms to borrow money to satisfy their inter-company obligations for the management fee (defined as 99% of the net income of the Managed Firm). For the eight months ended January 30, 1998, HLM Design earned $1,034,008; however, due to cash requirements of the Managed Firms, the management fee required to be paid at January 30, 1998 was $450. The remaining balance of $1,033,558 has been recorded as a receivable by HLM Design, which will be paid with future positive cash flows. Effective January 1, 1998, all HLMI employees were transferred to HLM Design and now provide services to HLMI as HLM Design employees. From May 30, 1997 (the date of inception of the Management and Services Agreement), until December 31, 1997, HLMI accrued no compensation bonuses for HLMI stockholder officers. 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; 25 (ii) stockholders may not sell, pledge, give or otherwise transfer any or all of their stock to any third party, either voluntarily or involuntarily, without first obtaining the Managed Firm's written approval of such transfer; (iii) the Managed Firm has the right at any time to purchase all, but not less than all, of the stock then owned by any or all of the stockholders; and (iv) the stockholders agree that with respect to all matters which are submitted to stockholder vote (and, to the extent that all or any of the stockholders serve as a director of the Managed Firm, then also with respect to all matters which are submitted to a vote of the board of directors), the stockholders will, if not in unanimous agreement, follow specified procedures to achieve unity in voting among all stockholders. In addition, the Stockholders' Agreements will contain an acknowledgment on the part of each stockholder that it is in the parties' best interest that certain of the Managed Firm's administrative and managerial functions be performed pursuant to a Management and Services Agreement with HLM Design and that in order to ensure consistency and continuity in the management of the firm's business and affairs, that with respect to all matters pertaining to the initiation of stock "calls" and the approval or denial of proposed stock transfers, the Managed Firm will in all cases act in accordance with the written recommendation of HLM Design. The Stockholders' Agreement will provide that they may be terminated upon the occurrence of any of the following events: (i) cessation of the Managed Firm's business, (ii) bankruptcy, receivership or dissolution of the Managed Firm, or (iii) the voluntary agreement of all parties bound by the terms of such Stockholders' Agreement. Each of the stockholders of HLMI, HLMNC, and HLMO have entered into Stockholders' Agreements which provide each stockholder with nominee stockholder status. It is anticipated that Stockholders' Agreements among stockholders of the AEP Firms 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. Its lease of such offices 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. Although HLM Design is not aware of any other company actively pursuing a strategy of consolidating firms' administrative and management functions, it believes 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. 26 The state laws, or the regulations established by a registration board, may also establish requirements for the practice of architecture or engineering by a corporation or partnership. A few states do not permit the practice of architecture or engineering in a corporate form. Some states require design professionals who want to incorporate to do so as a professional corporation authorized and certified by the secretary of state. Most states permit practice through either a professional corporation or a general business corporation. Even if a state permits practice in a corporate form, the state may require that a certain number of principals in the corporation must be registered architects or engineers. Some states specify that a certain percentage of the principals, directors or stockholders of a corporate entity must be registered architects or engineers in order to practice in the state. A corporation seeking to practice in a state other than that in which it is incorporated must register as a foreign corporation in the other state and satisfy all of the registration requirements. There can be no assurance that the regulatory environment in which the Company operates will not change significantly in the future. For additional information regarding uncertainties concerning governmental regulations relating to the practice of architecture and engineering in light of the relationship between HLM Design and the Managed Firms, see "Risk Factors -- Governmental Regulation." Federal, state and local environmental laws and regulations have not historically had a material impact on the operations of the Company; however, the Company cannot predict the effect on its operations of possible future environmental legislation or regulations. EMPLOYEES Prior to January 1, 1998, all employees were employed with HLMI; however, under HLMI's Management and Services Agreement and consistent with HLM Design's strategy, all employees were transferred to HLM Design as of January 1, 1998. As of January 1, 1998, HLM Design employed approximately 246 persons of which approximately 92 were registered professionals (engineers, architects and others), approximately 102 were degreed professionals and approximately 52 were administrative personnel. None of HLM Design's employees or the Managed Firm's employees is represented by a labor union. HLM Design considers its relations with its employees and the employees of the Managed Firms to be satisfactory. The registered professional architects and engineers generally have degrees from accredited architecture or engineering schools, several years of work experience and have passed licensing examinations. Both registered and degreed architects have either a five year architectural degree or a four year degree and a two year advanced architectural degree. The Company's degreed professionals who are not registered have not yet passed the required licensing examinations. LEGAL PROCEEDINGS From time to time HLM Design or one or more of the Managed Firms are named in claims involving contractual disputes or other matters arising in the ordinary course of business. Currently, no legal proceedings are pending against or involve HLM Design or the Managed Firms that, in the opinion of management, when considering insurance coverage, could reasonably be expected to have a material adverse effect on the business, financial condition or results of operations of HLM Design. 27 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. 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 28 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. After the Offering, HLM Design intends to maintain 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 maintain two independent directors who will thereafter comprise its Compensation Committee. LIMITATIONS OF DIRECTORS' LIABILITY HLM Design's Certificate of Incorporation includes a provision that effectively eliminates the liability of directors to HLM Design or to HLM Design's stockholders for monetary damages for breach of the fiduciary duties of a director, except for breaches of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, certain actions with respect to unlawful dividends, stock repurchases or redemptions and any transaction from which the director derived an improper personal benefit. This provision does not prevent stockholders from seeking nonmonetary remedies covering any such action, nor does it affect liabilities under the federal securities laws. HLM Design's Bylaws further provide that HLM Design shall indemnify each of its directors and officers, to the fullest extent authorized by Delaware law, with respect to any threatened, pending or completed action, suit or proceeding to which such person may be a party by reason of serving as a director or officer. Delaware law currently authorizes a corporation to indemnify its directors and officers against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by a third party if such officers or directors acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. Indemnification is permitted in more limited circumstances with respect to derivative actions. HLM Design believes that these provisions of its Certificate of Incorporation and Bylaws are necessary to attract and retain qualified persons to serve as directors and officers. COMMITTEES OF THE BOARD The Board of Directors of HLM Design intends to establish a Compensation Committee and an Audit Committee consisting of independent directors. The Compensation Committee will review and approve compensation for the executive 29 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. 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 February 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 57,954 shares of Common Stock, exercisable, in the case of incentive stock options, at 110% of the initial public offering price, and in the case of nonstatutory stock options, at $5.50 per share. See " -- Stock Option Plan." 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. 30 STOCK OPTION PLAN In February 1998, the Board of Directors and stockholders of HLM Design adopted the HLM Design, Inc. 1998 Stock Option Plan (the "Stock Option Plan") in order to attract and retain key personnel. The following discussion of the material features of the Stock Option Plan is qualified by reference to the text of such plan filed as an exhibit to the Registration Statement of which this Prospectus is a part. Under the Stock Option Plan, options to purchase up to an aggregate of 159,955 shares of Common Stock may be granted to key employees of HLM Design and its Managed Firms and to officers, directors, consultants and other individuals providing services to the Company. Unless designated as "incentive stock options" ("ISOs") intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), options granted under the Stock Option Plan are intended to be "nonstatutory stock options" ("NSOs"). The Compensation Committee of the Board of Directors of HLM Design will administer the Stock Option Plan and will determine, among other things, the persons who are to receive options, the number of shares to be subject to each option, and the vesting schedule of options; provided, that the Board of Directors of HLM Design will make such determinations with respect to the initial grants made under the Stock Option Plan. Members of the Board of Directors who serve on the Compensation Committee must qualify as "non-employee directors," as that term is defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. The Board of Directors of HLM Design will determine the terms and conditions upon which HLM Design may make loans to enable an optionee to pay the exercise price of an option. In selecting individuals for options and determining the terms thereof, the Compensation Committee may consider any factors it considers relevant, including present and potential contributions to the success of the Company. Options granted under the Stock Option Plan must be exercised within a period fixed by the Compensation Committee, which period may not exceed ten years 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 of NSOs will not be less than 85% of the market value of the Common Stock on the date of grant of the NSOs. 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. 31 The Board of Directors of HLM Design on or before the consummation of the Offering intends to grant NSOs to purchase 40,568 shares of Common Stock and ISOs to purchase 17,386 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 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 if 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. Following the effective date of the Registration Statement of which this Prospectus is a part, the Company will not permit the total number of shares subject to outstanding warrants (exclusive of the Underwriters' Warrants (as defined herein)) and options granted or authorized to be granted to exceed 10% of all shares of Common Stock outstanding. EMPLOYEE STOCK PURCHASE PLAN In February 1998, the Board of Directors and stockholders of HLM Design adopted the HLM Design, Inc. Employee Stock Purchase Plan (the "ESPP"). The ESPP is intended to promote the interests of the Company by providing employees of the Company the opportunity to acquire a proprietary interest in the Company through the purchase of Common Stock. The following discussion of the material features of the ESPP is qualified by reference to the text of such Plan filed in an exhibit to the Registration Statement of which this Prospectus is a part. The ESPP is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. The ESPP is administered by the Compensation Committee, which, subject to the terms of the ESPP, has plenary authority in its discretion to interpret and construe the ESPP. The Compensation Committee will construe the provisions of the ESPP so as to extend and limit participation in a manner consistent with the requirements of Section 423 of the Code. A total of 57,954 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. 32 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. 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 if 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. 33 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. Future material transactions between HLM Design or any of the Managed Firms and any of the Company's officers, directors or controlling persons will be made or entered into on terms that are no less favorable to HLM Design than those that can be obtained from unaffiliated third parties. Additionally, future loans to, or forgiveness of any loans to, any of the Company's officers, directors or controlling persons will be approved by a majority of HLM Design's directors and by a majority of its independent directors who do not have an interest in the transactions. 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. merged, 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 HLMI with a $3.2 million loan from HLM Design) was converted into the right to receive $64.00 in cash (the "Merger Consideration") and each share of BBH Corp. then outstanding was 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. The Company has also agreed, in connection with the Offering, to sell to the Underwriters, including Berthel Fisher & Company Financial Services, Inc., certain warrants. See "Underwriting." PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of HLM Design's Common Stock as of March 27, 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. 34
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) 367,142 39.3% 17.2% Vernon B. Brannon(4)(5) 367,141 39.3% 17.2% Clay R. Caroland III(4) 10,991 1.3% * D. Shannon LeRoy(4) -- -- -- Berthel Leasing(6) 43,631 5.0% 2.1% Pacific(7)(8) 98,953 10.2% 4.6% Equitas(9) 73,300 8.4% 3.5% All directors and executive officers as a group (4 persons) 745,274 85.2% 35.9%
- --------------- * 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. (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, 15.9%; Vernon Brannon, 15.9%; Clay Caroland III, less than 1%; Berthel Leasing, 1.9%; Pacific, 4.2%; Equitas, 3.3%; and all directors and executive officers as a group, 33.0%. (4) The address of such person is care of HLM Design at 121 West Trade Street, Suite 2950, Charlotte, North Carolina 28202. (5) Gives effect to currently exercisable options granted under HLM Design's Stock Option Plan. See "Management -- Stock Option Plan." (6) The address of such person is 100 Second Street Southeast, Cedar Rapids, Iowa 52407. (7) Includes shares of Common Stock which underlie currently exercisable Warrants held by such person to be exercised immediately prior to the effective date of the Registration Statement of which this Prospectus is a part. (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. DESCRIPTION OF CAPITAL STOCK HLM Design's authorized capital stock consists of (i) 9,000,000 shares of Common Stock, $.001 par value, and (ii) 1,000,000 shares of Preferred Stock, $.10 par value. Upon completion of this Offering, HLM Design will have 2,075,087 outstanding shares of Common Stock (giving effect to the Stock Split and the exercise by Pacific of its Warrants and not including Common Stock which underlies the options granted pursuant to the Stock Option Plan) and no shares of preferred stock. The following summary description of HLM Design's capital stock does not purport to be complete and is qualified in its entirety by reference to HLM Design's Certificate of Incorporation, which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, and the Delaware General Corporation Law (the "DGCL"). Reference is made to such exhibit and the DGCL for a detailed description of the provisions thereof summarized below. COMMON STOCK The holders of validly issued and outstanding shares of Common Stock are entitled to one vote per share of record on all matters to be voted upon by stockholders. At a meeting of stockholders at which a quorum is present, a majority of the votes cast decides all questions, unless the matter is one upon which a different vote is required by express provision of law or HLM Design's Certificate of Incorporation or Bylaws. There is no cumulative voting with respect to the election of directors (or any other matter), but HLM Design's Board of Directors is classified. The holders of a majority of the shares at a meeting at which a quorum is present can, therefore, elect all of the directors of the class then to be elected if they choose to do so, and, in such event, the holders of the remaining shares would not be able to elect any directors of that class. The holders of Common Stock have no preemptive rights and have no rights to convert their Common Stock into any other securities. 35 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 226,874 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. As of the date hereof, (i) all of the Warrants held by Berthel Leasing and by Equitas have been exercised and the shares underlying such Warrants are included in the currently outstanding shares reflected elsewhere in this Prospectus, and (ii) Pacific will exercise all of its Warrants immediately prior to the effective date of the Registration Statement of which this Prospectus is a part. Except as the context otherwise requires, the shares underlying the Warrants held by Pacific are included in the outstanding shares reflected elsewhere in this Prospectus. Following the effective date of the Registration Statement of which this Prospectus is a part, the Company will not permit the total number of shares subject to outstanding warrants (exclusive of the Underwriters' Warrants (as defined herein)) and options granted or authorized to be granted to exceed 10% of all shares of Common Stock outstanding. 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 36 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 and simultaneously gaining control of the Board of Directors by filling the vacancies with their own nominees. 37 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, HLM Design will have outstanding 2,075,087 shares of Common Stock (excluding shares of Common Stock which underlie options granted under the Stock Option Plan (115,908 shares) and assuming no exercise of the Underwriters' over-allotment option). Of such amount, the 1,200,000 Shares sold in this Offering will be freely transferable and may be resold without further registration under the Securities Act, except for any shares purchased by an "affiliate" of HLM Design (as defined below), which shares will be subject to the resale limitations of Rule 144 under the Securities Act ("Rule 144"). The 629,366 shares of Common Stock held by affiliates of the Company are "restricted securities" within the meaning of Rule 144. The 361,629 shares of Common Stock, which (i) are held by non-affiliates of the Company or (ii) which underlie (x) options granted on or before the consummation of Offering under the Company's Stock Option Plan, and (y) the Warrants are also "restricted securities." Such "restricted securities" 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, 618,375 of the 875,087 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. The remaining 256,712 shares are "restricted securities", and therefore may not be resold pursuant to Rule 144 upon completion of this Offering. 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. Additionally, Messrs. Harris and Brannon and Berthel Leasing have agreed to escrow Common Stock owned by each of them pursuant to the requirements of the various state securities commissions. 38 UNDERWRITING Each of the underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their respective names below. The nature of the obligations of the Underwriters is such that if any of such shares are purchased, all must be purchased.
