U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ( X ) QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1998 ( )TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ____________ to ____________ Commission file Number 001-14137 --------- HLM Design, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 56-2018819 (State or Other Jurisdiction (I.R.S Employer Identification No.) of Incorporation or Organization) 121 West Trade Street, Suite 2950 Charlotte, North Carolina 28202 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (704) 358-0779 Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Title of Each Class Outstanding at September 8, 1998 - ------------------- -------------------------------- Common stock, par value $.001 per share 2,075,087 shares HLM DESIGN, INC. AND AFFILIATES INDEX TO FORM 10-Q PAGE NO. PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - May 1, 1998 and July 31, 1998 3 Consolidated Statements of Operation - One month period ended May 30, 1997 (Predecessor), Three month period ended August 1, 1997 and July 31, 1998 5 Consolidated Statement of Stockholders' Equity - Three month Period ended July 31,1998 6 Consolidated Statements of Cash Flows - One month period ended May 30, 1997 (Predecessor), Three month period ended August 1, 1997 and July 31,1998 7 Notes to Unaudited Consolidated Financial Statements 8 ITEM 2. Management's Discussion and Analysis of Financial Operations And Results of Operations 11 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED BALANCE SHEETS May 1, July 31, 1998 1998 ---- ---- (Unaudited) ASSETS: Current Assets: Cash $ 17,369 $ 1,920,361 Accounts Receivable: Trade and other receivables, less allowance for doubtful accounts at May 1 and July 31 $150,000 6,089,929 6,452,638 Costs and estimated earnings in excess of billings on uncompleted projects, net 5,513,854 5,998,496 Prepaid expenses 724,010 160,770 ------------------------------------ Total Current Assets 12,345,162 14,532,265 ------------------------------------ Other Assets: Deferred income taxes 465,601 560,421 Other 825,018 468,345 Goodwill, net 2,426,598 2,383,574 ------------------------------------ Total Other Assets 3,717,217 3,412,340 ------------------------------------ Property and Equipment: Leasehold improvements 782,609 782,609 Furniture and fixtures 1,786,250 1,965,012 ------------------------------------ Property and Equipment, at cost 2,568,859 2,747,621 Less Accumulated depreciation 768,904 1,001,170 ------------------------------------ Property and equipment, net 1,799,955 1,746,451 ------------------------------------ TOTAL ASSETS $ 17,862,334 19,691,056 ==================================== See notes to unaudited consolidated financial statements. 3 HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED BALANCE SHEETS May 1, July 31, 1998 1998 ---- ---- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current maturities of long-term debt and capital lease obligations $ 656,576 $ 579,112 Notes payable 2,250,000 1,500,000 Accounts payable 3,041,859 2,055,843 Accrued expenses 1,913,505 1,459,368 Income tax payable 215,950 95,862 Billings in excess of costs and estimated earnings on uncompleted projects 3,008,023 3,608,296 Deferred income taxes 1,517,146 1,569,320 ------------------------------------ Total Current Liabilities 12,603,059 10,867,801 ------------------------------------ LONG-TERM DEBT 4,164,401 1,893,464 ------------------------------------ TOTAL LIABILITIES 16,767,460 12,761,265 ------------------------------------ MINORITY INTEREST 15,187 15,422 ------------------------------------ COMMITMENT AND CONTINGENCIES WARRANTS OUTSTANDING 114,932 1,200 ------------------------------------ STOCKHOLDERS' EQUITY: Capital Stock: Common, $.001 par value, voting, authorized 9,000,000 shares: issued 776,134 and 2,075,087, respectively 776 2,075 Preferred, $.10 par value, voting, authorized 1,000,000 shares, no shares outstanding Additional paid in capital 185,623 6,221,965 Retained earnings 778,356 689,129 ------------------------------------ TOTAL STOCKHOLDERS' EQUITY 964,755 6,913,169 ------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,862,334 $ 19,691,056 ==================================== See notes to unaudited consolidated financial statements. HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF OPERATION (Unaudited) (Predecessor Company) One Three Three Month Months Months Ended Ended Ended May 30, August 1, July 31, 1997 1997 1998 ---- ---- ---- REVENUES: Fee Income $ 1,998,611$ 4,843,288 $ 7,655,816 Reimbursable Income 234,425 467,753 478,306 ----------------------------------- Total Revenues 2,233,036 5,311,041 8,134,122 ----------------------------------- CONSULTANT EXPENSE 192,862 848,588 1,256,955 ----------------------------------- PROJECT EXPENSES: Direct Expenses 35,404 217,308 194,089 Reimbursable expenses 68,617 141,592 338,087 ----------------------------------- Total project expenses 104,021 358,900 532,176 ----------------------------------- NET PRODUCTION INCOME 1,936,153 4,103,553 6,344,991 DIRECT LABOR 