UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: June 12, 1998
HAGLER BAILLY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
54-1759180
(I.R.S. Employer Identification Number)
1530 Wilson Boulevard, Suite 400, Arlington, VA 22209
(Address of principal executive offices)(Zip Code)
703-351-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months(or 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. [X] Yes [ ] No
Table of Contents
Description Page
Item 5. Other Events 01
SIGNATURES 24
Item 5. Other Events.
On February 23, 1998 Hagler Bailly, Inc. ("Hagler Bailly") completed the
merger (the "Merger") of its wholly-owned subsidiary, Hagler Bailly Acquisition
Corp. 1998-1 ("Merger Sub") with and into TB&A Group, Inc. ("TB&A") pursuant to
the Plan and Agreement of Merger dated as of February 2, 1998 by and among
Hagler Bailly, Merger Sub and TB&A (the "Merger Agreement"). Upon consummation
of the Merger, TB&A became a wholly-owned subsidiary of Hagler Bailly. In
connection with this transaction, Hagler Bailly issued 454,994 shares of its
common stock to the shareholders of TB&A.
Presented below are the Hagler Bailly's restated 1997 audited financial
statements to reflect the acquisition which took place after December 31, 1997.
The transaction is accounted for as a pooling-of-interest under generally
accepted accounting principles.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Hagler Bailly, Inc.
We have audited the accompanying consolidated balance sheets of Hagler Bailly,
Inc. (the "Company") and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 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 audits. We did not audit the financial statements of Apogee Research, Inc.,
a wholly owned subsidiary, as of December 31, 1996, and for each of the two
years ended December 31, 1996, which statements reflect total assets of $3.0
million at December 31, 1996, and total revenues of $6.6 million and $6.4
million for the two years then ended. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Apogee Research, Inc., is based solely on the
report of the other auditors.
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, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hagler Bailly, Inc.
and its subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
April 28, 1998
Vienna, Virginia /s/ Ernst & Young LLP
HAGLER BAILLY, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------------
1996 1997
--------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 2,009,343 $ 3,960,598
Investments - 6,551,446
Accounts receivable, net 19,044,281 32,687,925
Note receivable - 1,000,000
Prepaid expenses 464,432 719,914
Other current assets 234,490 1,867,444
--------------------------------------
Total current assets 21,752,546 46,787,327
Property and equipment, net 2,839,968 2,852,679
Software development costs, net - 2,463,174
Intangible assets, net 7,661,092 6,925,960
Other assets 757,820 1,279,466
Deferred income taxes - 601,002
--------------------------------------
Total assets $ 33,011,426 $ 60,909,608
======================================
Liabilities and stockholders' equity Current liabilities:
Bank line of credit $ 2,600,000 $ -
Accounts payable and accrued expenses 3,501,508 5,058,623
Accrued compensation and benefits 4,426,740 5,096,818
Billings in excess of cost 2,367,441 1,757,208
Notes payable - financial institution 1,107,542 180,000
Notes payable - related party 2,456,788 620,417
Current portion of long-term debt 1,337,466 -
Deferred income taxes 1,554,600 1,383,689
Income taxes payable 44,305 1,951,897
--------------------------------------
Total current liabilities 19,396,390 16,048,652
Long-term debt, net of current portion 7,329,280 -
--------------------------------------
Total liabilities 26,725,670 16,048,652
Stockholders' equity :
Common stock:
Class A par value $0.01, 20,000,000 shares authorized, 5,888,152 and 58,881 88,677
8,867,843 issued and outstanding in 1996 and 1997
Additional capital 10,608,741 41,396,385
Retained (deficit) earnings (4,381,866) 3,375,894
--------------------------------------
Total stockholders' equity 6,285,756 44,860,956
--------------------------------------
Total liabilities and stockholders' equity $ 33,011,426 $ 60,909,608
======================================
See accompanying notes.
