SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number.
December 31, 1998 0-29292
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HAGLER BAILLY, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 54-1759180
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1530 Wilson Boulevard, Suite 400, Arlington, Virginia
22209
(Address of principal executive offices) (zip code)
(703) 351-0300
(Registrant's telephone number, including area code:)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
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 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.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of March 1, 1999, 16,551,994 shares of the Registrant's common stock,
par value $0.01 per share, were outstanding. The aggregate market value of the
voting stock held by non-affiliates* of the Registrant, (based upon the closing
price of such shares on the Nasdaq National Market on March 1, 1999) was
approximately $322,763,883.
The Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held May 13, 1999, is incorporated by reference into Part III of
this Annual Report on Form 10-K.
* For the purposes of this calculation, the registrant is not including stock
held by executive officers, directors and beneficial owners of more than five
percent (5%) of the registrant's outstanding common stock.
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i
HAGLER BAILLY, INC. AND SUBSIDIARIES
FORM 10-K ANNUAL REPORT
FOR YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
ITEM 1. BUSINESS........................................................2
ITEM 2 -PROPERTIES........................................................19
ITEM 3 -- LEGAL PROCEEDINGS...............................................20
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............20
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.............................................21
ITEM 6 -- SELECTED FINANCIAL DATA.........................................21
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................24
ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA...............................................39
ITEM 9 -- CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCUSSIONS.......................................39
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF HAGLER BAILLY..............40
ITEM 11 -- EXECUTIVE COMPENSATION.........................................40
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND............40
MANAGEMENT
ITEM 13 -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................40
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.........41
Except for any historical information contained herein, the matters
discussed in this Annual Report on Form 10-K of Hagler Bailly, Inc. and its
subsidiaries ("Hagler Bailly" or the "Company") contain forward-looking
statements. For this purpose, any statements contained herein that are not
statements of historical fact, are intended, and are hereby identified as,
"forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended by Public Law
104-67. Without limiting the foregoing, the words "anticipates," "believes,"
"estimates," "expects," "intends," "plans" and similar expressions are intended
to identify forward-looking statements. The important factors discussed below in
this Item 1 under the caption "Risk Factors", as well as other factors
identified in the Company's filings with the Securities and Exchange Commission
("SEC") and those presented elsewhere by management from time to time, could
cause actual results to differ materially from those indicated by
forward-looking statements made herein.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 and files periodic reports, including Current Reports on
Form 8-K, Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Proxy
Statements with the SEC.
The public may read and copy materials filed by the Company with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding companies that file electronically (such as the Company)
with the SEC (http://www.sec.gov). The Company's Internet address is
http://haglerbailly.com.
PART I
ITEM 1. BUSINESS
INTRODUCTORY NOTE
On March 22, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to 1,500,000 shares of the Company's common
stock. The purchases will be made from time to time in the open market or in
privately negotiated transactions.
On March 2, 1999, certain of the Company's domestic subsidiaries (Putnam,
Hayes & Bartlett, Inc., Hagler Bailly Consulting, Inc., TB&A Group, Inc., and
Theodore Barry & Associates) were merged with and into a newly incorporated
Delaware corporation, PHB Hagler Bailly, Inc., through which the Company will
provide its commercial rate consulting activities.
On February 8, 1999, the Company acquired all of the outstanding stock of
Lacuna Consulting Limited, a United Kingdom corporation, in exchange for 65,000
shares of the Company's common stock.
On November 20, 1998, the Company completed a new, three-year, $50 million
revolving credit facility with NationsBank, N.A., a subsidiary of Bank of
America. This credit facility replaced Hagler Bailly's $15 million revolving
line of credit and Putnam, Hayes & Bartlett, Inc.'s $4 million revolving line of
credit.
On November 17, 1998, the Company completed the acquisition of certain
assets of The Fieldston Company ("TFC") and all of the outstanding stock of
Fieldston Publications, Inc. ("FPI"). Total consideration of the acquisition was
approximately $2.3 million in cash and 232,558 shares of Hagler Bailly common
stock. The acquisition was accounted for using the purchase method. Accordingly,
the consolidated financial statements reflect the results of operations of TFC
and FPI since the date of acquisition. As a result of the transaction, the
Company recorded intangible assets of approximately $4.8 million.