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------------------------------------ --------- Berthel Fisher & Company Financial Services, Inc.......................................... Westport Resources Investment Services, Inc............................................... Marion Bass Securities Corporation........................................................ --------- Total................................................................................ ---------
The Underwriters have advised HLM Design that they propose initially to offer the Common Stock offered hereby to the public at the price to the public set forth on the cover page of this Prospectus. The Underwriters may allow a concession to selected dealers who are members of the National Association of Securities Dealers, Inc. ("NASD") not in excess of $ per share, and the Underwriters may allow, and such dealers may reallow, to members of the NASD a concession not in excess of $ per share. After the public offering, the price to the public, the concession and the reallowance may be changed by the Underwriters. HLM Design has granted an option to the Underwriters, exercisable within 45 business days after the date of the Prospectus, to purchase up to an aggregate of 180,000 additional shares of Common Stock at the initial price to the public, less the underwriting discount, set forth on the cover page of this Prospectus. The Underwriters may exercise the option only for the purpose of covering over-allotments. To the extent that the Underwriters exercise such option, each Underwriter will be committed, subject to certain conditions, to purchase from HLM Design on a pro rata basis that number of additional shares of Common Stock which is proportionate to such Underwriters' initial commitment. HLM Design, certain stockholders 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. Additionally, Messrs. Harris and Brannon and Berthel Leasing have agreed to escrow Common Stock owned by each of them pursuant to the requirements of the various state securities commissions. At the request of HLM Design, the Underwriters have reserved up to 9,273 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 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. 39 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 underwriting group 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 reimburse the Underwriters for actual out of pocket expenses incurred by the Underwriters in connection with the Offering, none of which has been paid as of the date of this Prospectus. HLM Design has also agreed to pay all expenses in connection with qualifying the Common Stock offered hereby for sale under the laws of such states as the Underwriters may designate, including filing fees and fees and expenses of counsel retained for such purposes by the Underwriters, and registering the Offering with the NASD. In connection with this Offering, HLM Design has agreed to sell to the Underwriters, for a price of $.01 per warrant, warrants (the "Underwriters' Warrants") to purchase shares of Common Stock equal to 10% of the total number of shares of Common Stock sold pursuant to this Offering, excluding shares subject to the over-allotment option. The Underwriters' Warrants are exercisable at a price equal to 120% of the initial public offering price ($7.20 assuming an initial public offering price of $6.00 per share (the low point of the range set forth on the cover of this Prospectus)) for a period of four years commencing one year from the date of this Prospectus (the "Exercise Period"). 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. In addition, the $0.8 million term loan constitutes more than 10% of the subordinated debt of the Company. Accordingly, the Offering will be conducted in accordance with NASD Conduct Rules 2710(c)(8) and 2820, which require that the public offering price of the Common Stock be no higher than the price recommended by a Qualified Independent Underwriter which has participated in the preparation of the Registration Statement and performed its usual standard of due diligence with respect thereto. Westport Resources Investment Services, Inc. will act as the Qualified Independent Underwriter for the Offering, and the public offering price will not be higher than the price recommended by Westport Resources Investment Services, Inc. LEGAL MATTERS Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina, counsel to the Company, will render an opinion that the Shares offered hereby, when issued and paid for in accordance with the terms of the Underwriting Agreement, will be duly authorized, validly issued, fully paid and nonassessable. Bradley & Riley, P.C., Cedar Rapids, Iowa, has served as counsel to the Underwriters in connection with this Offering. 40 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 their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form S-1 under the Securities Act with respect to the Shares offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Shares offered hereby, reference is made to the Registration Statement, including the exhibits and schedules filed as part thereof. Statements contained in this Prospectus as to the contents of any contract or any other documents are not necessarily complete, and, in each such instance, reference is made to the copy of the contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference thereto. The Registration Statement, together with its exhibits and schedules, may be inspected at the Public Reference Section of the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of such materials may be obtained from any such office upon payment of the fees prescribed by the SEC. Such information may also be inspected and copied at the office of Nasdaq at 1735 K Street, NW Washington, DC 20006-1500. The Commission also maintains a Website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 41 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 January 30, 1998.......................... F-3 Statements of Operations (unaudited) for the nine months ended January 24, 1997 (Predecessor), the one month ended May 30, 1997 (Predecessor) and the Combined Statements of Income for the nine months ended January 30, 1998 (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 nine months ended January 30, 1998.................................................. F-5 Statements of Cash Flows (unaudited) for the nine months ended January 24, 1997 (unaudited) (Predecessor), the one month ended May 30, 1997 (Predecessor) and Combined Statements of Cash Flows for the nine months ended January 30, 1998 (HLM Design Inc.)....................................................................................... F-6 Notes to Financial Statements..................................................................................... F-7 HANSEN LIND MEYER, INC. ("HLMI") INDEPENDENT AUDITORS' REPORT......................................................................................... F-15 FINANCIAL STATEMENTS: Balance Sheets at April 26, 1996 and April 25, 1997............................................................... F-16 Statements of Operations for the years ended April 30, 1995, April 26, 1996 and April 25, 1997.................... F-17 Statements of Stockholders' Equity for the years ended April 30, 1995, April 26, 1996 and April 25, 1997.......... F-18 Statements of Cash Flows for the years ended April 30, 1995, April 26, 1996 and April 25, 1997.................... F-19 Notes to Financial Statements..................................................................................... F-20
F-1 INDEPENDENT AUDITORS' REPORT BOARD OF DIRECTORS HLM DESIGN, INC. Charlotte, North Carolina We have audited the accompanying balance sheet of HLM Design, Inc. (the "Company") as of April 25, 1997, and the related statements of stockholders' equity, for the period from inception March 6, 1997 to April 25, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 25, 1997, and the changes in stockholders equity for the period from inception March 6, 1997 to April 25, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP November 11, 1997 (January 30, 1998, February 13, 1998 and February 27, 1998 as to the last paragraph in Note 1) Charlotte, North Carolina F-2 HLM DESIGN, INC. AND AFFILIATES BALANCE SHEETS APRIL 25, 1997 AND JANUARY 30, 1998
HLM DESIGN COMBINED APRIL 25, JANUARY 30, 1997 1998 --------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash.............................................................................................. $ 2,771 Trade and other receivables, less allowance for doubtful accounts of $150,000 at January 30, 1998........................................................................................... 6,338,342 Costs and estimated earnings in excess of billings on uncompleted projects (Note 3)............... 5,471,799 Prepaid expenses.................................................................................. 591,819 ----------- Total current assets......................................................................... 12,404,731 ----------- OTHER ASSETS: Deferred income taxes (Note 8).................................................................... 562,821 Goodwill, less amortization of $114,549 at January 30, 1998 (Note 2).............................. 2,467,513 Other noncurrent assets........................................................................... 774,950 ----------- Total other assets........................................................................... 3,805,284 ----------- PROPERTY AND EQUIPMENT: Leasehold improvements............................................................................ 701,119 Furniture and fixtures............................................................................ 1,560,298 ----------- Total property and equipment................................................................. 2,261,417 ----------- Less accumulated depreciation..................................................................... (427,877) ----------- Property and equipment, net.................................................................. 1,833,540 ----------- TOTAL ASSETS........................................................................................ $18,043,555 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable (Note 4)............................................................................ $ 2,250,000 Accounts payable.................................................................................. 3,547,171 Accrued expenses.................................................................................. 1,444,022 Income taxes payable.............................................................................. 19,353 Billings in excess of costs and estimated earnings on uncompleted projects (Note 3)............... 3,188,791 Deferred income taxes (Note 8).................................................................... 1,644,953 Current maturities of long-term debt (Note 4)..................................................... 743,311 ----------- Total current liabilities.................................................................... 12,837,601 ----------- LONG-TERM DEBT (Note 4)............................................................................. 4,357,057 ----------- TOTAL LIABILITIES................................................................................... 17,194,658 ----------- COMMITMENTS AND CONTINGENCIES (Note 5, 6) WARRANTS OUTSTANDING (Note 4)....................................................................... 200,068 ----------- STOCKHOLDERS' EQUITY: HLM Design, Inc. Capital Stock Common, $.001 par value, voting, authorized 9,000,000 shares; issued 618,375 and 702,834, respectively.................................................................................. 618 703 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: Class A, voting, authorized 2,000,000 shares; issued 200....................................... 2 Class B, nonvoting, authorized 1,000,000 shares, no shares outstanding......................... -- -- Additional paid in capital........................................................................ 2,382 101,031 Retained earnings................................................................................. 556,611 Stock Subscription Receivable..................................................................... (3,000) (9,524) --------- ----------- Total stockholders' equity.......................................................................... 648,829 --------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................................... $ $18,043,555 ========= ===========
See notes to financial statements. F-3 HLM DESIGN, INC. AND AFFILIATES STATEMENTS OF OPERATIONS ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR) AND NINE MONTHS ENDED JANUARY 24, 1997 (PREDECESSOR) AND JANUARY 30, 1998 (COMBINED)
(HLM (PREDECESSOR (PREDECESSOR DESIGN) COMPANY) COMPANY) COMBINED ----------- ---------- ----------- NINE MONTHS ONE MONTH NINE MONTHS ENDED ENDED ENDED ----------- ---------- ----------- JANUARY 24, MAY 30, JANUARY 30, 1997 1997 1998 ----------- ---------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) REVENUES (Note 1): Fee income..................................................................... $18,439,931 $1,998,611 $16,160,923 Reimbursable income............................................................ 1,002,349 234,425 5,382,493 ----------- ---------- ----------- Total revenues............................................................ 19,442,280 2,233,036 21,543,416 ----------- ---------- ----------- CONSULTANT EXPENSES.............................................................. 3,573,159 192,862 3,802,734 ----------- ---------- ----------- PROJECT EXPENSES: Direct expenses................................................................ 522,063 35,404 744,579 Reimbursable expenses.......................................................... 877,693 68,617 630,190 ----------- ---------- ----------- Total project expenses.................................................... 1,399,756 104,021 1,374,769 ----------- ---------- ----------- NET PRODUCTION INCOME............................................................ 14,469,365 1,936,153 16,365,913 DIRECT LABOR..................................................................... 4,944,712 602,096 4,802,078 INDIRECT EXPENSES................................................................ 9,848,192 1,172,712 9,744,540 ----------- ---------- ----------- OPERATING INCOME (LOSS).......................................................... (323,539) 161,345 1,819,295 ----------- ---------- ----------- OTHER INCOME (EXPENSE): Interest income................................................................ 3,575 54 1,888 Interest expense............................................................... (283,602) (37,005) (750,509) ----------- ---------- ----------- Total other income (expense), net......................................... (280,027) (36,951) (748,621) ----------- ---------- ----------- INCOME (LOSS) BEFORE TAXES....................................................... (603,566) 124,394 1,070,674 INCOME TAXES (Note 7): Current tax expense (benefit).................................................. (23,713) (11,907) 58,000 Deferred tax expense (benefit)................................................. (119,804) 54,907 456,063 ----------- ---------- ----------- Total income tax expense (benefit)........................................ (143,517) 43,000 514,063 ----------- ---------- ----------- NET INCOME (LOSS)................................................................ $ (460,049) $ 81,394 $ 556,611 =========== ========== =========== PRO FORMA NET INCOME PER SHARE (NOTE 1).......................................... $ .65 =========== PRO FORMA NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (NOTE 1)............... 859,973 ===========
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 NINE MONTHS ENDED JANUARY 30, 1998 (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.......... 618,375 618 2,382 (3,000) -------- ------ --------------- ------------ BALANCE, APRIL 25, 1997........................ 618,375 618 2,382 (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)...... 84,459 85 98,055 (5,924) 92,216 Net Income -- Combined (unaudited)........... 556,611 556,611 -------- ------ --------------- -------- ------------ ------------- BALANCE JANUARY 30, 1998 -- COMBINED (UNAUDITED).................................. 703,634 $ 711 $ 101,031 $556,611 $ (9,524) $ 648,829 ======== ====== =============== ======== ============ -------------
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 NINE MONTHS ENDED JANUARY 24, 1997 (PREDECESSOR) AND JANUARY 30, 1998 (COMBINED)
(PREDECESSOR COMPANY) (HLM -------------------------- DESIGN) COMBINED NINE MONTHS ONE MONTH NINE MONTHS ENDED ENDED ENDED ----------- ----------- ----------- JANUARY 29, MAY 30, JANUARY 30, 1997 1997 1998 ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................................................... $ (460,049) $ 81,394 $ 556,611 Adjustments to reconcile net income to net cash used in operating activities: Depreciation................................................................. 431,073 55,544 247,463 Amortization of goodwill..................................................... 77,589 9,571 114,549 Amortization of deferred loan fees........................................... 108,526 Deferred rent................................................................ 4,249 Deferred income taxes........................................................ (110,228) 54,907 (17,844) Changes in certain working capital items: Increase in trade and other receivables.................................... (326,971) (1,500,472) (622,088) Increase in costs and estimated earnings compared to billings on uncompleted contracts, net................................................ 1,162,905 1,199,028 38,310 (Increase) decrease in refundable income taxes............................. (42,465) (11,157) 504,400 Increase in prepaid expenses............................................... (545,813) (10,427) (333,837) (Increase) decrease in other assets........................................ 352,700 (1,152) (170,668) Increase (decrease) in accounts payable.................................... (808,446) 233,659 (913,522) Increase (decrease) in accrued expenses.................................... 718,998 (278,500) 643,475 Increase (decrease) in other non-current liabilities....................... (15,000) 15,000 ----------- ----------- ----------- Net cash (used in) provided by operating activities..................... 438,542 (152,605) 155,375 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................................. (600,377) (2,023) (549,848) Note receivable from officer.................................................... (130,000) 30,000 ----------- ----------- ----------- Net cash used in investing activities................................... (730,377) (2,023) (519,848) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on line of credit....................................................... 400,000 (2,360,000) Proceeds from long-term borrowings.............................................. 100,000 2,800,000 6,712,307 Payments on long-term borrowings................................................ (216,974) (285,372) (3,305,100) Payment of deferred loan fees................................................... (56,300) Payment on ESOP buyback......................................................... (3,221,824) Proceeds from issuance of notes payable to shareholders......................... 182,308 Proceeds from the issuance of warrants.......................................... 24,757 Proceeds from exercise of warrants.............................................. (135) Proceeds from issuance of common stock.......................................... 28,910 ----------- ----------- ----------- Net cash provided by financing activities............................... 283,026 154,628 364,923 ----------- ----------- ----------- INCREASE (DECREASE) in Cash....................................................... (8,809) 450 CASH BALANCE: Beginning of year............................................................... 11,130 2,321 2,321 ----------- ----------- ----------- End of year..................................................................... $ 2,321 $ 2,321 $ 2,771 ============ =========== =========== SUPPLEMENTAL DISCLOSURES: Cash paid (received) during the year for: Interest..................................................................... $ 280,042 $ 6,827 $ 584,695 Income tax payments (refunds)................................................ $ 18,752 $ (750) $ 21,244 Noncash investing and financing transactions: Retirement of common stock through issuance of note payable.................. $ 36,047 Reduction of ESOP debt....................................................... $ 336,231 Issuance of warrants to certain debtholders.................................. $ 238,752
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 NINE MONTHS ENDED JANUARY 24, 1997 (PREDECESSOR -- UNAUDITED), THE ONE MONTH PERIOD ENDED MAY 30, 1997 (PREDECESSOR -- UNAUDITED) AND THE NINE MONTHS ENDED JANUARY 30, 1998 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 January 30, 1998 (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 nine months ended January 24, 1997 (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 January 30, 1998 and for the nine 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 January 30, 1998 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 January 24, 1997 and January 30, 1998 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 May 1, 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 May 1, 1998 financial statements. If the change had been effected for the nine months ended January 30, 1998, the effect would have been a reduction to Stockholder's Equity by approximately $10,511, an increase in minority interest by approximately $10,511 and a decrease in Net Income of approximately $10,509. INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial information for the nine months ended January 24, 1997 (Predecessor) and January 30, 1998 (Combined) has been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. STOCK SPLIT AND PRO FORMA NET INCOME PER SHARE -- All share and per share amounts included in the accompanying financial statements for all periods presented have been adjusted to reflect an 11 for 1 stock split of the HLM Design Common Stock effective as of January 30, 1998 and a 1.75 for 1 stock split effective as of February 13, 1998, and a reverse stock split of .66 for 1 effective as of February 27, 1998 for an effective 12.75 for 1 stock split ("Stock Split"). In addition, there was a reduction in Common Stock par value to $.001 effective as of February 13, 1998. Pro forma net income per share in the accompanying financial statements has been prepared based upon the shares outstanding without giving effect to the issuance of common stock related to the offering. F-9 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 nine month periods.
9 MONTHS ENDED JANUARY 30, -------------------------- 1997 1998 ----------- ----------- Revenues................................................... $19,442,280 $23,776,453 =========== =========== Net Income (loss).......................................... $ (397,590) $ 617,655 ============ ===========
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 nine 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 January 30, 1998 is as follows:
JANAURY 30, 1998 ----------- Costs incurred on uncompleted projects (excluding overhead).................................................... $35,988,413 Estimated earnings thereon..................................................................................... 38,170,640 ----------- Total.......................................................................................................... 74,159,053 Less billings to date.......................................................................................... 71,876,045 ----------- Net underbillings.............................................................................................. $ 2,283,008 ===========
Net underbillings are included in the accompanying balance sheet as follows:
JANUARY 30, 1998 ----------- Costs and estimated earnings in excess of billings on uncompleted projects......................................................................................... $ 5,471,799 Billings in excess of costs and estimated earnings on uncompleted projects......................................................................................... (3,188,791) ----------- Net underbillings.............................................................................................. $ 2,283,008 ===========
F-10 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 4. FINANCING ARRANGEMENTS A summary of notes payable at January 30, 1998 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 January 30, 1998 is as follows:
1/30/98 ---------- 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, 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........................................................... 2,536,049 ---------- Total long-term debt............................................................................................ 5,100,368 ---------- Less current maturities (based on refinanced terms)............................................................. 743,311 ---------- Long-term portion............................................................................................... $4,357,057 ==========