HAGLER BAILLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------------------------------------
----------------------------------------------------------
1995 1996 1997
----------------------------------------------------------
Revenues $ 44,722,616 $ 74,475,376 $ 96,099,443
Cost of services 36,473,953 59,284,033 71,922,597
----------------------------------------------------------
Gross profit 8,248,663 15,191,343 24,176,846
Selling, general and administrative expenses 5,858,180 10,388,858 13,869,907
Stock and stock option compensation - 6,172,000 79,869
----------------------------------------------------------
Income (loss) from operations 2,390,483 (1,369,515) 10,227,070
----------------------------------------------------------
Other income (expense):
Interest income 95,740 160,660 969,054
Interest expense (957,004) (1,304,368) (1,097,037)
----------------------------------------------------------
Income (loss) before income tax expense 1,529,219 (2,513,223) 10,099,087
Income tax expense 869,900 961,319 4,676,925
----------------------------------------------------------
Net income (loss) before extraordinary gain 659,319 (3,474,542) 5,422,162
Extraordinary gain, net of income tax expense
of $0, $0, and $177,000 in 1995, 1996, and
1997, respectively (Note 10) 829,280 145,904 2,335,598
==========================================================
Net income (loss) $ 1,488,599 $ (3,328,638) $ 7,757,760
==========================================================
Earnings per share:
Basic:
Net income (loss) before extraordinary gain $ 0.19 $(0.64) $ 0.72
Extraordinary gain, net of income tax expense $ 0.24 $ 0.03 $ 0.31
Net income (loss) $ 0.44 $(0.61) $ 1.04
Diluted:
Net income (loss) before extraordinary gain $ 0.17 $(0.64) $ 0.65
Extraordinary gain, net of income tax expense $ 0.21 $ 0.03 $ 0.28
Net income (loss) $ 0.38 $(0.61) $ 0.93
Weighted average shares outstanding:
Basic 3,419,904 5,441,534 7,479,944
==========================================================
Diluted 3,946,830 5,441,534 8,313,424
==========================================================
See accompanying notes.
HAGLER BAILLY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
Shares Additional Retained Earnings Total
Stockholders'
------------------------------
Class A Class B Amount Capital (Deficit) Equity
---------------------------------------- --------------------------------------------------
Balance, December 31, 1994 701,506 - $7,015 $472,649 $(2,959,128) $(2,479,464)
Reduction of ESOP debt - - - - 560,943 560,943
Issuance of Common Stock at MBO 4,149,040 - 41,490 2,958,510 - 3,000,000
Less: Notes receivable for Common Stock - - - (97,447) - (97,447)
Issuance of Common Stock 295,120 103,726 3,988 334,021 - 338,009
Repurchase of Common Stock (32,061) (320) (63,791) (119,148) (183,259)
Net income - - - - 1,488,599 1,488,599
--------------------------------------------------------------------------------------------
Balance, December 31, 1995 5,113,605 103,726 52,173 3,603,942 (1,028,734) 2,627,381
Common Stock - - - - - -
Repayment of notes receivable for - - - 97,447 - 97,447
Common Stock
Issuance of Common Stock 1,027,390 - 10,274 1,066,212 - 1,076,486
Repurchase of Common Stock (346,196) - (3,462) (331,235) (24,494) (359,191)
Substitution and issuance of 93,353 (103,726) (104) 6,172,375 - 6,172,271
compensatory stock and options
(Note13)
Net loss - - - - (3,328,638) (3,328,638)
--------------------------------------------------------------------------------------------
Balance, December 31, 1996 5,888,152 - 58,881 10,608,741 (4,381,866) 6,285,756
Issuance of Common Stock (IPO) 2,500,000 - 25,000 30,240,031 - 30,265,031
Compensatory stock and options - - - 79,869 - 79,869
Issuance of Common Stock (options) 484,701 - 4,847 132,879 - 137,726
Repurchase of Common Stock (76,087) - (761) (49,735) - (50,496)
Issuance of Common Stock 71,077 - 710 384,600 - 385,310
Net Income - - - - 7,757,760 7,757,760
--------------------------------------------------------------------------------------------
$8,867,843 - $88,677 $41,396,385 $3,375,894 $44,860,956
============================================================================================
See accompanying notes
HAGLER BAILLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------------------------
1995 1996 1997
-----------------------------------------------------------
Operating activities
Net income (loss) $ 1,488,599 $(3,328,638) $7,757,760
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 897,232 1,435,438 1,970,806
Accrued interest - 125,350 -
Gain on disposition of equipment (70,889) - -
Extraordinary gain (829,280) (145,904) (2,335,598)
Provision for possible losses 129,484 1,092,713 503,460
Provision for deferred income taxes 723,300 816,100 (948,913)
Stock and stock option compensation - 6,172,000 79,869
Changes in operating assets and liabilities: -
Accounts receivable (1,492,410) (3,613,096) (14,147,104)
Prepaid expenses 88,741 (173,521) (255,482)
Other current assets (269,003) 330,999 (1,632,954)
Other assets (230,197) (340,191) (521,646)
Accounts payable and accrued expenses (2,191,057) (774,716) 1,868,447
Accrued compensation and benefits 2,387,559 738,646 670,078
Income taxes payable (102,641) 15,934 1,907,592
Billings in excess of cost 1,264,370 933,851 (610,233)
-----------------------------------------------------------
-----------------------------------------------------------