602,096 1,145,045 1,752,119 INDIRECT EXPENSES 1,172,712 2,610,124 4,035,743 ----------------------------------- OPERATING INCOME 161,345 348,384 557,129 ----------------------------------- OTHER EXPENSE: Interest Expense, net 36,951 150,580 203,990 Other 603 835 ----------------------------------- Total Other Expense 36,951 151,183 204,825 ----------------------------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 124,394 197,201 352,304 INCOME TAX 43,000 150,000 160,682 ----------------------------------- NET INCOME BEFORE EXTRAORDINARY ITEM 81,394 47,201 191,622 EXTRAORDINARY ITEM FOR EARLY EXTINGUISHMENT OF DEBT, NET OF TAX OF $171,842 280,849 =================================== NET INCOME (LOSS) $ 81,394 $ 47,201 $ (89,227) =================================== NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM: Basic $ 0.13 ============ Diluted $ 0.13 ============ NET INCOME (LOSS) PER SHARE Basic $ (0.06) ============ Diluted $ (0.06) ============ NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Basic 1,489,844 ============ Diluted 1,489,844 ============ SUPPLEMENTAL PROFORMA NET INCOME (LOSS) PER SHARE: NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM Basic $ 0.11 ============ Diluted $ 0.11 ============ NET INCOME (LOSS) PER SHARE Basic $ (0.05) ============ Diluted $ (0.05) ============ NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Basic 1,764,012 ============ Diluted 1,764,012 ============ See notes to unaudited financial statements. 5 HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) Additional Total Common Stock Paid-In Retained Stockholders' ------------ Shares Amount Capital Earnings Equity ------ ------ ------- -------- ------- Balance, May 1, 1998 776,134 $ 776 $ 185,623 $ 778,356 $ 964,755 Issuance of Common Stock 1,298,953 1,299 6,036,342 6,037,641 (Note 4) Net Loss (89,227) (89,227) ============================================================================================ Balance, July 31, 1998 2,075,087 $ 2,075 $ 6,221,965 $ 689,129 $ 6,913,169 ============================================================================================ See notes to unaudited financial statements. 6 HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Predecessor Company) One Three Three Month Months Months Ended Ended Ended May 30, August 1, July 31, 1997 1997 1998 ------ ------ ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 81,394 $ 47,201 $ (89,227) Adjustments to reconcile net income (loss) to net used in operating activities: Extraordinary item for early extinguishment of debt 280,849 Depreciation 55,544 90,673 232,266 Amortization of goodwill 9,571 158,140 43,024 Amortization of deferred loan fees 9,300 31,056 Deferred income taxes 54,907 (314,000) 129,196 Other Minority interest 603 235 Changes in certain working capital items: Increase in trade and other accounts receivable (1,500,472) (1,069,271) (362,709) Deecrease in costs and estimated earnings compared to billings on uncompleted contracts, net 1,199,028 786,526 115,631 (Increase) decrease in refundable income taxes (11,157) 440,181 Increase (decrease) in prepaid expenses and other assets (11,579) (175,893) 436,166 Increase (decrease) in accounts payable 233,659 (977,850) (986,016) Increase (decrease) in accrued expenses (278,500) 266,095 (454,137) Decrease in income tax payable (120,088) Increase in other non-current liabilities 15,000 ------------------------------------------------ Net cash (used in) provided by operating activities (152,605) (738,295) (743,754) ------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,023) (147,745) (178,762) ------------------------------------------------ Net cash used in investing activities (2,023) (147,745) (178,762) ------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payment on line of credit (2,360,000) Net proceeds from issuance of common stock 28,784 5,922,709 Proceeds from long-term borrowings 2,800,000 3,000,000 Payment on short term borrowings (750,000) Payment on long-term borrowings (285,372) (122,568) (2,348,401) Payment of ESOP buyback (3,221,824) Proceeds from issuance of notes payable to shareholders 182,308 Proceeds from issuance of warrants 20,001 1,200 ------------------------------------------------ Net cash provided by financing activities 154,628 (113,299) 2,825,508 ------------------------------------------------ INCREASE (DECREASE) IN CASH - (999,339) 1,902,992 CASH BALANCE: Beginning of period 2,321 2,321 17,369 ================================================ End of period $ 2,321 $ (997,018) $ 1,920,361 ================================================ SUPPLEMENTAL DISCLOSURES: Cash paid (received) during the year for: Interest $ 6,827 $ 162,415 $ 263,509 Income tax payments (refunds) $ (750) $ (12,300) $ 139,170 Noncash investing and financing transactions: Issuance of warrants to certain debt holders $ 238,752 $ 192,832 $ 1,200 See notes to unaudited financial statements. 