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 January 30, 1998 the Company was in compliance with such covenants. Repayment of the various financing agreements are as follows: Three months ended May 1, 1998.................................. $ 401,675 Fiscal 1999..................................................... 517,255 Fiscal 2000..................................................... 579,679 Fiscal 2001..................................................... 976,438 Fiscal 2002..................................................... 2,463,660 Thereafter...................................................... 161,661 ---------- Total......................................................... $5,100,368 ==========
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 (183,244 shares after giving effect to the Stock Split) were attached to the notes issued to Pacific Capital and Equitas. In addition, warrants to purchase 3,422 shares of common stock (43,630 shares after giving effect to the Stock Split) were attached to the notes issued to Berthel Fisher in September 1997 and in December 1997. Each warrant allows holders to purchase a share of stock for $.01 a share for a five year period. At January 30, 1998, all of the warrants held by Berthel Fisher were exercised. All other warrants issued with debt were outstanding at January 30, 1998. 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 $238,753 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 January 30, 1998. 5. LEASE COMMITMENTS The total minimum rental commitment under non-cancellable operating leases at January 30, 1998, which has been reduced by minimum rentals to be received under subleases, are as follows: 3 months ended May 1, 1998............................................................. $ 531,441 Fiscal 1999............................................................................ 1,960,201 Fiscal 2000............................................................................ 1,939,163 Fiscal 2001............................................................................ 1,852,952 Fiscal 2002............................................................................ 1,714,856 Thereafter............................................................................. 6,539,818 ----------- Total $14,538,431 ===========
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 nine months ended January 30, 1998, the Company incurred $22,911 in financing advisory fees related to debt financings, for services provided by a director. Such director resigned effective October 1997. 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
NINE MONTHS NINE MONTHS ENDED ENDED JANUARY 24, JANUARY 30, 1997 1998 ------------ ----------- Current: Federal................................................................ $ (20,749) $ 50,750 State.................................................................. (2,964) 7,250 Deferred................................................................. (119,804) 456,063 ------------ ----------- Provision for Income Taxes............................................... $ (143,517) $ 514,063 ============ ===========
The reconciliation of the statutory federal income tax rate with the Company's federal and state overall effective income rate is as follows:
NINE MONTHS NINE MONTHS ENDED ENDED JANUARY 24, JANUARY 30, 1997 1998 ----------- ----------- Statutory federal rate...................................................... (35.0)% 35.0% State Income Taxes, net of federal benefit.................................. (3.3) 3.3 Penalties................................................................... 9.8 2.7 Meals and Entertainment..................................................... 4.6 2.7 Other....................................................................... 0.1 4.3 ----------- ----------- Effective Tax Rates....................................................... (23.8)% 48.0% =========== ===========
The tax effect of temporary differences giving rise to deferred income tax assets and liabilities as of January 30, 1998 is as follows:
JANUARY 30, 1998 ----------- Deferred income tax liabilities -- difference between the accrual basis and cash basis of accounting related to certain assets and liabilities.............................. $(1,644,953) ----------- Deferred income tax assets: Contribution carryforwards........................................................... 46,410 Property and equipment............................................................... 257,598 Net operating loss carryforward...................................................... 258,812 ----------- Total deferred income tax assets....................................................... 562,820 ----------- Deferred income tax liabilities, net................................................... $(1,082,133) ===========
Management believes it is probable that the Company will realize the tax benefits of these deductible differences that were available as of January 30, 1998. At January 30, 1998, the Company has federal net operating loss carryforwards of approximately $677,000 expiring in various amounts beginning in 2012; however, net operating loss carryforwards are subject to restriction under Section 382 and the separate return limitation year rules of the Internal Revenue Code due to the merger transaction. HLM Design, Inc. and its Affiliates will file separate company federal and state income tax returns. 9. SUBSEQUENT EVENTS (UNAUDITED) In February 1998, 3,422 warrants were exercised resulting in the issuance of 3,422 shares of common stock (43,630 shares after giving effect to the stock split). F-13 HLM DESIGN, INC. AND AFFILIATES NOTES TO FINANCIAL STATEMENTS -- CONTINUED 10. HLM DESIGN FINANCIAL INFORMATION (UNAUDITED) HLM Design's balance sheet and income statement for the nine months ended January 30, 1998 are as follows: BALANCE SHEET Current assets........................................................................... 42,561 --------- Non-current assets....................................................................... 5,141,018 --------- Total assets............................................................................. 5,183,579 ========= Current liabilities...................................................................... 2,182,886 --------- Non-current liabilities.................................................................. 2,162,307 --------- Total liabilities........................................................................ 4,345,193 ========= Total stockholders equity................................................................ 838,386 --------- Total liabilities & S/E.................................................................. 5,183,579 ========= INCOME STATEMENT Revenues................................................................................. 1,034,008 Net interest, tax and other expense...................................................... 487,906 --------- Net income............................................................................... 546,102 =========
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 26, 1996, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended April 25, 1997. These financial statements are the responsibility of HLMI's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HLMI as of April 25, 1997 and April 26, 1996, and the results of its operations and its cash flows for each of the three years in the period ended April 25, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP October 31, 1997 Charlotte, North Carolina F-15 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...................................... 11 Dividend Policy...................................... 11 Capitalization....................................... 12 Dilution............................................. 13 Selected Financial Data.............................. 14 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 18 Business............................................. 23 Management........................................... 28 Certain Transactions................................. 34 Principal Stockholders............................... 34 Description of Capital Stock......................... 35 Shares Eligible for Future Sale...................... 38 Underwriting......................................... 39 Legal Matters........................................ 40 Experts.............................................. 41 Additional Information............................... 41 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. ============================================================================== ============================================================================== 1,200,000 SHARES HLM DESIGN, INC. COMMON STOCK ---------------- PROSPECTUS ---------------- BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. WESTPORT RESOURCES INVESTMENT SERVICES, INC. MARION BASS SECURITIES CORPORATION , 1998 =============================================================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses to be borne by the Registrant in connection with the issuance and distribution of the securities being registered hereby other than underwriting discounts and commissions. All the amounts shown are estimates, except for the registration fee with the Securities and Exchange Commission, the NASD filing fee and the Nasdaq fees. SEC Registration fee................................................................... $ 2,121.22 NASD filing fee........................................................................ 1,200 Nasdaq fees............................................................................ 7,500 Transfer agent and registrar fees...................................................... 15,000 Accounting fees and expenses........................................................... 195,000 Legal fees and expenses................................................................ 120,000 "Blue Sky" fees and expenses (including legal fees).................................... 15,000 Costs of printing and engraving........................................................ 90,000 Miscellaneous.......................................................................... 14,178.78 ----------- Total............................................................................. $460,000.00 ===========
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. The following information excludes the effect of the Stock Split. As of March 20, 1997, as part of the original organization of HLM Design, the Registrant issued 20,500 shares of Common Stock to Joseph Harris, 20,500 shares of Common Stock to Vernon Brannon and 7,500 shares of Common Stock to William Blalock in exchange for $1,000 from each person. On May 16, 1997, May 19, 1997, May 28, 1997, July 7, 1997, July 8, 1997, July 14, 1997, August 22, 1997 and November 1, 1997 the Registrant issued an aggregate of 2,340 shares of Common Stock to senior level employees of the Company in exchange for $14.81 per share. As of May 30, 1997, September 10, 1997 and December 24, 1997, the Registrant issued warrants to purchase 17,794 shares of Common Stock for an aggregate of $23,500 in connection with financing arrangements. On November 10, 1997, Clay R. Caroland exercised his Warrant and purchased 862 shares of Common Stock at an exercise price of $.01 per share. On December 26, 1997 Berthel Leasing exercised its Warrant and purchased 3,422 shares of Common Stock at an exercise price of $.01 per share. On February 12, 1998 Equitas exercised its Warrant and purchased 5,749 shares of Common Stock at an exercise price of $.01 per share. In each of the foregoing transactions, the securities were not registered under the Securities Act, in reliance upon the exemption from registration provided by Section 4(2) of said Act in view of the sophistication of the foregoing purchasers, their access to material information, the disclosures actually made to them by the Registrant and the absence of any general solicitation or advertising. On or before the consummation of the Offering, the Registrant will issue to Joseph Harris and Vernon Brannon, two of its officers and employees, pursuant to the Registrant's Stock Option Plan, options to purchase 115,908 shares (taking into account the Stock Split) 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. Pacific has indicated that it will exercise its Warrants immediately prior to the effective date of this Registration Statement. Such securities will not be 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 Pacific, its access to material information, the disclosures actually made to it by the Registrant and the absence of any general solicitation or advertising. ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION - ----- ------------- 1.1 Form of Underwriting Agreement 1.2 Form of Agreement Among Underwriters 3.1 Certificate of Incorporation of the Registrant, as amended to date 3.2* Bylaws of the Registrant 4.1** Form of Common Stock Certificate 4.2 Form of Common Stock Purchase Warrant 4.3* Registration Rights Agreement dated as of May 30, 1997 by and among HLM Design, Inc., Pacific Capital, L.P. and Equitas, L.P. 4.4* Registration Rights Agreement dated as of September 10, 1997 by and among HLM Design, Inc. and Berthel Fisher & Company Leasing, Inc. 5.1 Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities registered. 10.1* Management and Services Agreement dated as of May 29, 1997 by and between Hansen Lind Meyer Inc. and HLM Design. 10.2* Management and Services Agreement dated as of May 29, 1997 by and between HLM of North Carolina, P.C. and HLM Design. 10.3* Management and Services Agreement dated as of May 29, 1997 by and between HLM of Oregon, Architecture and Planning, P.C. and HLM Design. 10.4* Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and Hansen Lind Meyer Inc. 10.5* Stockholders' Agreement dated as of May 29, 1997, by and among Joseph M. Harris, Vernon B. Brannon, Phillip J. Antis and HLM of North Carolina, P.C. 10.6* Stockholders' Agreememt dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon, Viktor A. Lituczy and HLM of Oregon, Architecture and Planning, P.C. 10.7 Intentionally Left Blank.
II-2
EXHIBIT NO. DESCRIPTION - ----- ----------- 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, Joseph M. Harris, and a former director. 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* 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 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 filed 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. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Charlotte, North Carolina on April 10, 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. 3 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 April 10, 1998 ------------------ JOSEPH M. HARRIS executive officer) and Chairman /s/VERNON B. BRANNON Senior Vice President, Treasurer, Chief April 10, 1998 -------------------- VERNON B. BRANNON Financial Officer (principal financial and accounting officer) and Director /s/* Director April 10, 1998 -------------------- CLAY R. CAROLAND III /s/* Director April 10, 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 1.2 Form of Agreement Among Underwriters 3.1 Certificate of Incorporation of the Registrant, as amended to date 3.2* Bylaws of the Registrant 4.1** Form of Common Stock Certificate 4.2 Form of Common Stock Purchase Warrant 4.3* Registration Rights Agreement dated as of May 30, 1997 by and among HLM Design, Inc., Pacific Capital, L.P. and Equitas, L.P. 4.4* Registration Rights Agreement dated as of September 10, 1997 by and among HLM Design, Inc. and Berthel Fisher & Company Leasing, Inc. 5.1 Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities registered. 10.1* Management and Services Agreement dated as of May 29, 1997 by and between Hansen Lind Meyer Inc. and HLM Design. 10.2* Management and Services Agreement dated as of May 29, 1997 by and between HLM of North Carolina, P.C. and HLM Design. 10.3* Management and Services Agreement dated as of May 29, 1997 by and between HLM of Oregon, Architecture and Planning, P.C. and HLM Design. 10.4* Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and Hansen Lind Meyer Inc. 10.5* Stockholders' Agreement dated as of May 29, 1997, by and among Joseph M. Harris, Vernon B. Brannon, Phillip J. Antis and HLM of North Carolina, P.C. 10.6* Stockholders' Agreememt dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon, Viktor A. Lituczy and HLM of Oregon, Architecture and Planning, P.C. 10.7 Intentionally Left Blank. 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, Joseph M. Harris, and a former director. 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* 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 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 filed by amendment EX-1 2 EXHIBIT 1.1 Exhibit 1.1 March ___, 1998 Berthel Fisher & Company Financial Services, Inc. 100 Second Street S.E. Cedar Rapids, Iowa 52401 Westport Resources Investment Services, Inc. 315 Post Road West Westport, Connecticut 06880 Marion Bass Securities Corporation - ---------------------- Charlotte, North Carolina ______ Gentlemen: HLM Design, Inc., a Delaware corporation (the "Company"), of 121 West Trade Street, Suite 2950, Charlotte, North Carolina 28202, hereby confirms its agreement with Berthel Fisher & Company Financial Services, Inc. ("Berthel"), Westport Resources Investment Services, Inc. and Marion Bass Securities Corporation ("Marion Bass") ("Westport" and "Marion Bass" together with Berthel, the "Representatives") and members of the Underwriting Group (hereinafter, the Representatives and other members of the Underwriting Group being referred to herein as the "Underwriting Group" or "Underwriters") as follows: SECTION I DESCRIPTION OF SECURITIES The Company's authorized and outstanding capitalization when the offering of the securities contemplated hereby is permitted to commence and at the Closing Date (hereinafter defined), will be as set forth in the Registration Statement and Prospectus included therein (each as hereinafter defined). The Company proposes to issue and sell to the Underwriting Group an aggregate of One Million Two Hundred Thousand (1,200,000) shares of its authorized $0.01 par value common stock (the "Stock"), at a price of $______* per share on the terms as hereinafter set forth. The Underwriting Group shall also have an over-allotment option to purchase up to an additional One Hundred Eighty Thousand (180,000) shares as provided in Section 3.01 hereof. The Company proposes to issue and sell to the Representatives, on the Closing Date at a price of $.01 per warrant, warrants (the "Warrants") to purchase shares of the Company's common stock (the "Warrant Stock") as provided in Section 3.03 hereof. SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY In order to induce the Underwriting Group to enter into this Agreement, the Company hereby represents and warrants to and agrees with the Underwriting Group as follows: 2.01. REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on Form S-1 (File No. 333-40616) (the "Registration Statement") with respect to the Stock, including the related Prospectus, copies of which have heretofore been delivered by the Company to the Representatives, has been prepared by the Company, and conform as of the date filed in all material respects with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations ("Rules and Regulations") of the Securities and Exchange Commission (the "Commission") promulgated thereunder, and said Registration Statement has been filed with the Commission under the Act; one or more amendments to said Registration Statement, copies of which have heretofore been delivered to the Representatives, has or have heretofore been filed; and said Registration Statement has been declared effective (as hereinafter defined) with the Commision. As used in this Agreement, the term "Registration Statement" refers to and means said Registration Statement on Form S-1 and all amendments thereto, including the Prospectus, all exhibits thereto and financial statements, as it becomes effective; the term "Prospectus" refers to and means the Prospectus included in the Registration Statement when it becomes effective and a Prospectus filed with the Commission pursuant to Rule 424 of the Act, after the Effective Date; and the term "Preliminary Prospectus" refers to and means any prospectus included in said Registration Statement before it became effective. The term "effective" refers to the entry of an order by the Commission declaring the Registration Statement effective pursuant to Section 8 of the Act. The term "Effective Date" refers to the date the Commission declares the Registration Statement effective. 2.02. ACCURACY OF REGISTRATION STATEMENT AND PROSPECTUS. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus with respect to the Stock, and each Preliminary Prospectus conformed, when so filed, in all material respects with the requirements of the Act and the applicable Rules and Regulations of the Commission thereunder and to the best of the Company's knowledge has not included at the time of filing any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein in light of the circumstances in which they were made, not misleading. As of the date hereof, and on the Closing Date, the Registration Statement and Prospectus and any further amendments or supplements thereto will contain all statements which are required to be stated therein in accordance with the Act and the rules and regulations for the purposes of the proposed public offering of the Stock, and all statements of material fact contained in the Registration Statement and Prospectus will be true and correct, and neither the Registration Statement nor the Prospectus will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made, not misleading; provided, however, the Company does not make any representations -2- or warranties as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon written information furnished on behalf of the Representatives specifically for use in connection with the preparation thereof. 2.03. FINANCIAL STATEMENTS. The financial statements of the Company together with related schedules and notes as set forth in the Registration Statement and Prospectus present fairly the financial position of the Company and the results of its operations and the changes in its financial position at the respective dates and for the respective periods for which they apply; such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied, throughout the periods indicated except as otherwise stated therein. 2.04. INDEPENDENT PUBLIC ACCOUNTANT. Deloitte & Touche LLP, which has certified or shall certify certain of the financial statements filed or to be filed with the Commission as part of the Registration Statement and Prospectus, are independent certified public accountants within the meaning of the Act and the rules and regulations promulgated thereunder. 2.05. NO MATERIAL ADVERSE CHANGE. Except as may be reflected in or contemplated by the Registration Statement or the Prospectus, since the dates as of which information is given in the Registration Statement and Prospectus, (i) there has not been any material adverse change in the condition, financial or otherwise, of the Company or in its business taken as a whole; (ii) there has not been any material transaction entered into by the Company other than transactions in the ordinary course of business; (iii) the Company has not incurred any material obligations, contingent or otherwise, which are not disclosed in the Prospectus; (iv) there has not been any change in the capital stock or long-term debt (except current payments) of the Company; and (v) the Company has not paid or declared any dividends or other distributions on its common stock. 2.06. NO DEFAULTS. The Company is not in any default, which default has not been waived, in the performance of any obligation, agreement or condition contained in any debenture, note or other evidence of indebtedness or any indenture or loan agreement of the Company. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated, and compliance with the terms of this Agreement will not conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default under, the articles of incorporation, as amended, or bylaws of the Company, any note, indenture, mortgage, deed of trust, or other agreement or instrument to which the Company is a party or by which it or any of its property is bound, or any existing law, order, rule, regulation, writ, injunction, or decree of any government, governmental instrumentality, agency or body, arbitration tribunal or court, domestic or foreign, having jurisdiction over the Company or its property. The consent, approval, authorization, or order of any court or governmental instrumentality, agency or body is not required for the consummation of the transactions herein contemplated except such as may be required under the Act or under the blue sky or securities laws of any state or jurisdiction. 2.07. INCORPORATION AND STANDING. The Company is duly incorporated and validly existing and is in good standing as a corporation under the laws of the State of Delaware with -3- authorized and outstanding capital stock as set forth in the Registration Statement and the Prospectus, and with full corporate power and authority to own its property and conduct its business, present and proposed, as described in the Registration Statement and Prospectus; the Company has full corporate power and authority to enter into this Agreement. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which it owns or leases real property or transacts business requiring such qualification, except where the failure to so qualify or to be in good standing would not result in a material adverse effect on the Company. The Company has no subsidiaries other than as shown in Exhibit 23.1 to the Registration Statement. 2.08. LEGALITY OF OUTSTANDING STOCK. The outstanding common stock of the Company has been duly authorized, validly issued and is fully paid and nonassessable and will conform to all statements with regard thereto contained in the Registration Statement and Prospectus. No sales of securities have been made by the Company in violation of the registration provisions of the Act. 2.09. LEGALITY OF STOCK, WARRANT STOCK AND WARRANTS. The Stock and Warrant Stock have been duly and validly authorized and, when issued and delivered against payment therefor as described in this Agreement, will be validly issued, fully paid and nonassessable. The Stock and Warrant Stock, upon issuance, will not be subject to the preemptive rights of any shareholders of the Company. The Warrants, when sold and delivered, will constitute valid and binding obligations of the Company enforceable against it in accordance with the terms thereof. A sufficient number of shares of common stock have been reserved for issuance upon exercise of the Warrants. The Stock and Warrants will conform to all statements with regard thereto in the Registration Statement and Prospectus. 2.10. PRIOR SALES. No securities of the Company or of an affiliate or of a predecessor of the Company have been sold within one year prior to the date hereof, except as set out in Item 15 of Part II of the Registration Statement. 2.11. LITIGATION. Except as set forth in the Registration Statement and Prospectus, there is no action, suit or proceeding before any court or governmental agency, authority or body pending or, to the knowledge of the Company, threatened, which might result in judgments against the Company not adequately covered by insurance or reserves established and reflected in the Company's financial statements or which collectively might result in any material adverse change in the condition (financial or otherwise), of the business, or properties or assets of the Company. 2.12. WARRANTS. Upon delivery of and payment for the Warrants to be sold by the Company as set forth in Section 3.03 of this Agreement, the Representatives and the Underwriter's designees will receive good and marketable title thereto, free and clear of all liens, encumbrances, charges and claims whatsoever; and the Company has, as of the date hereof, and will have at the time of delivery of such Warrants full legal right and power and all authorization and approval required by law to sell, transfer and deliver such Warrants in the manner provided hereunder. -4- 2.13. FINDER. The Company knows of no outstanding claims for services in the nature of a finder's fee or origination fee with respect to the sale of the Stock hereunder resulting from its acts for which the Representatives may be responsible. 2.14. EXHIBITS. There are no contracts or other documents which are required to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been so filed, and each contract to which the Company is a party and to which reference is made in the Prospectus has been duly and validly executed, is in full force and effect in all material respects in accordance with its terms, and none of such contracts has been assigned by the Company; and the Company knows of no present situation or condition or fact which would prevent compliance with the terms of such contracts, as amended to date. Except for amendments or modifications of such contracts in the ordinary course of business, the Company has no intention of exercising any right which it may have to cancel any of its obligations under any of such contracts, and has no knowledge that any other party to any of such contracts has any intention not to render full performance under such contracts. 2.15. TAX RETURNS. The Company has filed all federal and state tax returns which are required to be filed by it and has paid all taxes shown on such returns and on all assessments received by it to the extent such taxes have become due, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. All taxes with respect to which the Company is obligated have been paid or adequate accruals have been set up to cover any such unpaid taxes. 2.16. PROPERTY. Except as otherwise set forth in or contemplated by the Registration Statement and Prospectus, the Company has good title, free and clear of all liens, encumbrances and defects, except liens for current taxes not due and payable, to all property and assets which are described in the Registration Statement and the Prospectus as being owned by the Company, subject only to such exceptions as are not material and do not adversely affect the present or prospective business of the Company. 2.17. AUTHORITY. The execution and delivery by the Company of this Agreement has been duly authorized by all necessary corporate action and this Agreement is the valid, binding and legally enforceable obligation of the Company. 2.18 LEGALITY OF OPERTATIONS. The operations of the Company are in material compliance with applicable state laws governing permitted owners of engineering and architectural firms, and governing the splitting of professional fees paid to engineers and architects with persons not licensed to engage in such professions. SECTION 3 PURCHASE AND SALE OF THE STOCK 3.01. PURCHASE OF STOCK AND OVER-ALLOTMENT OPTION. The Company hereby agrees to sell to members of the Underwriting Group named in Schedule I hereto (for all of whom the -5- Representatives are acting), severally and not jointly, and each member of the Underwriting Group, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees to purchase from the Company, severally and not jointly, the number of shares of Stock set forth opposite their respective names in Schedule I hereto at a purchase price of $_____*per share. The Company hereby grants to the Underwriting Group an option (the "Option") for a period of 45 days after Closing to purchase at a purchase price of $_____* per share up to One Hundred Eighty Thousand (180,000) additional shares of Stock in order to cover over-allotments. The Option shares of Stock shall be purchased for the account of each member of the Underwriting Group as nearly as practicable in the proportion that the number of shares of Stock set opposite the name of each Underwriter in Schedule I hereto bears to _________*. 3.01.01. DEFAULT BY AN UNDERWRITER. If any of the Underwriters shall fail to purchase the entire number of shares of Stock set opposite its name in Schedule I hereto, and such failure to purchase shall constitute a default by such Underwriter in the performance of its obligations under this Agreement, the remaining Underwriters shall have the right and shall be obligated to take up and pay for (in the respective proportions which the number of shares of Stock set opposite the names of the several remaining Underwriters bears to the aggregate number of shares of Stock set opposite the names of all the remaining Underwriters) the entire amount of shares of Stock which the defaulting Underwriter agreed but failed to purchase, provided, however, that the aggregate amount of all such increases for all non-defaulting Underwriters shall not exceed _______* shares of Stock, and provided, further, that in the event that such additional shares of Stock shall exceed the foregoing maximum, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the entire amount (but not less than all) of remaining shares of Stock which all defaulting Underwriters agreed but failed to purchase. 3.01.02. LIABILITY OF DEFAULTING UNDERWRITER. Nothing contained in this Section 3.01 shall relieve any defaulting Underwriter of its liability, if any, to the Company or to the remaining Underwriters for damages occasioned by its default hereunder. 3.01.03. RIGHTS OF REMAINING UNDERWRITERS. If any of the Underwriters shall fail to purchase the entire number of shares of Stock set opposite its name and such failure to purchase shall not constitute a default by such Underwriter in the performance of its obligations under this Agreement, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the entire amount (but not less than all) of the shares of Stock which all withdrawing Underwriters agreed but failed to purchase. 3.02. PUBLIC OFFERING PRICE. The Underwriters propose to offer the Stock to the public at a public offering price of $______* per share as set forth in the Prospectus. The Underwriters may allow such concessions and discounts upon sales to selected dealers is described in the Registration Statement. -6- 3.02.01. PAYMENT FOR STOCK. Payment for the Stock (including Option shares) which the Representatives agree to purchase shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, upon delivery to the Representatives of certificates for shares and Warrants in definitive form in such numbers and registered in such names as the Representatives requests in writing at least two full business days prior to such delivery. 3.02.02. CLOSING. The time and date of delivery and payment hereunder is herein called the "Closing Date" and shall take place at the office of Berthel in Cedar Rapids, Iowa at 11:00 p.m. C.S.T. on the third business day following the execution of this Agreement. Should the Representatives elect to exercise any part of the over-allotment option pursuant to Section 3.01 hereinabove, the time and date of delivery and payment for said over-allotment shares shall be as mutually agreed, but not later than the 45th calendar day after the "Closing Date." Said date is hereinafter referred to as the "Over-Allotment Closing Date." 3.02.03. INSPECTION OF CERTIFICATES. For the purpose of expediting the checking and packaging of the certificates for shares and Warrants, the Company agrees to make the certificates available for inspection by the Representatives at the office of Berthel in Cedar Rapids, Iowa, at least one full business day prior to the proposed delivery date. 3.03. SALE OF WARRANTS. The Company will sell and deliver to the Representatives, at a purchase price of $_____* per Warrant, Warrants, dated the date of Closing, substantially in the form of Exhibit A, attached hereto and by this reference incorporated herein, evidencing the right of designees of Berthel to purchase __________* shares of Warrant Stock; the right of designees of Westport to purchase __________* shares of Warrant Stock; and the right of designees of Marion Bass to purchase ______* shares of Warrant Stock at the price per share and upon the terms and conditions provided in the Warrants. The Company shall not be obligated to sell and deliver the Warrants, and the Representatives will not be obligated to purchase and pay for the Warrants, except upon payment for the shares pursuant to Subsection 3.02.01 hereof. 3.04. UNDERWRITER'S EXPENSE ALLOWANCE. The Company shall reimburse the Underwriters for all out-of-pocket expenses (which shall not include compensation or benefits for the personnel of the Underwriters) incurred by Underwriters in connection with the Offering or this Agreement, including Underwriters' attorney's fees. Underwriters shall provide an invoice for all such expenses to be reimbursed (including the expenses offset against the retainer) and payment of any expenses shall be made only after receipt by the Company of such invoices. 3.05. REPRESENTATIONS OF THE PARTIES. The parties hereto respectively represent that as of the Closing Date the representations herein contained and the statements contained in all the certificates theretofore or simultaneously delivered by any party to another, pursuant to this Agreement, shall in all material respects be true and correct. 3.06. POST-CLOSING INFORMATION. The Representatives covenant that reasonably promptly after the Closing Date, they will supply the Company with all such information as the -7- Company may reasonably request to be supplied to the securities commissions of such states in which the Stock has been qualified for sale. 3.07. RE-OFFERS BY SELECTED DEALERS. On each sale by the Underwriters of any of the Stock to selected dealers, the Representatives shall require the selected dealer purchasing any such Stock to agree to re-offer the same on the terms and conditions of the offering set forth in the Registration Statement and Prospectus. SECTION 4 REGISTRATION STATEMENT AND PROSPECTUS 4.01. DELIVERY OF REGISTRATION STATEMENTS. The Company shall deliver to the Representatives without charge two signed copies of the Registration Statement, including all financial statements and exhibits filed therewith and any amendments or supplements thereto, and shall deliver without charge to the Representatives five conformed copies of the Registration Statement and any amendment or supplement thereto, including such financial statements and exhibits. The signed copies of the Registration Statement so furnished to the Representatives will include signed copies of any and all consents and certificates of the independent public accountant certifying to the financial statements included in the Registration Statement and Prospectus and signed copies of any and all consents and certificates of any other persons whose profession gives authority to statements made by them and who are named in the Registration Statement or Prospectus as having prepared, certified, or reviewed any part thereof. 4.02. DELIVERY OF PRELIMINARY PROSPECTUS. The Company will deliver to the Representatives, without charge, as many copies of each Preliminary Prospectus filed with the Commission bearing in red ink the statement required by Regulation S-K, Item 501(C)(8) as may be reasonably requested by the Underwriters. The Company consents to the use of such documents by the Underwriters and by dealers prior to the Effective Date. The Company will deliver at its expense such copies of the Preliminary Prospectus as the Representatives may deem reasonably necessary in order to recirculate the Preliminary Prospectus and/or to permit compliance with the provisions of Rule 15c-2(8)(b) promulgated pursuant to the Securities Exchange Act of 1934, as amended ("Exchange Act"). 4.03. DELIVERY OF PROSPECTUS. The Company will deliver, at its expense, as many printed copies of the Prospectus as the Representatives may reasonably request for the purposes contemplated by this Agreement and shall deliver said printed copies of the Prospectus to the Representatives as soon as practicable on effectiveness of this Agreement, but in no event more than one business day after the date of this Agreement. The Company will deliver such additional copies at its expense as may be reasonably necessary to permit dealers to comply with the requirements of Rule 174 promulgated pursuant to the Act. 4.04. FURTHER AMENDMENTS AND SUPPLEMENTS. If during such period of time as in the opinion of the Representatives or their respective counsel a Prospectus is required to be delivered under the Act, any event occurs or any event known to the Company relating to or -8- affecting the Company shall occur as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time after the Effective Date to amend or supplement the Prospectus to comply with the Act, the Company will forthwith notify the Representatives thereof and prepare and file with the Commission such further amendment to the Registration Statement or supplemental or amended Prospectus as may be required and furnish and deliver to the Representatives and to others whose names and addresses are designated by the Representatives, all at the cost of the Company, a reasonable number of copies of the amended or supplemented Prospectus which as so amended or supplemented will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the Prospectus, in the light of the circumstances under which it is delivered to a purchaser or prospective purchaser, not misleading, and which will comply in all material respects with the Act. 4.05. USE OF PROSPECTUS. The Company authorizes the Underwriters in connection with the distribution of the Stock and all dealers to whom any of the Stock may be sold by the Underwriters to use the Prospectus as from time to time amended or supplemented, in connection with the offering and sale of the Stock and in accordance with the applicable provisions of the Act and the applicable Rules and Regulations and applicable state blue sky or securities laws. SECTION 5 COVENANTS OF THE COMPANY The Company covenants and agrees with the Underwriters that: 5.01. OBJECTION OF REPRESENTATIVES TO AMENDMENTS OR SUPPLEMENTS. After the Effective Date, the Company will not at any time, file any amendment or supplement to the Registration Statement or Prospectus, unless and until a copy of such amendment or supplement has been previously furnished to the Representatives within a reasonable time period prior to the proposed filing thereof, or to which the Representatives or counsel for the Representatives has reasonably objected, in writing, on the ground that such amendment or supplement is not in compliance with the Act or the Rules and Regulations. 5.02. BEST-EFFORTS TO CAUSE AMENDMENTS TO BECOME EFFECTIVE. The Company will use its best efforts to cause any post-effective amendment subsequently filed, to become effective as promptly as reasonably practicable and will promptly advise the Representatives, and will confirm such advice in writing (i) when any amendment to the Registration Statement shall have become effective and when any amendment of or supplement to the Prospectus shall be filed with the Commission, (ii) when the Commission shall make a request or suggestion for any amendment to the Registration Statement or the Prospectus or for additional information and the nature and substance thereof, and (iii) of the issuance by the Commission of an order suspending the effectiveness of the Registration Statement pursuant to Section 8 of the Act or of the initiation of any proceedings for that purpose, (iv) of the happening of any event -9- which in the judgment of the Company makes any material statement in the Registration Statement or Prospectus untrue or which requires the making of any changes in the Registration Statement or Prospectus in order to make the statements therein not misleading, and (v) of the refusal to qualify or the suspension of the qualification of the Stock by any authority of competent jurisdiction for offering or sale in any jurisdiction, or of the institution of any proceedings by any authority of competent jurisdiction for any of such purposes. The Company will use every reasonable effort to prevent the issuance of any such order or of any order preventing or suspending such use, to prevent any such refusal to qualify or any such suspension, and to obtain as soon as possible a lifting of any such order, the reversal of any such refusal and the termination of any such suspension. 5.03. PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. The Company will prepare and file promptly with the Commission, upon request of the Representatives, such amendments or supplements to the Registration Statement or Prospectus, in form satisfactory to counsel to the Company, as in the opinion of counsel to the Representatives and of counsel to the Company may be necessary in connection with the offering or distribution of the Stock and will use its best efforts to cause the same to become effective as promptly as possible. 5.04. BLUE-SKY QUALIFICATION. The Company will, when and as requested by the Representatives, use reasonable efforts in cooperation with the Representatives to qualify the Stock or such part thereof as the Representatives may determine for sale under the so-called blue sky laws of the States of North Carolina, Iowa and of so many other states as the Representatives may reasonably request, and to continue such qualification in effect so long as required for the purposes of the distribution of the Stock. 5.05. FINANCIAL STATEMENTS. The Company at its own expense will prepare and give and will continue to give such financial statements and other information to and as may be required by the Commission, or the proper public bodies of the states in which the Stock may be qualified. 5.06. REPORTS AND FINANCIAL STATEMENTS TO THE REPRESENTATIVES. During the period of five years from the Closing Date, the Company will deliver to the Representatives, (i) copies of each annual report of the Company and reports filed by the Company pursuant to the Exchange Act, (ii) copies of all other statements, documents, or other information which the Company shall mail or otherwise make available to any class of its security holders, or shall file with Commission; and (iii) upon request in writing from the Representatives, furnish to the Representatives such other information as may reasonably be requested and which may be properly disclosed to the Representatives with reference to the property, business and affairs of the Company and its subsidiaries, if any. 5.07. EXPENSES PAID BY THE COMPANY. The Company will pay, whether or not the transactions contemplated hereunder are consummated or this Agreement is prevented from becoming effective or is terminated, all costs and expenses incident to the performance of its obligations under this Agreement, including all expenses incident to the authorization of the Stock and their issue and delivery to the Representatives, any original issue taxes in connection therewith, all transfer taxes, if any, incident to the initial sale of the Stock to the -10- public, the fees and expenses of the Company's counsel and accountants, the costs and expenses incident to the preparation, printing and filing under the Act and with the National Association of Securities Dealers, Inc. of the Registration Statement, any Preliminary Prospectus and the Prospectus and any amendments or supplements thereto, the cost of printing, reproducing and filing all exhibits to the Registration Statement, the underwriting documents and the Selected Dealers Agreement, the cost of printing and furnishing to the Representatives copies of the Registration Statement and copies of the Prospectus as herein provided, and the cost of qualifying the Stock under the state securities or Blue Sky laws as provided in Section 5.04 herein, including expenses and disbursements of the Representatives incurred in connection with such qualification. 5.08. REPORTS TO SHAREHOLDERS. During the period of five years from the Closing Date, the Company will, as promptly as possible, not to exceed 120 days, after each annual fiscal period render and distribute reports to its shareholders which will include audited statements of its operations and changes of financial position during such period and its balance sheet as of the end of such period, as to which statements the Company's independent certified public accountants shall have rendered an opinion. 5.09. SECTION 11(A) FINANCIALS. The Company will make generally available to its security holders and will deliver to the Representatives, as soon as practicable, but in no event later than the first day of the sixteenth full calendar month following the Effective Date, an earnings statement (as to which no opinion need be rendered but which will satisfy the provisions of Section 11(a) of the Act) covering a period of at least 12 months beginning after the Effective Date. 5.10. POST-EFFECTIVE AVAILABILITY OF PROSPECTUS. Within the time during which the Prospectus is required to be delivered under the Act, the Company will comply, at its own expense, with all requirements imposed upon it by the Act, as now or hereafter amended, by the Rules and Regulations, as from time to time may be in force, and by any order of the Commission, so far as necessary to permit the continuance of sales or dealings in the Stock. 5.11. APPLICATION OF PROCEEDS. The Company will apply the net proceeds from the sale of the Stock substantially in the manner set forth in the Registration Statement and Prospectus. 5.12. UNDERTAKINGS OF CERTAIN SHAREHOLDERS. The Company will deliver to the Representatives, prior to or simultaneously with the execution of this Agreement, the undertaking of each officer, director, and each employee of the Company who owns 5% or more of shares of the Company (based on the number of shares outstanding as of the date hereof) that such person shall not directly or indirectly offer or sell to the public, or privately, any portion of the shares of common stock owned prior to the date of this Agreement or hereafter acquired by exercise of an option for a period of twelve months from the Effective Date without the Underwriter's prior written consent. 5.13. DELIVERY OF DOCUMENTS. At the Closing, the Company will deliver to the Representatives true and correct copies of the certificate of incorporation of the Company and -11- all amendments thereto, all such copies to be certified by the Secretary of State of the State of Delaware; true and correct copies of the bylaws of the Company and of the minutes of all meetings of the directors and shareholders of the Company held prior to the Closing Date which in any way relate to the subject matter of this Agreement; and true and correct copies of all material contracts to which, the Company is a part, other than contracts for the sale of products or services in the normal course of business. 