Net cash provided by (used in) operating activities 1,793,808 3,284,965 (5,693,918)
-----------------------------------------------------------
Investing activities
Proceeds from disposition of equipment 74,850 - -
Acquisition of property and equipment (855,639) (1,131,251) (1,199,385)
Note receivable - - (1,000,000)
Purchase of investments - - (161,850,846)
Sale of investments - - 155,299,400
Purchase of RCG/Hagler Bailly, Inc. (net of $1,126,873 cash (11,802,250) - -
received)
Expenditures for software development - - (2,512,174)
-----------------------------------------------------------
Net cash used by investing activities (12,583,039) (1,131,251) (11,263,005)
-----------------------------------------------------------
Financing activities
Issuance of Common Stock, net 3,251,013 1,076,486 30,788,067
Retirement of Common Stock (178,606) - -
Repurchase of Common Stock (4,653) (214,280) (50,496)
Repayment of notes receivable for Common Stock - 97,447 -
Net borrowing (payments) on bank line of credit 1,420,328 433,701 (2,600,000)
Proceeds from long-term debt financing 7,100,000 266,750 -
Principal payments on debt (589,251) (2,738,649) (9,229,393)
-----------------------------------------------------------
Net cash provided by (used in) financing activities 10,998,831 (1,078,545) 18,908,178
-----------------------------------------------------------
Net increase in cash and cash equivalents 209,600 1,075,169 1,951,255
Cash and cash equivalents, beginning of year 724,574 934,174 2,009,343
===========================================================
Cash and cash equivalents, end of year $ 934,174 $2,009,343 $3,960,598
===========================================================
See accompanying notes.
HAGLER BAILLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. Organization
Hagler Bailly, Inc. ("Hagler Bailly" or the "Company") is a worldwide
provider of management consulting and other advisory services to the private and
public sectors. The Company operates in principally one business segment. The
firm is headquartered in the Washington, D.C. metropolitan area and has offices
in the United States, Asia, Europe, and Latin America.
Hagler Bailly was organized under the laws of the state of Delaware and formed
for the primary purpose of facilitating the acquisition of RCG/Hagler Bailly,
Inc. ("Predecessor") by its management. The Predecessor was a wholly-owned
subsidiary of RCG International, Inc. ("RCG"). The date of inception of the
Company was May 5, 1995. The Company had no operations from May 5, 1995 to May
25, 1995. Effective on the close of business on May 25, 1995, the Company,
through a wholly-owned subsidiary, acquired all of the voting stock of the
Predecessor and the Company began operations on May 26, 1995.
On July 3, 1997 the Company consummated an initial public offering of 2,500,000
shares at an offering price of $14 per share. The offering netted the Company
$30.3 million to be used to pay off all debt then outstanding, fund
acquisitions, and provide ongoing working capital needs.
On December 1, 1997, the Company acquired all of the outstanding common stock of
Apogee Research, Inc. ("Apogee") (see Note 17). On February 23, 1998 the Company
completed the acquisition of TB&A Group, Inc. and its wholly-owned subsidiary,
Theodore Barry & Associates ("TB&A") (see Note 17). Both business combinations
were accounted for as a pooling of interests. Accordingly, the consolidated
financial statements include the accounts of the Company, its subsidiaries,
Apogee and TB&A for all periods presented.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes, in particular, estimates of revenues and
contract cost used in the earnings recognition process. Actual results could
differ from those estimates.
HAGLER BAILLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments, which have an
original maturity when acquired of three months or less.
Marketable Securities
Marketable securities are classified as available-for-sale and are recorded at
fair market value with unrealized gains and losses, net of taxes, reported as a
separate component of shareholders' equity, if material.
Realized gains and losses and declines in market value judged to be other than
temporary are included in investment income. Interest and dividends are included
in investment income (see Note 3).
Property and Equipment
Property and equipment are recorded at original cost and depreciated using
primarily the straight line method over their estimated useful lives of three to
seven years. Leasehold improvements are recorded at cost and amortized over the
shorter of their useful lives or the term of the related leases by use of the
straight-line method.
Revenue Recognition
Consulting revenue represents revenue generated by professional staff of the
Company. Subcontractor and other revenue represents revenue principally
generated through the use of subcontractors and independent consultants.
Revenue from cost-plus fixed-fee contracts is recognized as costs are incurred
on the basis of direct costs plus allowable indirect costs and a pro rata
portion of estimated fee.
Revenue from fixed-bid type contracts is recognized on the
percentage-of-completion method of accounting with costs and estimated profits
included in revenue based on the relationship that contract costs incurred bear
to management's estimate of total contract costs. Losses, if any, are accrued
when they become known and the amount of the loss is reasonably determinable.