GENERAL
The predecessor of the Company was founded in 1980 as Hagler, Bailly & Company,
Inc. In July 1984, RCG International, Inc. ("RCG"), an indirect subsidiary of
Reliance Group Holdings, Inc., acquired the Company, and in 1987 was renamed
RCG/Hagler Bailly, Inc. In May 1995, the management of RCG/Hagler Bailly, Inc.
completed the purchase of RCG/Hagler Bailly, Inc. from RCG and the successor to
RCG/Hagler Bailly, Inc. became a wholly owned subsidiary of the Company. In July
1997, the Company completed its initial public offering.
For almost 20 years the Company has maintained its industry focus,
providing consulting, research and other professional services to corporate and
government clients in energy, network industries and the environment.
The Company believes that several factors distinguish it from its
competitors. In addition to industry focus, its full service capabilities,
existing global infrastructure, established client relationships, public sector
insight, knowledge base and experienced team of management and consultants,
position it to capitalize on the growing demand for consulting services in these
industries.
BUSINESS MODEL
The Company provides solutions custom-tailored to the client's needs by
combining content, including proprietary research and industry information, with
superior consulting processes. The Company then offers resources such as
information technologies needed to implement and sustain the solution, creating
tangible long-term value for the client.
Through PHB Hagler Bailly, Inc. ("PHB Hagler Bailly"), a wholly-owned
subsidiary of the Company, it provides strategic advice and analysis that
assists decision makers in business and governments in developed countries as
they solve issues involving energy, telecommunications, transportation, water
resources, the environment, litigation and other matters. PHB Hagler Bailly's
consulting professionals have first-hand experience in developing sound
strategies and applying business principles that focus on the unique issues of
each client matter and increase enterprise value. PHB Hagler Bailly has been at
the forefront of assessing market strength, providing asset valuations and
performance measurements, analyzing competition, measuring risks, and improving
financial and operating performance.
Through Hagler Bailly Services, Inc. ("Hagler Bailly Services"), another
wholly-owned subsidiary of the Company, it provides advisory and technical
services to public sector clients worldwide in the energy and network
industries, particularly transportation, water, and telecommunications, and the
environment. In addition to U.S. federal and state governments, Hagler Bailly
Services assists multilateral and bilateral donor and financial organizations,
foreign governments, and selected private clients in emerging or developing
markets. Hagler Bailly Services' consulting experts provide public policy
assistance by advising governments and business leaders on the evolution of
specific policies in each country and construct a global view of policy reforms.
Hagler Bailly Services has been at the forefront of developing policy and
pricing frameworks, formulating national and provincial strategy and planning,
drafting laws and regulations, managing the transition to competitive markets,
promoting investment and business creation, evaluating assets, and promoting
sustainable development.
SERVICE OFFERINGS
The Company offers its clients a broad array of consulting services, from
assisting in shaping the clients' vision through strategic planning to selection
of appropriate solutions, implementation and on-going management advice. The
Company's services are delivered to clients worldwide primarily through seven
specialized practices focused on energy, including electric and gas utilities;
network industries, including fuels, water, telecommunications and
transportation; and the environment.
These seven specialized practices are:
o The Strategy practice provides strategic counsel and related services
to the executive leadership of energy and other network companies.
Hagler Bailly has carefully developed methods that increase shareholder
value in an environment of rapid industry change and new pressures on
financial performance. Each method is a discipline to help guide
executives to value creation.
o The Management and Operations practice advises utility and
telecommunications companies on all aspects of business management and
operations. Hagler Bailly is experienced in helping clients understand
and respond to both the internal operational and external customer and
market challenges that affect businesses today.
o The Economics & Analytics practice provides practical and innovative
solutions to economic problems, providing economic analysis and
analytical tools to support strategic decision making. Hagler Bailly
offers a unique combination of academic rigor and hands-on professional
experience to advise clients on regulatory economics, policy evaluation
and business strategy.
o The Market and Survey Analysis practice provides a full range of market
research and survey analysis that clients need in order to solve their
mission-critical business problems. Hagler Bailly helps clients gain
insight on their customers, competitors, and the changing dynamics of
their market through state-of-the-art study design, quantitative and
qualitative data collection, and analysis.
o The Litigation Support practice assists law firms and corporate counsel
with litigation, mediation, and arbitration matters, including
liability and causation issues, determination of damages and
prejudgment interest, litigation strategy and settlement negotiations.