5.14. COOPERATION WITH UNDERWRITER'S DUE DILIGENCE. At all times prior to the Closing Date, the Company will cooperate with the Representatives in such investigation as the Representatives may make or cause to be made of all the properties, business and operations of the Company in connection with the purchase and public offering of the Stock, and the Company will make available to the Representatives in connection therewith such information in its possession as the Representatives may reasonably request. 5.15. NO SALE PERIOD. No offering, sale or other disposition of any common stock, equity or long-term debt will be made within one year after the Effective Date , directly or indirectly, by the Company, otherwise than hereunder or with the Underwriter's consent. 5.16. APPOINTMENT OF TRANSFER AGENT. The Company has appointed First Union National Bank as Transfer Agent for the Stock subject to the Closing. The Company will not voluntarily change or terminate such appointment for a period of three years from the Effective Date without first obtaining the written consent of the Representatives, which consent shall not be unreasonably withheld. 5.17. COMPLIANCE WITH CONDITIONS PRECEDENT. The Company will use all reasonable efforts to comply or cause to be complied with the conditions precedent to the several obligations of the Underwriters in Section 8 hereof. 5.18. REGISTRATION UNDER THE EXCHANGE ACT. The Company shall, within 90 days after the Effective Date, register the class of equity securities which includes the Stock by filing with the Commission a registration statement (and such copies thereof as the Commission may require) with respect to such security, to register a security pursuant to subsection (g) of Section 12 of the Act. 5.19. 5.19. APPLICATION TO AMEX. The Company has applied for and obtained admission for quotation of the Stock on the Small Cap listing of the National Association of Securities Dealers Automated Quote system commencing upon release by the Representatives of the Stock for offering after the Effective Date. 5.20 UNDERWRITERS' BOARD DESIGNEE. Following the Closing, and for a period of five (5) years after the Closing, the Company will grant to Berthel the right to designate one -12- individual, whom the Company shall use its best efforts to have elected to the Board of Directors of the Company. Berthel shall not be obligated to designate such an individual. 5.21 KEY MAN LIFE INSURANCE. The Company has in force, and will maintain for a period of five (5) years following the Closing, "key man" life insurance on the life of Joseph M. Harris, in the amount of $1,000,000. SECTION 6 INDEMNIFICATION 6.01. INDEMNIFICATION BY COMPANY. The Company agrees to indemnify and hold harmless the Underwriters and each person who controls any of the Underwriters within the meaning of Section 15 of the Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act or any other statute or at common law and to reimburse persons indemnified as above for any legal or other expenses (including the cost of any investigation and preparation) incurred by them in connection with any litigation, whether or not resulting in any liability, but only insofar as such losses, claims, damages, liabilities and litigation arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereto or any application or other document filed in order to qualify the Stock under the Blue Sky or securities laws of the states where filings were made, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, all as of the date when the Registration Statement or such amendment, as the case may be, becomes effective, or any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (as amended or supplemented if the Company shall have filed with the Commission any amendments thereof or supplements thereto), or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the indemnity agreement contained in this subsection 6.01 shall not apply to amounts paid in settlement of any such litigation if such settlements are effected without the written consent of the Company, nor shall it apply to the Underwriters or any person controlling the Underwriters in respect of any such losses, claims, damages, liabilities or actions arising out of or based upon any such untrue statements or alleged untrue statement, or any such omission or alleged omission, if such statement or omission was made in reliance upon information furnished in writing to the Company by any Underwriter specifically for use in connection with the preparation of the Registration Statement and Prospectus or any such amendment or supplement thereto. This indemnity agreement is in addition to any other liability which the Company may otherwise have to the Underwriters. The Underwriters agree within ten days after the receipt by them of written notice of the commencement of any action against them or against any person controlling them as aforesaid, in respect of which indemnity may be sought from the Company on account of the indemnity agreement contained in this subsection 6.01 to notify the Company in writing of the commencement thereof. The failure of the Underwriters so to notify the Company of any such action shall relieve the Company from any liability which it may have to the Underwriters or any person controlling -13- them as aforesaid on account of the indemnity agreement contained in this subsection 6.01, but shall not relieve the Company from any other liability which it may have to the Underwriters or such controlling person. In case any such action shall be brought against the Underwriters, or any of them, or any such controlling person and the Representatives shall notify the Company of the commencement thereof, the Company shall be entitled to participate in (and, to the extent that it shall wish, to direct) the defense thereof at its own expense, but such defense shall be conducted by counsel reasonably satisfactory to the Representatives or such controlling person or persons, defendant or defendants in such litigation. The Company agrees to notify the Representatives promptly of commencement of any litigation or proceedings against it or any of its officers or directors, of which it may be advised, in connection with the issue and sale of any of its securities and to furnish to the Representatives, at their request, copies of all pleadings therein and permit the Representatives to be an observer therein and apprise the Representatives of all developments therein, all at the Company's expense. Notwithstanding the foregoing, in no event shall the indemnification agreement contained in this Section 6.01 inure to the benefit of any Representatives (or any person controlling such Representatives) on account of any losses, claims, damages, liabilities or actions arising from the sale of the common stock upon the public offering to any person by such Representatives if such losses, claims, damages, liabilities or actions arise out of, or are based upon, an untrue statement or omission or alleged untrue statement or omission in a Preliminary Prospectus and if the Prospectus shall correct the untrue statement or omission or the alleged untrue statement or omission which is the basis of the loss, claim, damage, liability or action for which indemnification is sought and a copy of the Prospectus had not been sent or given to such person at or prior to the confirmation of such sale to him in any case where such delivery is required by the Securities Act, unless such failure to deliver the Prospectus was a result of non-compliance by the Company with Section 4.03 hereof. 6.02. INDEMNIFICATION BY UNDERWRITERS. The Underwriters severally agree, to the extent of and only to the extent of their commitment pursuant to Schedule 1, in the same manner as set forth in subsection 6.01 above, to indemnify and hold harmless the Company, the directors of the Company and each person, if any, who controls the Company within the meaning of Section 15 of the Act with respect to any statement in or omission from, or alleged untrue statement or omissions made in the Registration Statement or any amendment thereto, or the Prospectus (as amended or as supplemented, if amended or supplemented as aforesaid) or any application or other document filed in any state or jurisdiction in order to qualify the Stock under the blue sky or securities laws thereof, or any information furnished pursuant to Section 3.05 hereof, if such statement or omission was made in reliance upon information furnished in writing to the Company by the Underwriters on its behalf specifically for use in connection with the preparation thereof or supplement thereto. The Underwriters shall not be liable for amounts paid in settlement of any such litigation if such settlement was effected without the consent of the Underwriters. In case of commencement of any action in respect of which indemnity may be sought from the Underwriters on account of the indemnity agreement contained in this subsection 6.02, each person agreed to be indemnified by the Underwriters shall have the same obligation to notify the Underwriters as the Underwriters have toward the Company in subsection 6.01 above, subject to the same loss of indemnity in the event such notice is not given, and the Underwriters shall have the same right to participate in (and, to the extent that they shall wish, to direct) the defense of such -14- action at their own expense, but such defense shall be conducted by counsel of recognized standing and reasonably satisfactory to the Company. The Underwriters agree to notify the Company promptly of the commencement of any litigation or proceeding against the Underwriters or against any such controlling person, of which it may be advised, in connection with the issue and sale of any of the securities of the Company, and to furnish to the Company at its request copies of all pleadings therein and apprise it of all the developments therein, all at the Underwriters' expense, and permit the Company to be an observer therein. SECTION 7 There is no Section 7. SECTION 8 CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS The Underwriters' obligations hereunder to purchase the Stock and to make payment to the Company hereunder on the Closing Date shall be subject to the accuracy, as of the Closing Date, of the representations and warranties on the part of the Company herein contained, to the performance by the Company of all its agreements herein contained, to the fulfillment of or compliance by the Company with all covenants and conditions hereof, and to the following additional conditions: 8.01. EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement has been made effective by the Commission, and no order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission or shall be pending; any request for additional information on the part of the Commission (to be included in the Registration Statement or Prospectus or otherwise) has been complied with to the satisfaction of the Commission; and neither the Registration Statement or the Prospectus nor any amendment thereto shall have been filed to which counsel to the Representatives shall have reasonably objected in writing or have not given their consent. 8.02. ACCURACY OF REGISTRATION STATEMENT. The Representatives shall not have disclosed in writing to the Company that the Registration Statement or the Prospectus or any amendment thereof or supplement thereto contains an untrue statement of a fact which, in the opinion of counsel to the Representatives, is material, or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein, or is necessary to make the statements therein not misleading. 8.03. CASUALTY AND OTHER CALAMITY. Between the date hereof and the Closing Date, the Company shall not have sustained any loss on account of fire, explosion, flood, accident, calamity or any other cause, of such character as materially adversely affects its business or property considered as an entire entity, whether or not such loss is covered by insurance and neither Joseph M. Harris, President of the Company nor Vernon B. Brannon, Chief Financial Officer of the Company shall have suffered any injury or disability of a nature which would -15- materially adversely affect his ability to properly function as an officer and director of the Company. 8.04. LITIGATION AND OTHER PROCEEDINGS. Between the date hereof and the Closing Date, there shall be no litigation instituted or threatened against the Company and there shall be no proceeding instituted or threatened against the Company before or by any federal or state commission, regulatory body or administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding would materially adversely affect the business, franchises, licenses, patents, operations or financial condition or income of the Company considered as a whole. 8.05. LACK OF MATERIAL CHANGE. Except as contemplated herein or as set forth in the Registration Statement and Prospectus, during the period subsequent to the date of the last audited balance sheet included in the Registration Statement and prior to the Closing Date, the Company (A) shall have conducted its business in all material respects in the usual and ordinary manner as the same was being conducted on the date of the last audited balance sheet included in the Registration Statement, and (B) except in the ordinary course of its business, the Company shall not have incurred any material liabilities or obligations (direct or contingent) or disposed of any material portion of its assets, or entered into any material transaction or suffered or experienced any substantially adverse change in its condition, financial or otherwise. At the Closing Date, the capital stock and surplus accounts of the Company shall be substantially the same as at the date of the last audited balance sheet included in the Registration Statement, without considering the proceeds from the sale of the Stock, other than as may be set forth in the Prospectus, and except as the surplus reflects the result of continued losses from operations. 8.06. REVIEW BY UNDERWRITER'S COUNSEL. The authorization of the Stock, the Warrants, the Warrant Stock, the Registration Statement, the Prospectus and all corporate proceedings and other legal matters incident thereto and to this Agreement shall be reasonably satisfactory in all material respects to counsel to the Representatives. 8.07. OPINION OF COUNSEL. The Company shall have furnished to the Representatives the opinion, dated the Closing Date, addressed to the Representatives, from counsel to the Company reasonably acceptable to the Representatives and their counsel, to the effect that based upon a review of the Registration Statement, Prospectus, the Company's certificate of incorporation, bylaws, and relevant corporate proceedings, an examination of such statutes as they deem necessary and such other investigation as they deem necessary to express such opinion: (i) The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of Delaware, with full corporate power and authority to own and operate its properties and to carry on its business as set forth in the Registration Statement and Prospectus. (ii) The Company is not required to qualify or register as a foreign corporation in any state and there are no jurisdictions in which the Company's ownership of -16- property or its conduct of business requires such qualification or registration and where the failure to so qualify would have a material adverse effect on its operations. (iii) The Company has authorized and outstanding capital stock as set forth in the Registration Statement and Prospectus; the outstanding common stock of the Company, the Stock, and the Warrants conform to the statements concerning them in the Registration Statement and Prospectus; the outstanding common stock of the Company has been duly and validly issued and is fully-paid and nonassessable and contains no preemptive rights; the Stock and the shares of Warrant Stock issuable upon exercise of the Warrants will be, upon issuance thereof and payment therefor in accordance with this Agreement and the Warrants, duly and validly issued, fully paid and nonassessable, and will not be subject to the preemptive rights of any shareholder of the Company. (iv) The Warrants have been duly and validly authorized and issued and are valid and binding instruments enforceable in accordance with their terms under the laws of the State of Delaware. (v) A sufficient number of shares of common stock have been duly reserved for issuance upon exercise of the Warrants. (vi) To the best of the knowledge of such counsel, no consents, approvals, authorizations or orders of regulatory agencies, offices or authorities are known to such counsel which are necessary for the valid authorization, issue or sale of the Stock hereunder, except as required under the Act or blue sky or state securities laws. (vii) The issuance and sale of the Stock, the Warrants, and the consummation of the transactions herein contemplated and compliance with the terms of this Agreement will not conflict with or result in a breach of any of the terms, conditions, or provisions of or constitute a default under the certificate of incorporation, or bylaws of the Company, or any note, indenture, mortgage, deed of trust, or other material agreement or instrument known to such counsel to which the Company is a party or by which the Company or any of its property is bound or any existing law (provided this paragraph shall not relate to federal or state securities laws), order, rule, regulation, writ, injunction, or decree known to such counsel of any government, governmental instrumentality, agency, body, arbitration tribunal, or court, domestic or foreign, having jurisdiction over the Company or its property. (viii) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened by the Commission under the Act; and the Registration Statement and Prospectus, and each amendment and supplement thereto, as of the effective issue date comply as to form in all material respects with the requirements of the Act and the Rules and Regulations thereunder, all contracts described in the Registration Statement or Prospectus are sufficiently summarized or described therein or filed as exhibits thereto as required, and such counsel, to the best of such counsel's knowledge, does not know of any contracts required to be summarized or disclosed or filed as exhibits, and such counsel, does -17- not know of any legal or governmental proceedings pending or threatened to which the Company is the subject which might reasonably be expected to result in a material adverse effect. (ix) This Agreement has been duly authorized and executed by the Company and is a valid and binding agreement of the Company. (x) The operations of the Company are in material compliance with applicable state law governing permitted owners of engineering and architectural firms, and governing the splitting of professional fees paid to engineers and architects with persons not licensed to engage in such professions. As to routine factual matters such as the issuance of stock certificates and receipt of payment therefor, the states in which the Company transacts business, the adoption of resolutions reflected by the Company's minute book and the like, such counsel may rely on the certificate of an appropriate officer of the Company. 8.08.01. ACCOUNTANT'S LETTER. The Representatives shall have received a letter addressed to it and dated the date of this Agreement and the Closing Date, respectively, from Deloitte & Touche LLP, independent public accountants for the Company, stating that (i) with respect to the Company they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and the response to Item 509 of Regulation S-K as reflected by the Registration Statement is correct insofar as it relates to them; (ii) in their opinion, the financial statements examined by them of the Company at all dates and for all periods referred to in their opinion and included in the Registration Statement and Prospectus, comply in all material respects with the applicable accounting requirements of the Act and the published Rules and Regulations thereunder with respect to registration statements on Form S-1; (iii) on the basis of certain indicated procedures (but not an examination in accordance with generally accepted accounting principles), including examinations of the instruments of the Company set forth under "Capitalization" in the Prospectus, a reading of the latest available interim unaudited financial statements of the Company, whether or not appearing in the Prospectus, inquiries of the officers of the Company or other persons responsible for its financial and accounting matters regarding the specific items for which representations are requested below and a reading of the minute books of the Company, nothing has come to their attention which would cause them to believe that during the period from the last audited balance sheet included in the Registration Statement to a specified date not more than five days prior to the date of such letter (a) there has been any change in the capital stock or other securities of the Company or any payment or declaration of any dividend or other distribution in respect thereof or exchange therefor from that shown on its latest audited balance sheet, which was included in the Prospectus or in the debt of the Company from that shown or contemplated under "Capitalization" in the Registration Statement or Prospectus other than as set forth in or contemplated by the Registration Statement or Prospectus; (b) there have been any material decreases in net current assets or net assets as compared with amounts shown in the last audited balance sheet included in the Prospectus so as to make said financial statements misleading; and (c) on the basis of the indicated procedures and discussions referred to in clause (iii) above, -18- nothing has come to their attention which, in their judgment, would cause them to believe or indicate that (1) the unaudited financial statements and schedules set forth in the Registration Statement and Prospectus do not present fairly the financial position and results of Operations of the Company, for the periods indicated, in conformity with the generally accepted accounting principles applied on a consistent basis with the audited financial statements, and (2) the dollar amounts, percentages and other financial information set forth in the Registration Statement and Prospectus under the captions "Prospectus Summary," "Risk Factors," "Dilution," "Capitalization," "Management Stock Option Plan," "Principal Shareholders," and "Certain Transactions," are not in agreement with the Company's general ledger, financial records or computations made by the Company therefrom. 8.08.02. CONFORMED COPIES OF ACCOUNTANT'S LETTER. The Representatives shall be furnished without charge, in addition to the original signed copies, such number of signed or photostatic or conformed copies of such accountants letter as the Representatives shall reasonably request. 8.09. OFFICERS' CERTIFICATE. The Company shall have furnished to the Representatives a certificate of the Company, executed by the President and Chief Financial Officer, dated as of the Closing Date, to the effect that: (i) The representations and warranties of the Company in this Agreement are true and correct at and as of the Closing Date, and the Company has complied with all the agreements and has satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date. (ii) The Registration Statement has become effective and no order suspending the effectiveness of the Registration Statement has been issued and to the best of the knowledge of the respective signers, no proceeding for that purpose has been initiated or is threatened by the Commission. (iii) They have each carefully examined the Registration Statement and Prospectus and any amendments and supplements thereto, and to the best of their knowledge, the Registration Statement and the Prospectus and any amendments and supplements thereto contain all statements required to be stated therein, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading and, since the Effective Date, there has occurred no event required to be set forth in an amended or a supplemented Prospectus which has not been so set forth. (iv) Except as set forth in the Registration Statement and Prospectus, since the respective dates as of which the periods for which information is given in the Registration Statement and Prospectus and prior to the date of such certificate, (A) there has not been any substantially adverse change, financial or otherwise, in the affairs or condition of the Company, and (B) the Company has not incurred any material liabilities, direct or contingent, or entered into any material transactions, otherwise than in the ordinary course of business. -19- (v) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, no dividends or distribution whatever have been declared and/or paid on or with respect to the common stock of the Company. 8.10. TENDER OF DELIVERY OF STOCK. All of the Stock being offered by the Company and the Warrants being purchased from the Company by the Representatives shall be tendered for delivery in accordance with the terms and provisions of this Agreement. 