Revenue from standard daily rate contracts is recognized at amounts represented
by the agreed-upon billing amounts and costs are recognized as incurred.
Amounts billed or received in excess of revenue recognized in accordance with
the Company's revenue recognition policy are classified as billings in excess of
cost in the accompanying balance sheets.
Income Taxes
The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
temporary differences between financial and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share". Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is computed very similarly to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to the Statement 128
requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
1995 1996 1997
----------------- --- ------------------ --- -----------------
Numerator:
Net income (loss) before extraordinary gain $659,319 $(3,474,542) $5,422,162
================= === ================== === =================
Extraordinary gain, net of income tax expense $829,280 $145,904 $2,335,598
================= === ================== === =================
Net income (loss) $1,488,599 $(3,328,638) $7,757,760
================= === ================== === =================
Denominator:
Denominator for basic earnings per share - weighted
average shares 3,419,904 5,441,534 7,479,944
Effect of dilutive securities:
Stock options 526,926 - 833,480
================= === ================== === =================
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions
3,946,830 5,441,534 8,313,424
================= === ================== === =================
Recent Pronouncements
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" which established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in-capital in the
equity section of the balance sheet. This statement is effective for fiscal
years beginning after December 15, 1997.
The Company believes that the adoption of this statement will not have a
material impact on its financial position or results of operations.
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments of
an Enterprise and Related Information" which established standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes the standards for related disclosures about
products and services, geographic areas and major customers. This Statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. The financial information
is required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for financial statements for
periods beginning after December 15, 1997. The Company believes that the
adoption of this statement will not have a material impact on its financial
position or results of operations.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which changes the requirements for revenue recognition effective for
transactions that the Company will enter into beginning January 1, 1998. The
Company believes that the impact of the adoption of the SOP will not be material
to the 1998 financial statements.
3. Investments
The composition of investments are as follows:
December 31, 1997
Municipal debt security $1,000,569
--------
Mortgage backed debt security 5,406,522
--------
Equity securities 51,116
Cash equivalents 93,239
--------------------------
Total $6,551,446
==========================
All investment securities have maturities of twelve months or less.
Interest income for the year ended December 31, 1997 was approximately
$347,000.
4. Accounts Receivable
At December 31, 1996 and 1997, the components of accounts receivable are:
1996 1997
-----------------------------------------
Billed amounts $14,686,556 $22,091,828
Unbilled amounts currently billable 5,148,209 11,562,266
Retention not currently billable 256,306 287,377
Allowance for possible losses (1,046,790) (1,253,546)
-----------------------------------------
Total $19,044,281 $32,687,925
=========================================
The activity in the allowance for possible losses for years ended December 31 is
as follows:
1996 1997
-----------------------------------------
Balance at beginning of year $ 503,164 $ 1,046,790
Provision for losses charged to expense 1,117,715 560,310
Charge-offs, net of recoveries (574,089) (353,554)
-----------------------------------------
Balance at end of year $ 1,046,790 $1,253,546
=========================================
All billed and unbilled receivable amounts are expected to be collected during
the next fiscal year. Management has provided an allowance for amounts which it
believes are doubtful as to their ultimate realization. Substantially all the
retention relates to contracts for which a final invoice is submitted upon
completion of indirect cost audits and contract close-outs; therefore it is
anticipated that the retention amounts will not all be collected within the next
fiscal year.
5. Property and Equipment
Components of property and equipment at December 31, 1996 and 1997 are as
follows:
1996 1997
--------------------------------------
Office equipment and furniture $4,307,426 $5,560,520
Leasehold improvements 373,025 353,868
--------------------------------------
4,680,451 5,914,388
Accumulated depreciated and amortization (1,840,483) (3,061,709)
======================================
$2,839,968 $2,852,679
======================================
Depreciation expense for the years ended December 31, 1995, 1996 and 1997 was
$537,854, $918,893 and $1,221,226, respectively. Costs of repairs and
maintenance of property and equipment are charged to expense as incurred.
6. Software Development Costs
At December 31, 1997, the Company had recorded $2,463,174 of capitalized
software development costs net of $49,000 of accumulated amortization. The
Company accounts for these development costs in accordance with FASB 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed".
Capitalized development costs are amortized on a product by product basis
starting when the product is available for general release to customers.
Amortization is calculated using the straight-line method over the remaining
estimated economic life of the product. The Company periodically evaluates the
net realizable value of all unamortized capitalized costs. At December 31, 1997
the Company believes there has been no impairment of net realizable value of
these recorded amounts.