Hagler Bailly provides economic and business analysis and expert
testimony on liability and damages issues in some of the largest civil
litigation cases of recent decades.
o The IT practice delivers information technology consulting services and
solutions to electric, gas and water utilities, and service providers
in the US and Canada. The Company provides these services through its
exclusive joint venture, Cap Gemini Hagler Bailly LLC, which designs
information technology frameworks that pass information efficiently
between and among organizations of all shapes and sizes.
o The Environment Management practice assists domestic and international
clients manage environmental issues and prevent environmental problems,
whether of local, regional, and/or global impact by offering
environmental economics, scientific, managerial and technical research
and services.
These specialized practices are designed to work together to provide
clients the full range of services and capabilities of the Company. From an
operational standpoint, the Company regularly reviews and, as appropriate,
restructures these practice areas and services to address the changing business
problems, strategic alternatives and policy issues of its clients.
In 1998, the Company provided its services to more than 1,150 clients in
both the private and public sectors.
COMPETITION
The market for consulting services in the energy, network industries and
the environment is intensely competitive, highly fragmented and subject to rapid
change. The market includes a large number of participants from a variety of
consulting market segments, both in the United States and internationally,
including general management consulting firms, the consulting practices of
accounting firms, consulting engineering firms, technical and economic advisory
firms and market research firms. Many information technology-consulting firms
also maintain significant energy, network industry and environmental practices
and others may enter the field in the future. Many of these companies are
national and international in scope and may have greater financial, technical
and marketing resources than the Company.
Hagler Bailly believes that it is in a strong position to compete in this
market. The Company believes that several factors distinguish it from many of
its current and potential competitors in the consulting industry.
o Industry Focus. Since its inception in 1980, the Company has maintained
its focus on providing a broad array of consulting services to the
energy, network industries and the environment. This focus
differentiates the Company from general management consulting firms
that serve a full range of industries and firms with limited skill sets
and capabilities. The Company believes that the insights gained by
working worldwide allow it to customize leading-edge-consulting
concepts and tools to specific situations and thus provide tangible
value, rather than just theories, to its clients.
o Full Service Capabilities. The Company's strategy is to partner with
its clients in conceptualizing and implementing solutions, which
significantly increase enterprise value, by building a broad range of
consulting platforms enabling it to meet its clients' consulting needs.
These include corporate strategy, marketing and sales, product
development, energy supply and logistics, operations management,
information systems and technology, economic analysis and environmental
management. In addition, the Company conducts its own market research
using a state-of-the-art survey center equipped with 26 CATI
(Computer-Assisted Telephone Interview) stations.
o Existing Global Infrastructure. The Company operates from 12 principal
offices in the United States at the following locations: Arlington,
Virginia; Boulder, Colorado; Cambridge, Massachusetts; Chicago,
Illinois; Houston, Texas; Los Angeles, California (two locations);
Madison, Wisconsin; New York, New York; Palo Alto, California; San
Francisco, California and The District of Columbia and from eleven
principal locations abroad in the following cities: Buenos Aires,
Argentina; Daventry, England; Dublin, Ireland; Jakarta, Indonesia;
Islamabad, Pakistan; Melbourne, Australia; London, England; Paris,
France; San Paulo, Brazil; Sydney, Australia; Toronto, Canada and
Wellington, New Zealand.
o Established Client Relationships. In the year ended 1998, the Company
received repeat business from approximately 42% of the clients who had
engaged the Company in the year ended 1997. Further, in the year ended
1998, revenues from clients served in the year ended 1997 were
approximately 60% of the Company's total revenues. Over the past year,
the clients have included approximately 220 electric or gas utilities
located throughout the world and four international development banks.