8.11. BLUE-SKY QUALIFICATION. The Stock shall be qualified in such states as the Representatives may reasonably request pursuant to Section 5.04, and each such qualification shall be in effect and not subject to any stop order or other proceeding by a regulating authority of competent jurisdiction on the Closing Date. 8.12. APPROVAL OF UNDERWRITER'S COUNSEL. All opinions, letters, certificates and evidence mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance satisfactory to counsel to the Representatives, whose approval shall not be unreasonably withheld. The suggested form of such documents shall be provided to the counsel for the Representatives at least one business day before the Closing Date. The Underwriter's counsel will provide a written memorandum stating such closing documents which he deems necessary for their review. Such memorandum shall be delivered five business days before the Closing Date to counsel for the Company. 8.13. OFFICERS' CERTIFICATE AS A COMPANY REPRESENTATIVE. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Representatives will be deemed a representation and warranty by the Company to the Representatives as to the statements made therein. SECTION 9 TERMINATION 9.01. TERMINATION BECAUSE OF NON-COMPLIANCE. This Agreement may be terminated by the Representatives by notice to the Company at any time prior to the Closing Date in the event that the Company shall have failed or been unable to comply with any of the terms, conditions or provisions of this Agreement on the part of the Company to be performed, complied with or fulfilled on or prior to the Closing (including but not limited to those specified in Sections 2, 3, 4, 5, and 8 hereof) within the respective times herein provided for, unless compliance therewith or performance or satisfaction thereof shall have been expressly waived by the Representatives in writing. 9.02. MARKET OUT TERMINATION. This Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the Closing Date if, in the reasonable judgment of the Representatives, payment for and delivery of the Stock is rendered impracticable or inadvisable because (i) trading in securities generally on the New York Stock Exchange, American Stock Exchange, or NASDAQ shall have been halted, suspended or -20- materially limited, (ii) a general moratorium on commercial banking activities in New York, Iowa, North Carolina or Delaware shall have been declared by either federal or state authorities, or (iii) a war or other national calamity, crisis or change in political, financial, or economic conditions, shall have occurred, the effect of which on the financial markets of the United States is such that it would be undesirable, impracticable or inadvisable in the reasonable judgment of the Representatives to proceed or continue with this Agreement or with the public offering. Notice of such termination may be given to the Company by telegram, telecopy or telephone and shall subsequently be confirmed by letter. 9.03. EFFECT OF TERMINATION HEREUNDER. Any termination of this Agreement pursuant to this Section 9 shall be without liability of any character (including, but not limited to, loss of anticipated profits or consequential damages) on the part of any party thereto, except that the Company shall remain obligated to pay the costs and expenses provided to be paid by it pursuant to Section 5.07; and the Company and the Representatives shall be obligated to pay, respectively, all losses, claims, damages or liabilities, joint or several, under Section 6.01 in the case of the Company and Section 6.02 in the case of the Representatives. SECTION 10 UNDERWRITERS' REPRESENTATIONS AND WARRANTIES The Underwriters represent and warrant to and agree with the Company that: 10.01. REGISTRATION AS BROKER-DEALER AND MEMBER OF NASD. Each Underwriter is registered as a broker-dealer with the Commission and is registered as a broker-dealer in all states in which it conducts business and is a member in good standing of the National Association of Securities Dealers, Inc. 10.02. NO PENDING PROCEEDINGS. There is not now pending or threatened against the Representatives any action or proceeding of which they have been advised, by or before the Securities and Exchange Commission or any state securities commission concerning its activities as a broker or dealer, nor has either of the Representatives been named as a "cause" in any such action or proceeding. 10.03. COMPANY'S RIGHT TO TERMINATE. In the event any action or proceeding of the type referred to in Section 10.02 above shall be instituted or threatened against the Representatives at any time prior to the Closing Date, or in the event there shall be filed by or against any of the Representatives in any court pursuant to any federal, state, local or municipal statute, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of any of the assets or if any of them makes an assignment for the benefit of creditors, the Company shall have the right upon written notice to the Representatives to terminate this Agreement without any liability to the Representatives of any kind except for the payment of all expenses as provided herein. -21- SECTION 11 NOTICE Except as otherwise expressly provided in this Agreement: 11.01. NOTICE TO THE COMPANY. Whenever notice is required by the provisions of this Underwriting Agreement to be given to the Company, such notice shall be in writing addressed to the Company as follows: HLM Design, Inc. c/o Mr. Joseph M. Harris 121 West Trade Street, Suite 2950 Charlotte, North Carolina 28202 with a copy to: Mr. Gary C. Ivey Parker, Poe, Adams & Bernstein L.L.P. 2500 Charlotte Plaza Charlotte, North Carolina 28244 11.02. NOTICE TO THE UNDERWRITERS. Whenever notice is required by the provisions of this Agreement to be given to the Underwriters, such notice shall be given in writing addressed to the Representatives at the addresses set out at the beginning of this Agreement, with a copy to: Mr. Michael K. Denney Bradley & Riley, P.C. 100 First Street S.W. Cedar Rapids, Iowa 52404 SECTION 12 MISCELLANEOUS 12.01. BENEFIT. This Agreement is made solely for the benefit of the Underwriters, and the Company, their respective officers and directors and (for the limited purposes of Section 6 hereof) any controlling person referred to in Section 15 of the Act, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successor" or the term "successors and assigns" as used in this Agreement shall not include any purchasers, as such, of any of the Stock. -22- 12.02. SURVIVAL. The respective indemnities, agreements, representations, warranties, covenants and other statements of the Company or its officers as set forth in or made pursuant to this Agreement and the indemnity agreements of the Company and the Underwriters contained in Section 6 hereof shall survive and remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company or the Underwriters or any such officer or director thereof or any controlling person of the Company or of the Underwriters, (ii) delivery of or payment for the Stock, and (iii) the Closing Date. Any successor of the Company and the Underwriters or any controlling person, officer or director thereof, as the case may be, shall be entitled to the benefits hereof. 12.03. GOVERNING LAW. The validity, interpretation and construction of this Agreement and of each part hereof will be governed by the laws of the State of Iowa. 12.04. UNDERWRITERS' INFORMATION. The statements with respect to the public offering of the Stock on the cover page of the Prospectus and under the caption "Underwriting" in the Prospectus constitute the written information furnished by or on behalf of the Underwriters referred to in subsection 2.02 hereof, in subsection 6.01 hereof and subsection 6.02 hereof. 12.05. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which may be deemed an original and all of which together will constitute one and the same instrument. Please confirm that the foregoing correctly sets forth the Agreement between you and the Company. Very truly yours, HLM Design, Inc. By: __________________________________ Joseph M. Harris, President By: __________________________________ Vernon B. Brannon, Chief Financial Officer -23- ACCEPTANCE AND ACKNOWLEDGMENT PAGE WE HEREBY CONFIRM AS OF THE DATE HEREOF THAT THE ABOVE LETTER SETS FORTH THE AGREEMENT BETWEEN THE COMPANY AND THE UNDERWRITER. Berthel Fisher & Company Financial Services, Inc. (for itself and as Representative of the members of the Underwriting Group) By: ____________________________________ Thomas J. Berthel, President Westport Resources Investment Services, Inc. (for itself and as Representative of the members of the Underwriting Group) By: ____________________________________ John Lane, Vice President Marion Bass Securities Corporation (for itself and as Representative of the members of the Underwriting Group) By: ____________________________________ Marion Bass, President -24- EX-1 3 EXHIBIT 1.2 Exhibit 1.2 __________* Shares HLM DESIGN, INC. AGREEMENT AMONG UNDERWRITERS May ___, 1998 Berthel Fisher & Company Financial Services, Inc. 100 Second Street S.E. Cedar Raids, Iowa 52401 Westport Resources Investment Services, Inc. 315 Post Road West Westport, Connecticut 06880 AS REPRESENTATIVES Gentlemen: We wish to confirm as follows the agreement among you, the undersigned and the other Underwriters named in Schedule I to the Underwriting Agreement, as it is to be executed (all such parties being herein called the "Underwriters"), with respect to the purchase by the Underwriters severally from the HLM Design, Inc., (the "Company") of the respective numbers of Shares (hereinafter the "Shares") set forth in Schedule I to the Underwriting Agreement. The number of Shares to be purchased by each Underwriter from the Company shall be determined in accordance with Section 3 of the Underwriting Agreement. It is understood that changes may be made in those who are to be Underwriters and in the respective numbers of Shares to be purchased by them, but that the number of Shares to be purchased by us as set forth in the Underwriting Agreement will not be changed without our consent except as provided herein and in the Underwriting Agreement. The obligations of the Underwriters to purchase the number of Shares set opposite their respective names in Schedule I to the Underwriting Agreement, as they may be increased by Section 3.01.01 of the Underwriting Agreement, are herein called their "underwriting obligations." The number of Shares set opposite our name in said Schedule I, as such number may be increased under said Section 3.01.01, are herein called "our Shares." For purposes of this Agreement the following definitions shall be applicable: (a) "Manager's Concession" shall be the compensation to you for acting as Manager as provided in paragraph 1 of not less than forty percent (40%) of the underwriting discount. The Manager's Concession shall include the right to all warrants to be issued pursuant to the Underwriting Agreement and the right of first refusal set forth in Section 11 of the Underwriting Agreement. (b) "Underwriting Group Concession" shall mean compensation to members of the Underwriting Group for assuming the underwriting risk and shall be not less than fifty percent (50%) of the underwriting discount on the Shares for which each Underwriter is obligated hereunder. (c) "Underwriting Fee" shall mean additional compensation to members of the Underwriting Group for assuming the underwriting risk and shall be not less than ten percent (10%) of the underwriting discount on the Shares for which each Underwriter is obligated hereunder. (d) "Dealer's Concession" shall mean compensation to Dealers who are members of the Selling Group and shall, as to Dealers who have executed an agreement with you, be not less than fifty percent (50%) of the underwriting discount. (e) "Dealer's Reallowance Concession" shall mean the compensation allowed Dealers by Underwriters other than the Manager and shall be one-half of the Dealer's Concession. (f) It is contemplated that the underwriting discount will be ten percent (10%) of the offering price. You in your absolute discretion shall determine, within the foregoing limitations, the precise allocation of the underwriting discount. 1. AUTHORITY AND COMPENSATION OF REPRESENTATIVES. We hereby authorize you as our Representatives and on our behalf, (a) to enter into an agreement with the Company substantially in the form attached hereto as Exhibit A (the "Underwriting Agreement"), but with such changes therein as in your judgment are not materially adverse to the Underwriters, (b) to exercise all the authority and discretion vested in the Underwriters and in you by the provisions of the Underwriting Agreement, and (c) to take all such action as you in your discretion may deem necessary or advisable in order to carry out the provisions of the Underwriting Agreement and this Agreement and the sale and distribution of the Shares, provided that the time within which the Registration Statement is required to become effective pursuant to the Underwriting Agreement will not be extended more than 48 hours without the approval of a majority in interest of the Underwriters (including yourselves). We authorize you, in executing the Underwriting Agreement on our behalf, to set forth in Schedule I of the Underwriting Agreement as our commitment to purchase the number of Shares (which shall not be substantially in excess of the number of shares included in your invitation to participate unless we have agreed otherwise) included in a wire, telex, or similar means of communication transmitted by you to us at least 24 hours prior to the commencement of the offering as our finalized underwriting obligation. -2- As our share of the compensation for your services hereunder, we will pay you, and we authorize you to charge to our account, a sum equal to the Manager's Concession. 2. PUBLIC OFFERING. A public offering of the Shares is to be made, as herein provided, as soon after the Registration Statement relating thereto shall become effective as in your judgment is advisable. The Shares shall be initially offered to the public at the public offering price of $_____* per share as determined by you and the Company. You will advise us by telegraph or telephone when the Shares shall be released for offering and shall advise us at or prior to that time of the allocation of the underwriting discount. We authorize you as Representatives of the Underwriters, after the initial public offering, to vary the public offering price, in your sole discretion, by reason of changes in general market conditions or otherwise. The public offering price of the Shares at the time in effect is herein called the "Offering Price." We hereby agree to deliver all preliminary and final prospectuses required for compliance with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934 and Section 5(b) of the Securities Act. You have heretofore delivered to us such preliminary prospectuses as have been requested by us, receipt of which is hereby acknowledged, and will deliver such final Prospectuses as will be requested by us. 3. OFFERING TO DEALERS AND GROUP SALES. We authorize you to reserve for offering and sale, and on our behalf to sell, to institutions or other retail purchasers (such sales being herein called "Group Sales") and to dealers selected by you (such dealers being herein called "Dealers") all or any part of our Shares as you may determine. Such sales of Shares, if any, shall be made (i) in the case of Group Sales, at the Offering Price, and (ii) in the case of sales to Dealers, at the Offering Price less the Dealer's Concession. Any Group Sales shall be as nearly as practicable in proportion to the underwriting obligations of the respective Underwriters. Any sales to Dealers made for our account shall be as nearly as practicable in the ratio that the Shares reserved for our account for offering to Dealers bears to the aggregate of all Shares of all Underwriters including you so reserved. The over-allotment option provided for in Section 3.01 to the extent exercised shall be exercised by you as a Representative of the Underwriters, and shall be exercised only for the purpose of making Group Sales or sales to Dealers by you. Such sales for our account of the over-allotment option shall as nearly as practicable be in proportion to the underwriting obligations of the respective Underwriters. On any Group Sales or sales to Dealers, including those pertaining to the over-allotment option, made by you on our behalf we shall be entitled to receive only the Underwriter's Concession. You agree to notify us not less than 24 hours prior to the commencement of the public offering as to the number of Shares, if any, which we may retain for direct sale. Prior to the termination of this Agreement, you may reserve for offering and sale as hereinbefore provided any Shares remaining unsold theretofore retained by us and we may, with your consent, retain any Shares remaining unsold theretofore reserved by you. -3- Sales to Dealers shall be made under a Selected Dealers Agreement, attached hereto as Exhibit B, attached hereto and by this reference incorporated herein. We authorize you to determine the form and manner of any communications with Dealers, and to make such changes in the Selected Dealers Agreement as you may deem appropriate. In the event that there shall be any such agreements with Dealers, you are authorized to act as managers thereunder and we agree, in such event, to be governed by the terms and conditions of such agreements. Each Underwriter agrees that it will not offer any of the Shares for sale at a price below the Offering Price or allow any concession therefrom except as herein otherwise provided. We as to our Shares may enter into agreements with dealers, but any Reallowance Concession shall not exceed half of the Dealer's Concession. It is understood that any person to whom an offer may be made as hereinbefore provided shall be a member of the National Association of Securities Dealers, Inc. or dealers or institutions with their principal place of business located outside of the United States, its territories or possessions and not registered under the Securities Exchange Act of 1934 who agree to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's interpretations with respect to free-riding and withholding. We authorize you to determine the form and manner of any public advertisement of the Shares. Nothing in this Agreement contained shall be deemed to restrict our right, subject to the provisions of this Section 3, to offer our Shares prior to the effective date of the Registration Statement, provided that any such offer shall be made in compliance with any applicable requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 and the rules and regulations of the Securities and Exchange Commission thereunder and of any applicable state securities laws. 4. REPURCHASES IN THE OPEN MARKET. Any Shares sold by us (otherwise than through you) which, prior to the termination of this Section or such earlier date as you may determine, shall be contracted for or purchased in the open market by you on behalf of any Underwriter or Underwriters, shall be repurchased by us on demand at a price equal to the cost of such purchase plus commissions and taxes on redelivery. Any Shares delivered on such repurchase need not be the identical Shares originally sold by us. In lieu of delivery of such Shares to us, you may (i) sell such Shares in any manner for our account and charge us with the amount of any loss or expense or credit us with the amount of any profit, less any expense, resulting from such sale, or (ii) charge our account with an amount not in excess of the concession to Dealers on such Shares. 5. DELIVERY AND PAYMENT. We agree to deliver to you at or before 9:00 a.m., Cedar Rapids Time, on the Closing Date referred to in the Underwriting Agreement, at your office, a certified or bank cashier's check payable to the order of [Berthel Fisher & Company Financial Services, Inc./Westport Resources Investment Services, Inc.]* for the offering price of the Shares less Dealer's Concession of the Shares which we retained for direct sale by us, the proceeds of which check shall be delivered by you, in the manner provided in the Underwriting -4- Agreement, to or for the account of the Company against delivery of certificates for such Shares to you for our account. You are authorized to accept such delivery and to give receipts therefor. You may advance funds for Shares which have been sold or reserved for sale to retail purchasers or Dealers for our account. If we fail (whether or not such failure shall constitute a default hereunder) to deliver to you, or you fail to receive, our check and/or payment for sales made by you for our account for the Shares which we have agreed to purchase, you, individually and not as Representatives of the Underwriters, are authorized (but shall not be obligated) to make payment, in the manner provided in the Underwriting Agreement, to or for the account of the Company for such Shares for our account, but any such payment by you shall not relieve us of any of our obligations under the Underwriting Agreement or under this Agreement and we agree to repay you on demand the amount so advanced for our account. We also agree on demand to take up and pay for or to deliver to you funds sufficient to pay for at cost any Shares and other shares of common stock of the Company purchased by you for our account pursuant to the provisions of Section 9 hereof, and to deliver to you on demand any Shares sold or over-allotted by you for our account pursuant to any provision of this Agreement. We authorize you to deliver our Shares, and any other shares purchased by you for our account pursuant to the provisions of Section 9 hereof, against sales made by you for our account pursuant to any provision of this Agreement. Upon receipt by you of payment for the Shares sold by us and/or through you for our account, you will remit to us promptly an amount equal to the Underwriter's Concession on such Shares. You agree to cause to be delivered to us, as soon as practicable after the Closing Date referred to in the Underwriting Agreement, such part of our Shares purchased on such Closing Date as shall not have been sold or reserved for sale by you for our account. In case any Shares reserved for sale in Group Sales or to Dealers shall not be purchased and paid for in due course as contemplated hereby, we agree to accept delivery when tendered by you of any Shares so reserved for our account and not so purchased and pay you the offering price less the Dealer's and Underwriter's Concessions. 6. AUTHORITY TO BORROW. We authorize you to advance your funds for our account (charging current interest rates) and to arrange loans for our account for the purpose of carrying out this Agreement, and in connection therewith to execute and deliver any notes or other instruments and to hold or pledge as security therefor all or any part of our Shares or any other shares of common stock of the Company purchased hereunder for our account. Any lending bank is hereby authorized to accept your instructions as Representatives in all matters relating to such loans. Any part of our Shares or of such other common stock held by you may be delivered to us for carrying purposes and, if so delivered, will be redelivered to you upon demand. 7. ALLOCATION OF EXPENSE AND LIABILITY. We authorize you to charge our account with and we agree to pay (a) all transfer taxes on sales made by you for our account, except -5- as herein otherwise provided, and (b) our proportionate share (based on our underwriting obligations) of all expenses in excess of those reimbursed by the Company incurred by you in connection with the purchase, carrying and distribution, or proposed purchase and distribution, of the Shares and all other expenses arising under the terms of the Underwriting Agreement or this Agreement. Your determination of all such expenses and your allocation thereof shall be final and conclusive. Funds for our account at any time in your hands as our Representative may be held in your general funds without accountability for interest. As soon as practicable after the termination of this Agreement, the net credit or debit balance in our account, after proper charge and credit for all interim payments and receipts, shall be paid to or paid by us, provided that you in your discretion may reserve from distribution an amount to cover possible additional expenses chargeable to the several Underwriters. 8. LIABILITY FOR FUTURE CLAIMS. Neither any statement by you, as Representative of the Underwriters, of any credit or debit balance in our account nor any reservation from distribution to cover possible additional expenses relating to the Shares shall constitute any representation by you as to the existence or non-existence of possible unforeseen expenses or liabilities of or charges against the several Underwriters. Notwithstanding the distribution of any net credit balance to us or the termination of this Agreement or both, we shall be and remain liable for, and will pay on demand, (a) our proportionate share (based on our underwriting obligations) of all expenses and liabilities which may be incurred by or for the accounts of the Underwriters, including any liability which may be incurred by the Underwriters or any of them based on the claim that the Underwriters constitute an association, unincorporated business, partnership or any separate entity, and (b) any transfer taxes paid after such settlement on account of any sale or transfer for our account. 