7. Management Buy-Out
Effective at the close of business on May 25, 1995, the Company purchased all of
the outstanding shares of RCG/Hagler Bailly, Inc. from RCG in an acquisition
accounted for as a purchase. The consolidated financial statements include the
results of operations from the date of acquisition. Under the terms of the
Management Buy-Out, the Company agreed to pay approximately $15,587,000 and
assume certain tax obligations of the seller. Acquisition related costs of
approximately $491,000 were incurred. The purchase was funded by capital
contributions, bank debt, and subordinated debt from RCG.
The purchase price was allocated to the assets acquired and the liabilities
assumed based upon their fair values as of the acquisition date. The excess of
the purchase price over the fair value of assets acquired in the purchase was
recorded as intangible assets, including goodwill, and are being amortized over
5 to 20 years on a straight-line basis. Intangible assets at December 31, 1996
and 1997 are net of accumulated amortization of $1,017,000 and $1,753,000,
respectively. Amortization expense for the years ended December 31, 1995, 1996
and 1997 was $334,000, $683,000 and $736,000, respectively.
The Company periodically reviews the value of its net intangible assets to
determine if an impairment has occurred. Based on its review, the Company does
not believe that an impairment of net intangible assets has occurred at December
31, 1997.
Pro forma unaudited consolidated operating results of the Company for the year
ended December 31, 1995 assuming the acquisition had been made as of January 1,
1995 are summarized below:
Pro forma revenue $64,597,974
Pro forma net income $1,594,371
Pro forma earnings per share:
Basic $0.47
Diluted $0.40
These pro forma results have been prepared for comparative purposes only and
include adjustments such as additional amortization expenses as a result of
goodwill and other intangible assets and increased interest expense related to
debt used to finance the Management Buy-Out. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combination occurred on January 1, 1995, or of the future results of
operations of the consolidated entities.
8. Note Receivable
During 1997 the Company entered into a bridge loan agreement for $1,000,000 with
another company. The loan is due in six equal installments beginning June 1,
1998. The loan pays interest at 15% and is secured by all of the assets of the
borrower. The loan agreement allows the Company to purchase an ownership
interest of this company as defined in the loan agreement.
9. Bank Line of Credit
At December 31, 1996 and 1997, the Company had a line of credit arrangement with
a bank which provides funds up to $5,750,000 and $15,000,000, respectively,
subject to sufficient collateral. The line is secured primarily by the Company's
accounts receivable and contract rights. Under the terms of the line of credit,
interest is payable monthly at the bank's prime rate. There is an annual fee
equal to 1/4 of 1% of the unused portion of the available line of credit. The
line of credit agreement contains certain covenants which among other things
restrict future borrowings and require the Company to maintain certain financial
ratios. At December 31, 1996 and 1997 the Company had available borrowing
capacity of $3,150,000 and $15,000,000, respectively, under the line of credit.
10. Notes Payable
Notes payable to financial institution
The Company has notes payable to a financial institution of $1.1 million and
$180,000 at December 31, 1996 and 1997, respectively. At December 31, 1996 the
$1.1 million note consists of $650,000 principle plus accrued interest at the
prime rate plus 2% with a floor of 10% and a cap of 15%. During 1996 the Company
was engaged in negotiations to refinance the note under more favorable terms.
During 1997 a refinance agreement was reached which consisted of cash payments
of $360,000 in 1997 to settle the original note and the issuance of a new note
in the amount of $180,000. The new note is due in twelve equal interest free
monthly installments of $15,000. The settlement resulted in an extraordinary
gain to the Company in 1997. The Company used working capital to finance the
settlement.
Notes payable to related-parties
The Company has notes payable to related-parties, primarily employees and
directors, of $2,456,788 and $620,417 at December 31, 1996 and 1997,
respectively. These notes are unsecured, due on demand and accrue interest at
rates which approximate 10%. The Company has actively pursued the settlement of
many of these notes at favorable terms. Such settlements have resulted in
extraordinary gains for the Company. The Company used working capital to finance
all settlements.
11. Long-term Debt
Long-term debt consisted of the following at December 31, 1996:
Senior term loan from a bank, in the original amount of
$7,000,000, interestpayable at the bank's prime rate plus
7/8%. Subject to certain limitations, the
Company may fix the interest rate on portions or all of
the note at LIBOR plus 2% for periods ranging from 30-360
days. The interest rate was 7.6% at December 31, 1996.
Principal is due in quarterly installments ranging from
$250,000 to $384,500, plus interest over the term of the note
secured by the assets of the Company.