7 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business-HLM Design, Inc. ("HLM Design") is a management services company incorporated March 6, 1997 for the purpose of providing management and services to architectural, engineering and planning design entities under long term management and services agreements ("MSAs"). HLM Design, Inc entered into an MSA with HLM Design of North America, Inc. ("HLMI"), HLM Design of the Southeast, P.C.("HLMNC"), and HLM Design of the Northwest, Architecture, Engineering and Planning, P.C. ("HLMO") in May 1997. In July 1998, HLM Design, Inc. entered into an MSA with HLM Design of the Midwest, Inc. ("HLMMW"), HLM Design of the Midatlantic, P.C. ("HLMMA"), and HLM Design of the Northeast, Architecture, Engineering and Planning, P.C. ("HLMNE"). HLMI, HLMNC, HLMO, HLMMW, HLMMA and HLMNE are collectively referred to as "Managed Firms". At the same time, the Managed Firms and its stockholders entered into a stockholders agreement (which positions the stockholders of Managed Firms as nominee stockholders); therefore, as of May 31, 1997 and thereafter, HLM Design, Inc. and Managed Firms financial statements are presented on a consolidated basis. HLMI has been in operation for over thirty years, while the other Managed Firms have had no operations as of July 31, 1998. HLM Design and the Managed Firms are referred to herein collectively as the "Company". Financial Statement Presentation - The accompanying unaudited financial information for the one month period ended May 30, 1997(Predecessor), and three month period ended August 1, 1997 and July 31, 1998 have been prepared in accordance with generally accepted accounting principles pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and the results of operations for the periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended May 1, 1998. In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information." This statement redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about the Company's fiscal year ending April 30, 1999, but will need not be applied to interim financial statements in the initial year of its application. The Company has not yet completed its' analysis of which operating segments it will disclose, if any. 8 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2. CONTRACTS IN PROGRESS Information relative to contracts in progress is as follows: May 1, July 31, 1998 1998 ------ -------- Costs incurred on uncompleted projects (excluding overhead) $45,830,792 $45,353,322 Estimated earnings thereon 45,615,282 45,976,974 ----------- ----------- Total 91,446,074 91,330,296 Less billings to date 88,940,243 88,940,096 ----------- ---------- Net underbillings $ 2,505,831 $ 2,390,200 =========== =========== Net underbillings are included in the accompanying balance sheets as follows: May 1, July 31, 1998 1998 ------- -------- Costs and estimated earnings in excess of billings On uncompleted projects $5,513,854 $5,998,496 Billings in excess of costs and estimated earnings On uncompleted projects (3,008,023) (3,608,296) ------------ ----------- Net underbillings $2,505,831 $2,390,200 ========== ========== 3. FINANCING ARRANGEMENTS A summary of changes in financing arrangements are as follows: Notes Payable: The Company repaid its indebtedness to Berthel Fisher & Company Financial Services, Inc. ($.75 million) from the net proceeds of its initial public offering (the "Offering") in June 1998. Long-Term Debt: The Company repaid its obligation to Pacific Capital, L.P. and Equitas, L.P. ($2.0 million) and to employee stockholders ($.2 million) from the net proceeds of the Offering in June 1998. On August 31, 1998, the Company increased its revolving line of credit with First Charter National Bank from $1.5 million to $3.0 million. At July 31, 1998, the Company had borrowings outstanding of $1.5 million. The revolving line of credit is secured by, among other things, a security interest in all accounts receivable. Any outstanding balance under this loan bears interest at prime plus 1%. This loan matures on June 30, 1999. The related loan agreement includes various provisions, which among other things, require maintenance of a minimum net worth of $6.0 million, a minimum current ratio of 1.25 to 1.0, and a maximum debt to equity ratio of 1.5 to 1.0. 9 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 4. INITIAL PUBLIC OFFERING In June 1998 pursuant to a Registration Statement on Form S-1 filed with the Securities and Exchange Commission, HLM Design consummated the Offering. Through the Offering, HLM Design offered and sold 1,200,000 shares of Common Stock at a price to the public of $6.00 per share. The net proceeds of the Offering totaling $5.92 million (after underwriting discount and other offering expenses) were used to repay certain indebtedness consisting of: (a)$2.0 million loan from Pacific Capital L.P. and Equitas L.P. and (b)$.75 million term loan from Berthel Fisher & Company Financial Services, Inc. and (c)$.2 million of indebtedness to employee stockholders. Remaining net proceeds will be used for development of new business and other general corporate purposes. The early extinguishment of the Pacific Capital, L.P., Equitas, L.P. and Berthel Fisher & Company Financial Services, Inc. debt resulted in an extraordinary charge of $280,849, net of income taxes of $171,842, that consisted of write-off of related unamortized financing costs. 5. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED) HLM Design, Inc.'s unconsolidated balance sheet for the three month period ended July 31, 1998 is as follows: Balance Sheet Current assets $ 3,480,905 ----------- Non-current assets 5,666,106 ----------- Total assets $ 9,147,011 ========= Current liabilities 2,244,420 ----------- Non-current liabilities 0 ---------- Total liabilities 2,244,320 ---------- Total stockholders' equity 6,902,691 ---------- Total liabilities and stockholders' equity $9,147,011 ========== Income Statement Equity in earnings of Affiliate $ 108,945 Net interest, extraordinary item, tax and other expense 198,172 ------- Net loss $ (89,227) =========== 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. RESULTS OF OPERATIONS 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. (an affiliate of HLM Design) into HLMI, the consummation of the MSA between HLM Design and the Managed Firms and stockholders' agreements among the Managed Firms and its stockholders, the discussion and analysis of operating results for the three month period ended August 1, 1997 is presented on a pro forma basis that reflects such acquisition, MSA and stockholders' agreements as through they occurred at the beginning of the period. First Quarter 1998 Compared with First Quarter 1997-Pro forma This pro forma financial information does not give effect to the Offering. Pro Forma for Consolidated Consolidated Three Months Three Months Ended Ended August 1, July 31, 1997 1998 ---- ---- Revenues $7,544,087 $8,134,122 Costs and expenses Direct cost of revenue 3,251,512 3,541,250 Operating expenses 3,755,836 4,055,743 ----------- ----------- Total costs and expenses 7,007,348 7,576,993 ----------- ----------- Income from operations 536,739 557,129 Other income (expense) Interest expense (244,531) (203,990) Other expense (603) (835) ----------- ----------- Total other expense (245,134) (204,825) ----------- ------------ Income before income taxes and extraordinary item 291,605 352,304 Income tax expense 183,350 160,682 ------- ------- Net income before extraordinary item 108,255 191,622 Extraordinary item for early extinguishment of debt, net Of tax of $171,842 0 280,849 ---------- ------------ Net income (loss) $ 108,255 $ (89,227) =========== ============ 11 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED Revenues were $8.1 million for the three month period ended July 31, 1998 as compared to $7.5 million for the three month period ended August 1, 1997. This increase of 7.8% is principally due to management's continued focus on marketing efforts which have continued from the previous year. This increase is partially offset by the Company's change in its fiscal year end date from the last Friday in April to the Friday nearest the end of April. This change resulted in an additional week of revenues in the three month period ended August 1, 1997 as compared to the three month period ended July 31, 1998. Direct costs primarily include, direct labor, subconsultant costs and reimbursable expenses. Direct costs were $3.5 million, or 43.5% of revenues, for the three month period ended July 31, 1998 as compared to $3.3 million, or 43.1% of revenues, for the three month period ended August 1, 1997. This increase as a percent of revenues is due to an increased use of subconsultants to meet project requirements (14.9%and 11.3% of revenue for the three month period ended July 31, 1998 and August 1, 1997, respectively). This increase is partially offset by a decrease in direct labor costs incurred due to improved productivity as a result of Company's increased focus on cost containment for each project (21.5% and 23.2% of revenue for the three month period ended July 31, 1998 and August 1, 1997, respectively). Operating costs were $4.0 million, or 49.9% of revenues, for the three month period ended July 31, 1998 as compared to $3.8 million, or 49.8% of revenues, for the three month period ended August 1, 1997. This increase as a percent of revenues is principally due to an increase in marketing expenses which is partially offset by a decrease in rent and occupancy costs in certain office locations as well as a decrease in travel expenses. Interest expense was $0.2 million for the three month period ended July 31, 1998 as compared to $0.2 million for the three month period ended August 1, 1997. In June 1998, the Company repaid approximately $3.0 million in debt from the proceeds of its Offering. See Note 4 to Notes to Consolidated Financial Statements. Income tax expense related to income before tax and extraordinary item was $0.2 million for the three month period ended July 31, 1998 as compared to $0.2 million for the three month period ended August 1, 1997. The effective income tax rate was 45.5% and 62.5% for the three month period ended July 31, 1998 and August 1, 1997, respectively. This rate decrease is principally due to nondeductible items in 1997 not repeating in 1998. 