9. STABILIZATION. We authorize you, until the termination of this Agreement, (a) to make purchases and sales of the shares of common stock of the Company, in the open market or otherwise, for long or short account, and on such terms and at such prices as you in your discretion may deem desirable, (b) in arranging for sales of Shares, to over-allot, and (c) either before or after the termination of this Agreement, to cover any short position incurred pursuant to this Section 9; subject, however, to the applicable rules and regulations of the Securities and Exchange Commission under the Securities Exchange Act of 1934. All such purchases, sales and over-allotments shall be made for the accounts of the several Underwriters as nearly as practicable in proportion to their respective underwriting obligations; provided that our net position resulting from such purchases and sales and over-allotments shall not at any time exceed, either for long or short account, 15% of the number of Shares agreed to be purchased by us. If you engage in any stabilizing transactions as Representative of the Underwriters, you shall notify us of that fact. Each of us agrees to file with you, within five business days following the date of termination of such transactions, triplicate originals of a report "not as manager" on Form X-17A-1 in accordance with the requirements of Rule 17a-2(e) under the Securities Exchange Act of 1934. You shall, as such Representative, file such reports with, and make the requisite reports on such transactions as required by, the Securities and Exchange Commission in accordance with Rule 17a-2 under the Securities Exchange Act of 1934. -6- We agree to advise you, from time to time upon request until the settlement of accounts hereunder, of the number of Shares at the time retained by us unsold, and we will upon request sell to you for the accounts of one or more of the several Underwriters such number of our unsold Shares as you may designate, at the Offering Price less such amount, not in excess of the concession to Dealers, as you may determine. 10. OPEN MARKET TRANSACTIONS. We agree that except with your consent and except as herein provided upon advice from you we will not make purchases or sales on the open market or otherwise or attempt to induce others to make purchases or sales, either before or after the purchase of the Shares, of any shares of common stock of the Company, and prior to the completion (as defined in Rule 10b-6 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of our participation in the distribution, we will otherwise comply with Rule 10b-6. Nothing in this Section 10 contained shall prohibit us from acting as broker or agent in the execution of unsolicited orders of customers for the purchase or sale of any securities of the Company. 11. BLUE SKY. Prior to the initial offering by the Underwriters, you will inform us as to the states under the respective securities or Blue Sky laws of which it is believed that the Shares have been qualified or are exempt for sale, but you do not assume any responsibility or obligation as to the accuracy of such information or as to the right of any Underwriter or Dealer to sell the Shares in any jurisdiction. We authorize you, if you deem it unadvisable in arranging sales of Shares for our account hereunder to sell any of our Shares to any particular Dealer or other buyer because of the securities or Blue Sky laws of any jurisdiction, to sell our Shares to one or more other Underwriters at the Offering Price less, in the case of a sale to a Dealer, such amount, not in excess of the concession to Dealers thereon, as you may determine. The transfer tax on any such sales among Underwriters shall be treated as an expense and charged to the respective accounts of the several Underwriters in proportion to their respective underwriting obligations. 12. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters in respect of their obligations under the Underwriting Agreement shall not release us from any of our obligations. In case of such default by one or more Underwriters, you are authorized to increase, pro rata with the other nondefaulting Underwriters, the number of Shares which we shall be obligated to purchase from the Company, provided that the aggregate amount of all such increases for all non-defaulting Underwriters shall not exceed 10% of the Shares, and, if the aggregate number of the Shares not taken up by such defaulting Underwriters exceeds such 10%, you are further authorized, but shall not be obligated, to arrange for the purchase by other persons, who may include yourselves, of all or a portion of the Shares not taken up by such Underwriters. In the event any such increases or arrangements are made, the respective numbers of Shares to be purchased by the non-defaulting Underwriters and by any such other person or persons shall be taken as the basis for the underwriting obligations under this Agreement, but this shall not in any way affect the liability of any defaulting Underwriters to the other Underwriters for damages resulting from such default. In the event of default by one or more Underwriters in respect of their obligations under this Agreement to take up and pay for any shares of common stock purchased by you for their -7- respective accounts pursuant to Section 9 hereof, or to deliver any such shares of common stock sold or over-allotted by you for their respective accounts pursuant to any provisions of this Agreement, and to the extent that arrangements shall not have been made by you for other persons to assume the obligations of such defaulting Underwriter or Underwriters, each non-defaulting Underwriter shall assume its proportionate share of the aforesaid obligations of each such defaulting Underwriter without relieving any such defaulting Underwriter of its liability therefor. 13. TERMINATION OF AGREEMENT. Unless earlier terminated by you, the provisions of Sections 2, 3, 4, 6, 9 and 10 of this Agreement shall, except as otherwise provided therein, terminate thirty full business days after the effective date of the Registration Statement herein referred to, but may be extended by you for an additional period or periods not exceeding thirty full business days in the aggregate. You may, however, terminate this Agreement or any provisions hereof at any time by written or telegraphic notice to us. 14. GENERAL POSITION OF THE REPRESENTATIVE. In taking action under this Agreement, you shall act only as agent of the several Underwriters. Your authority as Representative of the several Underwriters shall include the taking of such action as you may deem advisable in respect of all matters pertaining to any and all offers and sales of the Shares, including the right to make any modifications which you consider necessary or desirable in the arrangements with Dealers or others. You shall be under no liability for or in respect of the value of the Shares or the validity or the form thereof, the Registration Statement, the Prospectus, the Underwriting Agreement or other instruments executed by the Company or others; or for or in respect of the issuance, transfer or delivery of any of the Shares; or for the performance by the Company or others of any agreement on its or their part; nor shall you as such Representative or otherwise be liable under any of the provisions hereof or for any matters connected herewith, except for want of good faith, and except for any liability arising under the Securities Act of 1933; and no obligation not expressly assumed by you as such Representative herein shall be implied from this Agreement. In representing the Underwriters hereunder, you shall act as the Representative of each of them respectively. Nothing herein contained shall constitute the several Underwriters partners with you or with each other, or render any Underwriter liable for the commitments of any other Underwriter, except as otherwise provided in Section 12 hereof. The commitments and liabilities of each of the several Underwriters are several in accordance with their respective underwriting obligations and are not joint. 15. ACKNOWLEDGMENT OF REGISTRATION STATEMENT, ETC. We hereby confirm that we have examined the Registration Statement (including all amendments thereto) relating to the Shares as heretofore filed with the Securities and Exchange Commission, that we are familiar with the amendment to the Registration Statement and the final form of Prospectus proposed to be filed, that we are willing to accept the responsibilities of an underwriter thereunder, and that we are willing to proceed as therein contemplated. We further confirm that the statements made under the heading "Underwriting" in such proposed final form of Prospectus are correct and we authorize you so to advise the Company on our behalf. We understand that the aforementioned documents are subject to further change and that we will be supplied with copies of any amendment or amendments to the Registration Statement and of any -8- amended Prospectus promptly, if and when received by you, but the making of such changes and amendments shall not release us or affect our obligations hereunder or under the Underwriting Agreement. 16. INDEMNIFICATION. Each Underwriter, including you, agrees to indemnify and hold harmless each other Underwriter and each person who controls any other Underwriter within the meaning of Section 15 of the Securities Act of 1933, as amended, to the extent of their several commitment under the Underwriting Agreement and upon the terms that such Underwriter agrees to indemnify and hold harmless the Company as set forth in Section 6.02 of the Underwriting Agreement. The agreement contained in this Section 16 shall survive any termination of this Agreement Among Underwriters. 17. CAPITAL REQUIREMENTS. We confirm that our ratio of aggregate indebtedness to net capital is such that we may, in accordance with and pursuant to Rule 15c3-1, promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, agree to purchase the number of Shares we may be obligated to purchase under any provision of the Underwriting Agreement or this Agreement. 18. MISCELLANEOUS. We have transmitted herewith a completed Underwriters' Questionnaire on the form thereof supplied by you. Any notice hereunder from you to us or from us to you shall be deemed to have been duly given if sent by registered mail, telegram, teletype, telex, telecopier, graphic scan, or other written form of telecommunication to us at our address as set forth in the Underwriting Agreement, or to Berthel Fisher & Company Financial Services, Inc. at 100 Second Street S.E., Cedar Raids, Iowa 5240, and to Westport Resources Investment Services, Inc. at 315 Post Road West, Westport, Connecticut 06880. We understand that you are each members in good standing of the NASD. We hereby confirm that we are a member in good standing of the NASD who agrees to comply with all applicable rules of the NASD, including without limitation, the NASD's Interpretation with Respect to Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice or, if we are not such a member, we are a foreign dealer not eligible for membership in the NASD (a) who hereby agree to make no sales within the United States, its territories or its possessions (except that we may participate in Group Sales under Section 3 above) or to persons who are citizens thereof or residents therein, and, in making sales to comply with the above-mentioned interpretations in Sections 8, 24 and 36 of the above-mentioned Article III, as if we were an NASD member and Section 25 of such Article III as it applies to a non-member broker or dealer in a foreign country, and (b) who in connection with sales and offers to sell Stock made by us outside the United States, (i) we either furnish to each person to whom any such sale or offer is made a copy of the then current Preliminary Prospectus or the Prospectus (as then amended or supplemented if the Company shall have furnished amendments or supplements thereto), as the case maybe, or inform such person that such Preliminary Prospectus or Prospectus will be available upon request, and (ii) will furnish to each person to whom any such sale or offer is made such prospectus, advertisement or other offering document containing information relating to the Stock or the Company as may be required under the law of the jurisdiction in which such sale or offer is made. Any prospectus, advertisement or other offering document furnished by us -9- to any person in accordance with clause (b)(ii) of the preceding sentence and any such additional material as we may furnish to any person (i) shall comply in all respects with the law of the jurisdiction in which it is so furnished; (ii) shall be prepared and so furnished at our sole risk and expense; and (iii) shall not contain information relating to the Stock or the Company which is inconsistent in any respect with the information contained in the then current Preliminary Prospectus or in the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto), as the case may be. This instrument may be signed by the Underwriters in various counterparts which together shall constitute one and the same agreement among all the Underwriters and shall become effective upon execution. In no event, however, shall we have any liability under this Agreement if the Underwriting Agreement is not executed. Please confirm that the foregoing correctly states the understanding between us by signing and returning to us a counterpart hereof. Very truly yours, BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC., as Attorney-in-Fact for the several Underwriters named in Schedule I to the Underwriting Agreement By: __________________________________ Thomas J. Berthel, President Confirmed as of the date first above written. BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC., as Representative By: __________________________________ Thomas J. Berthel, President WESTPORT RESOURCES INVESTMENT SERVICES, INC., as Representative By: __________________________________ -10- John Lane, Vice President -11- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby irrevocably constitutes and appoints BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. and WESTPORT RESOURCES INVESTMENT SERVICES, INC., and each or either of them, the true and lawful agents and attorneys-in-fact of the undersigned with the power and authority to execute and deliver an Agreement Among Underwriters (which Agreement Among Underwriters grants to the Representatives of the Underwriters as named therein the authority to execute the Underwriting Agreement) and to otherwise act as agents and attorneys-in-fact of the undersigned with respect to all matters arising in connection with the undersigned's acting as one of the Underwriters of a proposed offering of: _____________* SHARES (APPROX.) THE HLM DESIGN, INC. COMMON SHARES (par value $.01 per share) with full power and authority to execute and deliver for and on behalf of the undersigned all agreements, consents and documents in connection therewith as said agents and attorneys-in-fact, or any of them, may deem advisable. The undersigned hereby gives to said agents and attorneys-in-fact the power and authority to appoint a substitute or substitutes to act hereunder with the same power and authority as said agents and attorneys-in-fact, or any of them, would have if personally acting. The undersigned hereby ratifies and confirms all that said agents and attorneys-in-fact, or any of them, or any substitute or substitutes, may do by virtue hereof. Duly executed at ____________________________ this _____ day of _____________, 1998. _____________________________________ (Firm Name) By___________________________________ Title:_______________________________ -12- CORPORATE ACKNOWLEDGMENT STATE OF _________________ ) ) ss: COUNTY OF _________________ ) On this _____ day of __________, 199____, before me, the undersigned, a Notary Public in and for the State of Iowa, personally appeared _______________________________ to me known to be the identical person named in and who executed the foregoing instrument, and acknowledged that such person, as the ____________________________________ of __________________________, executed the same as the voluntary act and deed of such corporation. ________________________________ Notary Public PARTNERSHIP ACKNOWLEDGMENT STATE OF _________________ ) ) ss: COUNTY OF _________________ ) On this _____ day of __________, 199____, before me, the undersigned, a Notary Public in and for the State of Iowa, personally appeared _______________________________ to me known to be the identical person named in and who executed the foregoing instrument, and acknowledged that such person, as the ____________________________________ of __________________________, executed the same as the voluntary act and deed of such partnership. ________________________________ Notary Public -13- SIGNING PROCEDURE: As a convenience to the Underwriters, we have instituted the following procedures: 1. All prospective Underwriters are requested to execute this Power of Attorney authorizing BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. and WESTPORT RESOURCES INVESTMENT SERVICES, INC., and each or either of them, to sign the Agreement Among Underwriters on their behalf. Prospective underwriters are encouraged to read the Agreement Among Underwriters and related agreements carefully before returning the Power of Attorney to us as it authorizes the execution of the Agreement Among Underwriters and the Underwriting Agreement on your behalf. 2. Prior to the anticipated signing of the Underwriting Agreement and public offering, we will notify you by telegram, teletype, telex, telecopier, graphic scan or other written form of telecommunication of your finalized underwriting obligation and the number of shares to be retained by you for sale. 3. Unless BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC. receives written notice from you by telegram, teletype, telex, telecopier, graphic scan or other written form of telecommunication from you (whether or not you received the notice referred to in Item 2) revoking this Power of Attorney prior to the time specified in our notice referred to in Item 2, the Agreement Among Underwriters will be signed on your behalf pursuant to this Power of Attorney. 4. We will in due course send you an executed copy (which may have facsimile or conformed signatures) of the Agreement Among Underwriters. HLM DESIGN, INC. UNDERWRITERS' QUESTIONNAIRE INSTRUCTIONS: Execute four copies and promptly forward three to Berthel Fisher & Company Financial Services, Inc. Attn: Michael H. Reynoldson 100 Second Street S.E. Cedar Rapids, Iowa 52401 Dear Sirs: The following information is supplied in connection with the proposed offering of ___________* Common Shares, par value $.01 per share (hereinafter, together with up to _____* additional shares subject to an option to cover over-allotments, called the "Stock"), of HLM Design, Inc. (hereinafter called the "Company"). The undersigned, a prospective Underwriter, authorizes you to deliver a copy of this questionnaire or information included herein to the Company for use by the Company in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Stock. 1. Our name, exactly as it should appear in the Prospectus, and our address are as follows: 2. (Check one) We are a corporation ( ); partnership ( ); sole proprietorship ( ). 3. Except as indicated below (a) neither we nor any of our directors, officers or partners have a "material" (as defined in the Rules and Regulations under the Securities Act of 1933) relationship with the Company or any of its officers or directors; (b) during the last three years, neither we nor any of our officers, directors or partners have been an officer or director of the Company or an "associate" (as defined in such Rules and Regulations) of any of the officers or directors of the Company or of any person who, to our knowledge, now owns of record or beneficially more than 10% of any class of voting securities of the Company; (c) neither we nor any of our directors, officers or partners, separately or as a group, now owns of record or beneficially more than 1% of any class of voting securities of the Company; (d) other than as may be stated in the Agreement Among Underwriters, the Underwriting Agreement, the Selected Dealer Agreement or in the Registration Statement, we do not know of any arrangements to limit or restrict the sale of the Stock for the period of distribution, to stabilize the market for the Stock, for withholding commissions, or otherwise to hold each prospective Underwriter or dealer responsible for the distribution of his participation in the Stock, or for any discounts or commissions to be allowed or paid to dealers; (e) other than as set forth in the Preliminary Prospectus we have no knowledge that more than 5% of any class of voting securities of the Company is or is to be held subject to any voting trust or any similar agreement; (f) our proposed commitment to purchase the Stock will not result in a violation of the financial responsibility requirements of Rule 15c3-1 under the Securities Exchange Act of 1934; (g) none of us, any of our directors, officers, partners or "persons associated with" us (as defined in the Bylaws of the National Association of Securities Dealers, Inc. ("NASD"), or, to our knowledge, any "related person" (defined by the NASD to include counsel, financial consultants and advisors, finders, members of the selling or distribution groups and any other persons associated with or related to any of the foregoing), or any other broker-dealer (i) within the last 18 months has purchased in private transactions, or intend before, at or within six months after the commencement of the public offering to purchase in private transactions, any securities of the Company or any parent or subsidiary thereof or (ii) within the last 12 months had any dealings with the Company, or any parent, subsidiary or controlling stockholder thereof (other than relating to the proposed Purchase Agreement, Agreement Among Underwriters and Selected Dealer Agreement), as to which documents or information are required to be filed with the NASD pursuant to its Statement of Policy Concerning Venture Capital and Other Investments or its Interpretation with Respect to Review of Corporate Financing, dated March 10, 1970, as amended; (h) we do not intend to confirm sales of Shares to any accounts over which we exercise discretionary authority. (State exceptions, if any, or state "No Exceptions.") 