$3,913,000
Subordinated note payable to RCG in the amount of $4,650,000;
interest at 9.5% payable semiannually; balloon payment
due May 2001. 4,650,000
Other notes and equipment loans; interest at rates
approximating prime; maturities through June 30, 1999. 104,000
---------------
Total long-term debt 8,667,000
Less: current portion 1,337,000
---------------
Long-term debt, net of current portion $ 7,330,000
Cash paid for interest for the years ended December 31, 1995, 1996 and 1997 was
approximately $606,144, $1,178,513 and $926,185, respectively.
The Company used a portion of the proceeds from the Initial Public Offering to
pay off all outstanding long-term debt of the Company in July 1997.
12. Income Taxes
The Company has historically filed its consolidated federal income tax return on
the cash basis, whereby for tax purposes, revenue was recognized when received
and expenses were recognized when paid. The timing of certain transactions,
primarily the collections of accounts receivable and the payments of accounts
payable and accrued expenses were applied to different periods for financial
statement and income tax reporting purposes. Deferred federal and state income
taxes were provided for these temporary differences. Upon consummation of the
IPO of the Company's Common Stock during 1997, the Company was required to
change to the accrual method for income tax reporting.
Components of income tax expense consisted of the following:
For the Year Ended
December 31,
------------------------------------------------------
1995 1996 1997
---------------- -- ------------- -- -----------------
Current:
Federal $118,000 $115,000 $4,481,000
State 29,000 30,000 1,098,000
---------------- -- ------------- -- -----------------
147,000 145,000 5,579,000
Deferred:
Federal 578,000 654,000 (723,000)
State 145,000 162,000 (179,000)
---------------- -- ------------- -- -----------------
723,000 816,000 (902,000)
================ == ============= == =================
$870,000 $961,000 $4,677,000
================ == ============= == =================
Income Tax Expense
The Company paid income taxes of $265,000, $86,000, and $2,939,000 during 1995,
1996 and 1997, respectively.
Income tax expense for the years ended December 31, 1995, 1996 and 1997, varies
from the amount computed using statutory rates as follows:
For the Year Ended
December 31,
--------------------------------------------------------
1995 1996 1997
----------------- - ----------------- -- ----------------
Tax computed at the Federal statutory rate $520,000 $(855,000) $3,434,000
State income taxes, net of Federal income tax benefit
92,000 151,000 606,000
Non-deductible charge for stock option compensation
- 1,661,000 31,000
Allowance for TB&A exposure 536,000
Other 258,000 4,000 70,000
================= = ================= == ================
Income tax expense $870,000 $961,000 $4,677,000
================= = ================= == ================
The components of temporary differences are as follows:
December 31,
-----------------------------------
1996 1997
--------------- -- ----------------
Deferred tax liabilities:
Accounts receivable $6,015,000 $1,421,000
Cash to accrual adjustment - 821,000
Other 179,000 126,000
--------------- -- ----------------
Total deferred tax liabilities 6,194,000 2,368,000
Deferred tax assets:
Accounts payable and accrued expenses 967,000 -
Accrued compensation and benefits 1,617,000 1,226,000
Billings in excess of cost 811,000 -
Deferred compensation 762,000 -
Provisions for possible accounts receivable losses
- 359,000
Net operating loss carry-forwards 482,000 -
--------------- -- ----------------
Total deferred tax assets 4,639,000 1,585,000
=============== == ================
Net deferred tax liability $1,555,000 $ 783,000
=============== == ================
As a result of historical losses, TB&A, which merged with Hagler Bailly on
February 23, 1998, had net operating loss carryforwards at December 31, 1995 and
1996. The deferred tax assets generated by these loss carryforwards were fully
reserved for by the Company in the years that they were generated. The Company
utilized all of its carryforwards during 1997.
13. Stockholders' Equity
The Company was authorized at inception to issue 6,915,067 shares of $.01 par
value Class A common stock and 2,074,521 shares of $.01 par value Class B common
stock. Pursuant to a stockholders' agreement, all of the Company's common stock
and options had certain restrictions on ownership and are subject to a
repurchase provision. Class B shares were not eligible for dividends and had no
voting privileges.
The Company may grant qualified and non-qualified stock options to employees to
purchase common stock under the Employee Incentive and Non-Qualified Stock
Option and Restricted Stock Plan (the "Stock Plan"). Prior to December 31, 1996,
the Company's Stock Plan was a formula based plan and was authorized to grant
options to purchase Class A and B shares. The exercise price of options granted
were based upon the book value per share at May 26, 1995, adjusted for accretion
of formula value during any interim period up to the grant date. Under the Stock
Plan, options to purchase Class B shares granted did not accrue value to the
option holder until date of exercise. Options to purchase Class A shares accrued
value to the option holder from the date of grant.