12 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED The Company reported an extraordinary item for early extinguishment of debt of $0.3 million, net of tax of $0.2 million for the three month period ended July 31, 1998. In June 1998, the Company used the net proceeds from the Offering to repay certain indebtedness which resulted in recognition of write off of related unamortized financing costs. LIQUIDITY AND CAPITAL RESOURCES At July 31, 1998, the Company's current assets of $14.5 million exceeded current liabilities of $10.9 million resulting in working capital of $3.6 million. During the three month period ended July 31, 1998, the Company used $0.8 million in operating activities primarily due to the decrease in accounts payable and accrued expenses and an increase in accounts receivable which was partially offset by the reduction in deferred debt discount caused by the extraordinary item for early extinguishment of debt. The Company used $0.2 million for investing activities, primarily the purchase of equipment. In addition, the Company generated $2.8 million in financing activities primarily from the net proceeds of $5.9 million from the sale of 1,200,000 shares of Common Stock sold at an aggregate price of $6.00 per share. Net proceeds of the Offering were used to repay certain indebtedness as follows: (a)a $2.0 million loan from Pacific Capital, L.P. and Equitas, L.P., (b)a $0.75 million loan from Berthel Fisher &Company Financial Services, Inc. and (c)$0.2 million of indebtedness due to employee stockholders. The remaining net proceeds of the Offering of $2.97 million will be used for new business development as well as working capital and general corporate purposes. The Company's growth and operating strategy will require substantial capital and may result in the Company incurring additional debt, issuing equity securities or obtaining additional bank financing. As a management company, HLM Design will be responsible for the financing of working capital growth, capital growth and other cash needs of its managed firms. As of September 1, 1998, the Company increased its revolving line of credit with First Charter National Bank from $1.5 million to $3.0 million. At July 31, 1998, the Company had borrowings outstanding of $1.5 million. The revolving line of credit is secured by, among other things, a security interest in all accounts receivable. Any outstanding balance under this loan bears interest at prime plus 1%. This loan matures on June 30, 1999. The related loan agreement includes various provisions, which among other things, require maintenance of minimum net worth of $6.0 million, minimum current ratio of 1.25 to 1.0, and maximum debt to equity of 1.5 to 1.0. The Company believes that the net proceeds from the Offering, its new revolving line of credit and anticipated funds from future operations will be sufficient to meet its operating cash needs for at least the next twelve months. 13 PART II-OTHER INFORMATION Item 5. Other Information As of September 1, 1998, in accordance with HLM Design's bylaws, the Board of Directors appointed Mr. Fred Pounds as a new director of HLM Design, filing the vacancy created as a result of a resignation from the Board earlier in the year. L. Fred Pounds has served as Chief Financial Officer of American Oncology Resources since its inception in January 1993. From June 1990 until joining the Company, Mr. Pounds was principal of Pounds & Associates, a health care consulting company. From January 1997 to May 1990, Mr. Pounds was President and Chief Operating Officer of Avanti Health Systems, Inc., a managed care and physician practice company. From September 1969 to January 1987, Mr. Pounds was employed by Price Waterhouse, in various positions, including partner in charge of the Southwest Area Health Care Group. As of September 10, 1998, the Board of Directors established an Audit Committee consisting of Clay R. Caroland III and D. Shannon LeRoy. The Audit Committee will recommend the selection of the auditors for the Company and will review the results of the audit and other reports and services provided by the Company's independent auditors. Item 6. Exhibits and Reports on Form 8-K (a) The exhibits filed as part of this Form 10-Q are: Exhibit No. Description 10.1 Promissory Note made by HLM Design, Inc. in favor of First Charter National Bank dated as of September 1, 1998 27 Financial Data Schedule (b)HLM Design has not filed any reports on Form 8-K during the period covered by this report. 14 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HLM DESIGN, INC. (Registrant) Date: September 14, 1998 By: /s/ Joseph M. Harris ----------------- --------------------- Joseph M. Harris President, Chairman and Director Date: September 14, 1998 By: /s/ Vernon B. Brannon ------------------ --------------------- Vernon B. Brannon Senior Vice President, Chief Financial Officer, Treasurer, Assistant Secretary And Director 15