4. Set forth below or attached separately is a list of the states under the laws of which we are registered as a dealer in securities: 5. Except as indicated below, we have not within the past 12 months prepared or had prepared for us any investment research reports or memoranda relating to the Company, engineering, management or similar report or memorandum relating to broad aspects of the business, operations or products of the Company, and no report or memorandum has been prepared for external use by us in connection with the proposed offering. (State "No Exceptions" or list and enclose three copies of each report or memorandum and describe distribution.) The undersigned understands that a court has held that it would be against the public policy manifested by the federal securities laws to permit an underwriter which has been found to have actual knowledge of false or misleading statements or omissions contained in a -2- prospectus or an offering circular, to enforce against the issuer of the indemnity provisions customarily contained in an underwriting agreement. In this connection, the undersigned represents that it has no actual knowledge of false and misleading statements in or omissions from the Registration Statement and that, in accordance with the next paragraph, it will advise you if it becomes aware of any such statements or omissions. The foregoing information is correctly stated to the best of our knowledge, information and belief. We will notify you immediately in the event of any development before the effective date of the Registration Statement which makes untrue or incomplete any of the above statements as of such effective date. You are to consider that there has not been any such development unless advised to the contrary. We further agree to furnish any such additional information as you or the Company may reasonably request. In the event that the Securities and Exchange Commission makes a cursory or a summary review of the Registration Statement pursuant to Securities Act Release No. 5231, we authorize you to furnish to the Commission on our behalf the letter required by the Release acknowledging our awareness that such cursory or summary review has been made and of our statutory responsibilities under the Securities Act of 1933. We agree to deliver all Preliminary Prospectuses and final Prospectuses required for compliance with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934. We will keep an accurate record of the names and addresses of all persons to whom we give copies of any Preliminary Prospectus, and, when furnished with copies of any amended Preliminary Prospectus, we will, upon your request, promptly forward copies thereof to each such person and keep a record of such forwarding. We will keep an accurate record of indications of interest and/or offers to buy received and will deliver a copy of the final form of Prospectus to each person who purchases any of the Stock. Very truly yours, For Corporate Signature _____________________________________________ (Name of Corporation) By __________________________________________ (Signature and Title of Authorized Officer) For Partnership Signature _____________________________________________ -3- _____________________________________________ (Partnership Name) By __________________________________________ (Partner) For Sole Proprietorship Signature _____________________________________________ Dated this ______ day of ____________, 1998. -4- Date:________________________________ RE: Offering of HLM Design, Inc. Common Stock Your underwriting obligation has been finalized at _________________________ shares. Your initial retention will be ___________________ shares. Offering expected ______________________, 1998. We will execute the Agreement Among Underwriters and Underwriting Agreement on your behalf pursuant to your Power of Attorney unless we have received notice revoking same from you by telegram, teletype, telex, telecopier, graphic scan or similar means of written communication prior to 9:00 a.m. Central Standard Time, December _____________________*, 1998. -5- EX-3 4 EXHIBIT 3.1 Exhibit A to 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF HLM DESIGN, INC. ARTICLE I Name The name of the corporation is HLM Design, Inc. (the "Corporation"). ARTICLE II Registered Office and Agent The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. ARTICLE III Purpose The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV Capital Stock Section 4.01. Authorized Capital Stock. The aggregate number of shares of capital stock which the Corporation shall have authority to issue is Ten Million (10,000,000) shares divided into the following classes: (a) Nine Million (9,000,000) shares of Common Stock with a par value of one cent ($0.01) per share (the "Common Stock"); and (b) One Million (1,000,000) shares of Preferred Stock with a par value of ten cents ($0.10) per share (the "Preferred Stock"). Section 4.02. Voting. Except as may otherwise be required by law, this Restated and Amended Certificate of Incorporation or, in the case of Preferred Stock, the provision of such resolution as may be adopted by the Board of Directors pursuant to Section 4.04 of this Article IV, each holder of Preferred Stock and each holder of Common Stock shall have one (1) vote for each share of Preferred Stock and each share of Common Stock standing in such holder's name on the stock transfer records of the Corporation with respect to each matter submitted to a vote of the stockholders. Section 4.03. Dividends and Distributions on Common Stock. (a) Subject to the preferential rights, if any, of the holders of Preferred Stock, the holders of Common Stock shall be entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors from funds legally available therefor. (b) After distribution in full of the preferential amount, if any, to be distributed to the holders of Preferred Stock in the event of voluntary or involuntary liquidation (either partially or completely), distribution or sale of assets, dissolution or winding up of the Corporation, the holders of the Common Stock shall be entitled to receive all the remaining assets of the Corporation, tangible and intangible, of whatever kind available for distributions to stockholders, ratably in proportion to the number of shares of Common Stock held by each. Section 4.04. Preferred Stock. The Preferred Stock may be issued from time to time in one or more series, each series to have distinctive designations. The powers, preferences and rights of each such series of Preferred Stock and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series of Preferred Stock at any time outstanding. The Board of Directors is hereby expressly granted the authority to cause the Preferred Stock to be issued in one or more series and, with respect to each such series, to fix by resolutions, the following characteristics prior to the issuance thereof: (a) The designation of the series, which may be by distinguishing number, letter or title; (b) The number of shares of the series, which number the Board of Directors may (except as otherwise provided in the creation of the series) increase or decrease (but not below the number of shares thereof then outstanding); (c) The voting rights of the shares of the series, which rights may be full or limited, or which shares may be without voting power; (d) The dividend rights of the shares of the series, if any, including without limitation the dividend rates, the dividend payment dates, whether dividends will be cumulative, any conditions for payment and any payment preferences in relation to the dividends payable on any other class or classes or series of stock of the Corporation; 2 (e) The redemption rights, if any, and the price or prices for the shares of the series; (f) Sinking funds requirements, if any, for the purchase or redemption of shares of the series; (g) Rights upon liquidation, dissolution or winding up of the Corporation or upon the distribution of the assets of the Corporation; (h) Whether the shares of the series shall be convertible into shares of any other class or classes or into shares of any other series of the same or of any other class or classes of stock, and if so, the conversion price, any adjustments thereof and all other terms and conditions upon which such conversion may be made; and (i) Such other powers, preferences, rights, qualifications, limitations or restrictions as the Board of Directors shall determine; all as shall be stated in the resolution or resolutions of the Board of Directors providing for the issuance of such series of Preferred Stock. The relative powers, preferences and rights of each series of Preferred Stock in relation to the powers, preferences and rights of each other series of Preferred Stock shall, in each case, be as fixed from time to time by the Board of Directors in the resolution or resolutions adopted pursuant to the authority granted in this Section 4.04, and the consent, by class or series vote or otherwise, of the holders of Preferred Stock of such of the series of Preferred Stock as are from time to time outstanding shall not be required for the issuance by the Corporation, acting at the direction of the Board of Directors, of any other series of Preferred Stock, regardless of whether the powers, preferences and rights of such other series shall be fixed by the Board of Directors as senior to, or on a parity with, the powers, preferences and rights of such outstanding series, or any of them, unless and to the extent that the Board of Directors may provide in such resolution or resolutions adopted with respect to any series of Preferred Stock that the consent of the holders of a majority (or such other proportions as shall be therein fixed) of the outstanding shares of such series voting thereon shall be required for the issuance of any or all other series of Preferred Stock. The shares of any series of Preferred Stock that (i) have been redeemed by the Corporation in accordance with the express terms thereof, (ii) are purchased in satisfaction of any sinking fund requirements provided for shares of such series, or (iii) are converted in accordance with the express terms thereof, in each case shall be cancelled and not reissued. Any shares of Preferred Stock otherwise acquired by the Corporation shall resume the status of authorized and unissued shares of Preferred Stock without series designation. Section 4.05. No Preemptive Rights. No holder of shares of any class of stock of the Corporation shall, as such holder, have any preemptive right to purchase shares of any class of stock of the Corporation or shares or other securities convertible into or exchangeable for or carrying rights or options to purchase shares of any class of stock of the Corporation, whether such class of stock, shares or other securities are now or hereafter authorized, which at any time may be proposed 3 to be issued by the Corporation or subjected to rights or options to purchase granted by the Corporation. Section 4.06. Cumulative Voting. Cumulative voting of shares is prohibited. ARTICLE V Amendment of Bylaws In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to adopt, amend or repeal the Bylaws of the Corporation by a majority vote at any regular or special meeting of the Board of Directors or by written consent, subject to the power of the stockholders of the Corporation to amend or repeal any Bylaw whether adopted by the Board of Directors or the stockholders. ARTICLE VI Limitation of Liability No director of the Corporation shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except that the foregoing provision shall not eliminate or limit the liability of a director (i) for any breach of such 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) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which such director derived an improper personal benefit. If the Delaware General Corporation Law hereafter is amended to authorize the further elimination or limitation on personal liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Delaware General Corporation Law. ARTICLE VII Amendment of Certificate of Incorporation Any of the provisions of this Amended and Restated Certificate of Incorporation may, from time to time, be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws and, subject to the provisions of Section 4.02 hereof, all rights at any time conferred upon the stockholders of the Corporation by this Amended and Restated Certificate of Incorporation are granted subject to the provisions of this Article VII. 4 ARTICLE VIII Board of Directors Section 8.01. Elections. Elections of directors need not be by written ballot unless and except to the extent that the Bylaws of the Corporation shall so require. Section 8.02. Vacancies. Subject to any rights of the holders of Preferred Stock, vacancies occurring in the Board of Directors, including any vacancy resulting from any increase in the authorized number of directors, removal, resignation or death, may only be filled by the affirmative vote of a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next election of the class for which such directors have been chosen, and until their successors are duly elected and qualified, or until their successors are duly elected and qualified, or until their earlier resignation or removal. In the event of any increase or decrease in the number of directors, the additional or eliminated directorships shall be classified or chosen so that all classes of directors shall remain or become as nearly equal in number as possible. 5 CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF HLM DESIGN, INC. Pursuant to Sections 242 and 228 of the General Corporation Law of the State of Delaware **************************** HLM DESIGN, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation") DOES HEREBY CERTIFY: FIRST: That Section 4.01(a) of the Amended and Restated Certificate of Incorporation of the Corporation is amended in its entirety to read as follows: (a) Nine Million (9,000,000) shares of Common Stock with a par value of one-tenth of one cent ($0.005) per share (the "Common Stock"); and SECOND: That the foregoing amendment has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware and by the written consent of the majority of stockholders of the Corporation in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, HLM Design, Inc. has caused its corporate seal to be hereunto affixed and this amendment to its Amended and Restated Certificate of Incorporation to be signed by Vernon B. Brannon, its Senior Vice President, and attested by Jean Irwin, its Secretary, this 3rd day of February, 1998. HLM DESIGN, INC. By: /s/ Vernon B. Brannon -------------------------- Vernon B. Brannon Senior Vice President [CORPORATE SEAL] ATTEST: By: /s/ Jean Irwin -------------------------- Jean Irwin, Secretary CERTIFICATE OF AMENDMENT OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF HLM DESIGN, INC. Pursuant to Sections 242 and 228 of the General Corporation Law of the State of Delaware **************************** HLM DESIGN, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation") DOES HEREBY CERTIFY: FIRST: That Section 4.01(a) of the Amended and Restated Certificate of Incorporation of the Corporation is amended in its entirety to read as follows: (a) Nine Million (9,000,000) shares of Common Stock with a par value of one-tenth of one cent ($0.001) per share (the "Common Stock"); and SECOND: That the foregoing amendment has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware and by the written consent of the majority of stockholders of the Corporation in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, HLM Design, Inc. has caused its corporate seal to be hereunto affixed and this amendment to its Amended and Restated Certificate of Incorporation to be signed by Vernon B. Brannon, its Senior Vice President, and attested by Jean Irwin, its Secretary, this 12th day of February, 1998. HLM DESIGN, INC. By: /s/ Vernon B. Brannon -------------------------- Vernon B. Brannon Senior Vice President [CORPORATE SEAL] ATTEST: By: /s/ Jean Irwin -------------------------- Jean Irwin, Secretary EX-4 5 EXHIBIT 4.1 COMMON STOCK COMMON STOCK [HLM DESIGN LOGO GOES HERE] INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFICATE TRANSFERABLE IN CHARLOTTE, NORTH CAROLINA CUSIP 404217 10 1 OR NEW YORK, NEW YORK SEE REVERSE FOR CERTAIN DEFINITIONS HLM DESIGN, INC. This Certifies that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS A COMMON STOCK, PAR VALUE $0.001 PER SHARE OF HLM DESIGN, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [HLM DESIGN SEAL GOES HERE] /s/ Vernon B. Brannon /s/ Joseph M. Harris Senior Vice President, Chief Financial Officer President and Chairman and Treasurer
[SIGNATURE LANGUAGE HORIZONTALLY TURNED 90 DEGREES TO THE RIGHT, CENTER EDGE OF THE CERTIFICATE AND COPY READS AS SUCH:] COUNTERSIGNED AND REGISTERED: FIRST UNION NATIONAL BANK OF NORTH CAROLINA (Charlotte, North Carolina) TRANSFER AGENT AND REGISTRAR By AUTHORIZED SIGNATURE HLM DESIGN, INC. HLM Design, Inc. will furnish to each stockholder a statement of the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions or such preferences and rights upon request therefor. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM- as tenants in common TEN ENT- as tenants by the entireties JT TEN- as joint tenants with right of survivorship and not as tenants in common UNIF TRANS MIN ACT-___________Custodian________________ (Cust) (Minor) under Uniform Transfers to Minors Act ____________________________________________________ (State) Additional abbreviations may also be used though not in the above list. For Value received, __________________________________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ----------------------------------------- - ----------------------------------------- - ------------------------------------------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------ Shares of the Class A Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint __________________________________ _________________________________________________________________, Attorney, to transfer the said shares on the books of the within named Corporation with full power of substitution. Dated, _______________________________ X __________________________________________ X___________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. SIGNATURE(S) GUARANTEED:_______________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. KEEP THIS CERTIFICATE IN A SAFE PLACE, IF IT IS LOST, STOLEN, OR DESTROYED, THE CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. EX-4 6 EXHIBIT 4.2 Exhibit 4.2 This Warrant has been sold pursuant to an exemption from registration under the Securities Act of 1933 and state securities statues requiring the purchaser to hold such Warrant for investment. The Warrant may not be resold or otherwise transferred unless the Warrant has been registered under said Act and state securities statutes or the holder of the Warrant obtains an opinion of counsel reasonably satisfactory to HLM DESIGN, INC. that such transfer is exempt from such registration. WARRANT HLM DESIGN, INC. (hereinafter referred to as the "Company") Right to purchase __________________________* (______*) shares (the "Warrant Shares") of Common Stock of the Company (the "Common Stock") at a price per share of $__________ [120% of Offering Price], exercisable in whole or in part at any time during the term set forth herein. THIS CERTIFIES THAT, for value received,__________________________ [the Underwriter] (hereinafter the "Holder"), its successors and assigns, is entitled to purchase and receive the aforementioned number of shares of the common stock of the Company at the time of exercise upon payment of the aforementioned price per share or an aggregate price of ______________________* Dollars ($___________*). The obligations of the Company and the rights of the Holder pursuant to this Warrant are subject to the following terms and conditions: I. DEFINITIONS A. "Holder" means _____________________________ and its heirs, successors and assigns. If there is more than one Holder at any time, each such Holder shall be entitled to the rights and privileges granted hereunder. B. "Company" means HLM DESIGN, INC. and its successors and assigns. C. "Registration," "register" and like words mean compliance with all of the laws, rules, regulations and provisions of agreements and corporate documents pertaining to lawful and unconditional transfer of the securities by way of a public offering or distribution, including Regulation A, when applicable. D. "Security" means this Warrant, shares of stock of all classes, types and services, and all rights, however evidenced or contained, convertible or exercisable or exchangeable into such shares. E. "Agreement" means the Underwriting Agreement dated May _____, 1998 entered into by the Company and Holder. II. TERM This Warrant shall expire upon the earlier of (i) the fifth (5th) anniversary date hereof, or (iii) thirty (30) days after the Holder has received written notice of the consolidation or merger of the Company to or with any corporation or corporations (other than a merger with another corporation in which the holders of Common Stock receive stock in the surviving corporation as the sole form of consideration), the sale or transfer by the Company of all or substantially all of its assets for cash, the acquisition by person or "group" (as such term is defined pursuant to Rule 13d-3 pursuant to the Securities Exchange Act of 1934, as amended) of all of the then outstanding shares of Common Stock (the "Expiration Date"). III. EXERCISE PRICE The exercise price for each share of Common Stock shall be $____________ per share. IV. EXERCISE A. This Warrant shall become exercisable one (1) year after the date hereof. This Warrant may be exercised in whole or in part at any time or times on or before the Expiration Date. B. This Warrant and the rights of the Holder hereunder shall be exercised by delivery (for notation in the case of partial exercise, or surrender in the case of total exercise) of this Warrant and of a signed subscription agreement in form attached hereto as Exhibit A specifying the portion of this Warrant exercised, and by payment to the Company by certified check or bank draft of the exercise price for such shares. C. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued stock for the purpose of issuance of the Warrant Shares upon exercise of this Warrant, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the exercise thereof in whole. V. THERE IS NO SECTION V. VI. TRANSFER A. This Warrant shall be registered on the books of the Company, which shall be kept at its principal office for that purpose and shall be transferable in whole or in part only on said books by the registered Holder hereof in person or by duly authorized attorney. B. This Warrant may be transferred, in whole or in part, only (i) pursuant to operation of law, (ii) to persons who are both officers and shareholders of the Holder; or (iii) to employees of the Holder. VII. THERE IS NO SECTION VII. VIII. CONSIDERATION This Warrant is referred to in the Agreement. The Company acknowledges that the consideration for the issuance of this Warrant was the execution and performance of the Agreement and other good and valuable consideration. IX. INFORMATION The Holder shall be entitled to receive all notices, communications and information mailed, delivered or made available to shareholders of the Company. The address for the Holder is 100 Second Street S.E., Cedar Rapids, IA 52401. IX. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. IX. MISCELLANEOUS The subject headings contained in this Warrant are for convenience only and shall not control or affect in any way the meaning or interpretation of the provisions of this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed and delivered and its seal placed hereon by its duly authorized officer at Cedar Rapids, Iowa, this day of May, 1998. HLM DESIGN, INC. By:___________________________ ____________, _____________ EXHIBIT A TO WARRANT FORM OF SUBSCRIPTION PURSUANT TO WARRANT The undersigned, holder or assignee of such holder of the foregoing Warrant of HLM DESIGN, INC., hereby (i) subscribes for ________________________ (______________) shares of stock which the undersigned is entitled to purchase under the terms of the Warrant, and (ii) directs that the stock issuable upon exercise of the Warrant be issued and delivered to the following named person(s), payment of the exercise price to be made on delivery as follows: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ DATED:_____________________________ ____________________________________________ (Name) ____________________________________________ (Address) Signature ____________________________________________ EX-5 7 EXHIBIT 5.1 EXHIBIT 5.1 (Parker, Poe, Adams & Bernstein L.L.P. Letterhead) __________, 1998 Board of Directors HLM Design, Inc. 121 West Trade Street, Suite 2950 Charlotte, North Carolina Dear Sirs: We are acting as counsel to HLM Design, Inc., a Delaware corporation (the "Company"), in connection with the preparation, execution, filing and processing, with the Securities and Exchange Commission (the "Commission"), pursuant to the Securities Act of 1933, as amended (the "Act"), of a Registration Statement (No. 333- 40617) on Form S-1 (as amended through the date hereof, the "Registration Statement") and the issuance and sale of the Shares referred to below. This opinion is furnished to you for filing with the Commission pursuant to Item 601(b)(5) of Regulation S-K promulgated under the Act. The Registration Statement covers the issuance and sale of up to 1,380,000 shares (the "Shares") of Common Stock, par value $.001 per share (the "Common Stock"), consisting of 1,200,000 shares to be offered by the Company, and up to 180,000 shares that the several underwriters to be party to the Underwriting Agreement referred to below (the "Underwriters") will have an option to purchase from the Company solely to cover over-allotments. The Shares are proposed to be sold pursuant to an Underwriting Agreement among the Company, Berthel Fisher & Co. Financial Services, Inc., Westport Resources, Inc., and Marion Bass Securities Corporation, as representatives of the Underwriters, a form of which Underwriting Agreement is filed as Exhibit 1.1 to the Registration Statement (the "Underwriting Agreement"). In our representation of the Company, we have examined the Registration Statement, the Underwriting Agreement, the Company's Amended and Restated Certificate of Incorporation and Bylaws, each as amended to date, all applicable actions of the Company's Board of Directors recorded in the Company's minute book, the form of certificate evidencing the Shares and such other documents as we have considered necessary for purposes of rendering the opinions expressed below. Board of Directors HLM Design, Inc. ________________, 1998 Page 2 Based upon the foregoing, we are of the following opinion: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 2. The completion, execution, attestation, issuance and delivery against payment by the Company of the Shares pursuant to the terms of the Underwriting Agreement have been duly authorized by all necessary corporate action on behalf of the Company. 3. When (a) the Underwriting Agreement in definitive form shall have been duly completed by including therein the purchase price of the Shares and related terms, (b) the Underwriting Agreement as so completed shall have been duly executed and delivered by or on behalf of the Underwriters and by or on behalf of the Company, and (c) the Shares shall have been duly completed, executed, attested, issued, delivered and paid for in accordance with the terms of the Underwriting Agreement, then the Shares will be validly issued, fully paid and nonassessable. The opinions expressed herein are limited to the laws of the State of North Carolina, the General Corporation Law of the State of Delaware and the Act. We hereby consent to the use of this opinion letter as Exhibit 5.1 to the Registration Statement and to the use of our name under the heading "Legal Matters" in related prospectuses. In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. Very truly yours, Parker, Poe, Adams & Bernstein L.L.P. EX-10 8 EXHIBIT 10.7 (Intentionally Left Blank) EX-23 9 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. 3 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 (January 30, 1998, February 13, 1998 and February 27, 1998 as to the last paragraph in Note 1) 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. 3 to the Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Charlotte, North Carolina April 10, 1998 -----END PRIVACY-ENHANCED MESSAGE-----