Effective at December 31, 1996, the Company (a) adopted an amendment to its
Stock Plan which changed the exercise price of future options to be granted
thereunder to the fair value of the underlying Common Stock; and (b) in
connection with a reclassification of its Common Stock amended all outstanding
options to purchase 971,963 Class B shares vesting on January 1, 1997 to
substitute 0.9 of a Class A share for each Class B share underlying such
options. In addition, a remaining total of 971,963 options to purchase Class B
shares vesting on January 1, 1998 were canceled. As a result, the Company
recorded a non-recurring, non-cash charge to operations of $6,172,000 of which
$4,618,000 was for options to purchase Common Stock and $1,554,000 was for
394,160 shares of Common Stock sold to employees during 1996. These charges
represent the aggregate difference between the exercise price of such
outstanding options or the issuance price of Common Stock sold to employees
during 1996, as the case may be, and the appraised market value of the
underlying Common Stock at December 31, 1996.
Options granted after 1996 vest over periods ranging from immediately to four
years and are generally exercisable up to ten years. Options issued prior to
1996 generally vest 50% after eighteen months and fully after an additional
year. Once vested, the options are exercisable for up to ten years from the
grant date.
Pro forma information regarding net income (loss) and per share data, is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method therein. The fair
value for options granted from May 25, 1997 to July 9, 1997 was estimated at the
date of grant using a minimal valuation method with the following
weighted-average assumptions, risk free interest rate of 5.25%, no expected
dividends and an average expected life of the options of 5 years.
For all options issued subsequent to July 9, 1997, in accordance with SFAS 123,
the fair value of options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997: Risk-free interest rate of 5.25%; no dividends; a
volatility factor of the expected market price of the Company's common stock of
.40 and a weighted-average expected life of the options of approximately 5
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of the pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period.
The Company's pro forma information follows:
Year ended December Year ended December Year ended December
31, 1995 31, 1996 31, 1997
--------------------- -- --------------------- -- ---------------------
Net income (loss) $1,488,599 $(3,365,294) $7,540,780
Earnings (loss) per share:
Basic $ 0.44 $ (0.62) $ 1.01
Diluted $ 0.38 $ (0.62) $ 0.91
The following summarizes option activity:
Weighted Average
Class A Class B Exercise Price
Options Options
---------------- -- --------------- --------------------
1995
Granted - 2,074,524 $0.16
Exercised - (103,726) $0.16
---------------- -- ---------------
Outstanding at December 31, 1995 - 1,970,798 $0.16
1996
Granted 62,236 - 1.06
Canceled - (971,963) 0.16
Forfeited - (26,872) 0.16
Substituted 874,707 (971,963) 0.16
---------------- -- ---------------
Outstanding at December 31, 1996 936,943 - 0.22
===============
1997
Granted 677,135 8.34
Exercised (484,701) 0.20
Canceled (15,000) 10.00
================
Outstanding at December 31, 1997 1,114,377 5.21
================
Exercisable at December 31, 1997 470,909 $1.05
================
The grant date weighted average fair value of options granted in 1995, 1996, and
1997 were $2.12, $0.74, and $1.98, respectively.
At December 31, 1997 the price range of options outstanding are as follows:
Weighted Average Remaining
Average Contractual Life
Options Exercise Per
Outstanding Share
------------------ -- --------------- -- ---------------------
Less than $1.00 420,420 $0.18 7.4
$1.00-$10.00 562,938 6.29 9.0
Over $10.00 131,019 16.73 9.7
==================
Total 1,114,377 $5.21 8.5
==================
14. Operating Leases
The Company leases office space and equipment located throughout the United
States and worldwide, all of which are under operating leases which expire over
the next seven years.
Substantially all office space leases provide for the Company to pay a pro rate
share of annual increases above a stated base amount of the landlords' related
real estate taxes and operating expenses. Management expects that in the normal
course of business, operating leases will be renewed or replaced by other
operating leases.
The following is a schedule by years of the future minimum rental payments
required under the operating leases that have an initial or remaining
noncancellable lease term in excess of one year as of December 31, 1997:
Year ended December 31,
1998 $3,382,000
1999 3,681,000
2000 3,477,000
2001 3,142,000
2002 512,000
==================
Total minimum rental payments $14,194,000
==================
Total rental expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $2,033,000, $2,782,000 and $2,907,000, respectively.
15. Retirement Plan
The Company maintains tax-deferred savings plans under Section 401(k) of the
Internal Revenue Code to provide retirement benefits for all eligible employees
(the "Plan"). Employees may voluntarily contribute a percentage of their annual
compensation to the Plan, subject to Internal Revenue Service limitations. The
Company may, but has no obligation to, make matching contributions. In addition,
the Company may, but has no obligation to, make a discretionary contribution to
the Plan. Discretionary contributions are allocated to participants' accounts in
proportion to their compensation. The company's discretionary matching and other
contributions for 1996 and 1997 were $1,384,000 and $1,528,000, respectively.
Rights to benefits provided by the Company's discretionary contributions vest as
follows: 40% after two years, 70% after three years and 100% after four years of
service. Participants are fully vested in their voluntary contributions.
16. Commitments and Contingencies
Cost subject to audit
Under its United States government contracts, the Company is subject to audit by
the Defense Contract Audit Agency, which could result in adjustments of amounts
previously billed. Management believes that the results of such audits will not
have a material adverse effect on the Company's financial position or results of
operations.
Financial Instruments and Risk Management
The Company operates around the world principally in United States currency. The
Company may reduce any periodic exposures to fluctuations in foreign exchange
rates by creating offsetting ("hedge") positions through the use of derivative
financial instruments. The Company currently does not use derivative financial
instruments for trading or speculative purposes, nor is the Company a party to
leverage derivatives. The Company regularly monitors any foreign currency
exposures and ensures that hedge contract amounts do not exceed the amounts of
the underlying exposures.
The Company had no open hedge positions at December 31, 1996 and 1997.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable.
The Company maintains cash and cash equivalents with various financial
institutions. These financial institutions are located in many different
countries throughout the world, and the Company's policy is designed to limit
exposure with any one institution. As part of its cash management process, the
company performs periodic evaluations of the relative credit standing of these
financial institutions.
At December 31, 1996 and 1997, respectively, cash of approximately $1,004,000
and $1,425,000 was located in foreign bank accounts.
Major Customers
At December 31, 1996 and 1997, included in accounts receivable was $6,824,000
and $9,143,000, respectively, due from agencies of the United States government.
Credit risk with respect to the remaining trade accounts receivable is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion across different industries and countries.
The Company performs ongoing credit evaluations of its customers' financial
condition.
The Company generates revenues from contracts with governmental agencies and
private companies within the United States and worldwide. During 1995, 1996 and
1997, the Company recognized approximately, $12,313,000, $25,997,000 and
$31,792,000, respectively, of its revenue from the United States Agency for
International Development ("USAID"), a U.S. government agency, and a major
public utility. Revenues earned from foreign customers, both commercial and
governmental, were approximately $713,000, $1,314,000 and $6,831,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
17. Pooling of Interests
In November of 1997, the Company acquired Apogee. In connection with this
transaction, Apogee shareholders received 1.2689 shares of the Company's stock
for each Apogee share. The Company issued 409,985 shares of its stock of all of
outstanding shares and stock options of Apogee. Apogee was founded in 1986, and
provides consulting services to the transportation and the environmental
sectors. The merger qualified as a tax-free reorganization and was accounted for
as a pooling of interests. Accordingly, the Company's financial statements have
been restated to include the results of Apogee for all periods presented. As
Hagler Bailly began operations on May 26, 1995, the financial statements for all
periods prior to May 26, 1995 will be those of Apogee and TB&A.
On February 23, 1998, the Company completed the acquisition of TB&A Group, Inc.,
and it's wholly-owned subsidiary, Theodore Barry and Associates ("TB&A"). The
Company issued 454,994 shares of common stock in connection with the business
combination. The business combination will be accounted for as a pooling of
interests. Accordingly, the Company's financial statements have been restated to
include the results of TB&A for all periods presented. As Hagler Bailly began
operations on May 26, 1995, the financial statements for all periods prior to
May 26, 1995, will be those of Apogee and TB&A.
Combined and separate results of Hagler Bailly, Apogee and TB&A during the
periods preceding the merger were as follows (in millions):
Hagler Bailly Apogee TB&A Combined
---------------------- ------------------ ------------- -- ----------------
Year ended December 31, 1995
Revenues 29.3 6.6 8.8 44.7
Net income 0.9 0.1 0.5 1.5
Year ended December 31, 1996
Revenues 61.6 6.3 6.6 74.5
Net income (loss) (3.6) 0.2 0.1 (3.3)
The combined financial results presented above include adjustments made to
conform accounting policies of the three companies.
SIGNATURES
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 hereunto duly authorized.
HAGLER BAILLY, INC.
(Registrant)
Date: June 12, 1998 By: /s/ Henri-Claude Bailly
-----------------------
Henri-Claude Bailly
President, Chief Executive Officer
and Chairman of the Board
Date: June 12, 1998 By:/s/ Daniel M. Rouse
-------------------
Daniel M. Rouse
Vice President, Chief Financial
Officer, and Treasurer