Relationships with clients, many of which date back over a decade, span
various levels within client organizations, ranging from corporate
boards, chief executive officers and other senior management to
functional managers.
o Public Sector Insight. The Company has worked with a number of public
sector organizations, including the United States Agency for
International Development ("USAID"), the Environmental Protection
Agency, the European Union, the U.K. Knowlton Fund, the Asian
Development Bank and the World Bank for many years. This gives the
Company a special perspective on the energy, utility and environmental
industries and enhances the Company's reputation and ability to compete
successfully for consulting business.
o Knowledge Base. The Company has developed an extensive knowledge and
information base. The Company owns several proprietary databases and
software packages -- OPECSM and NPESM, two nuclear power plant
operations databases, and IPPSM, a worldwide information database on
independent power producers. The Company has recently developed and is
aggressively marketing its proprietary database, RampUpSM, to provide
clients with unprecedented information on U.S. utility operations and
cost structure. Finally, through the Company's proprietary Business
Information and Knowledge Exchange Intranet ("BIKEnetSM"), Company
personnel have direct access to the Company's proprietary knowledge and
warehouse of information. This system is accessible from all of the
Company's offices.
o Experienced Team of Management and Consultants. The Company's
management and senior consultants have a wide range of energy,
telecommunications, transportation and environmental consulting
expertise and experience. In addition, many of the senior management
and consultants have worked extensively with one another. Management's
average tenure with the Company is approximately 13 years. This
consistency of leadership and teamwork, combined with training provided
by the Company, has fostered a strong company culture and employee
loyalty.
o Established Global Visibility. The Company's staff frequently publishes
articles and is invited to present at industry gatherings and
conferences. The staff is also active in several industry groups and
professional associations including elected or appointed positions to
the United States Energy Association (member of the Board of
Directors), the National Coal Council (member) and the Association of
Energy Services Professionals (member of the Board of Directors).
As a result of these competitive factors, the Company believes it has
emerged as one of the leading management consulting firms focused on energy, the
network and environmental industries.
MARKETING AND SALES
The Company markets its services from its headquarters in Arlington,
Virginia and through each of its subsidiaries. The Company employs a number of
business development and marketing strategies to communicate with prospective
and current clients, including, but not limited to, on-site presentations;
industry seminars featuring persentations by the Company's management and
consultants; speeches; articles in industry, business, economic, legal and
scientific journals; and through other publications and press releases regarding
the energy, network and environment industries and the Company's methodologies.
A significant portion of the new business arises from prior client
engagements. The Company often leverages the client relationships of firms it
acquires by cross-selling its existing services. Clients often expand the scope
of engagements during delivery to include follow-on complementary activities.
Also, the Company's on-site presence affords it opportunities to become
aware of, and to help define, additional project opportunities as they are
identified by the client. Strong client relationships arising out of many
engagements often facilitate the Company's ability to market additional
capabilities to its clients in the future.
The Company establishes a client development goal for each of its
consulting officers and principals and systematically reviews individual and
group performance against these goals. The Company's compensation system,
particularly in the award of bonuses and stock options, is weighted towards
success in meeting these client development goals.
o Commercial Sector Clients. In the commercial sector, client acquisition
techniques include referrals and focused presentations to boards of
directors, chief executive and operating officers and other executives
of prospective client companies. Presentations generally focus on
opportunities in the market segments most relevant to the prospective
clients, examples of the Company's previous work in related industries
and the Company's international capabilities.
o Public Sector Clients. In the public sector, contracts are awarded
primarily on the basis of competitive solicitation. The Company has
developed strong capabilities to prepare proposals that respond to
complex requests and often require the integration and coordination of
the services of several subcontractors and independent consultants.
The Company has also developed a detailed understanding of government
and other institutional procurement regulations in the United States
and internationally. In addition, in order to obtain government
contracts, consultants must adhere to stringent cost, accounting and
regulatory controls. In order to comply with such requirements, the
Company regularly holds training seminars to ensure compliance with
applicable government regulations and uses a sophisticated
computer-based accounting system that allows it to track costs in
adherence to government standards. The Company also meets public
sector clients' cost guidelines through competitive pricing.
HUMAN RESOURCES
As of December 31, 1998, the Company's personnel consisted of 780
full-time employees.
The Company supplements its consultants on certain engagements with highly
skilled independent contractors. The Company believes that its practice of
retaining independent contractors on a per-engagement basis provides it with
greater flexibility in adjusting professional personnel levels in response to
changes in demand for its services.
RISK FACTORS
Attraction, Retention and Management of Professional and Administrative
Staff. The Company's business involves the delivery of professional services and
is labor intensive. The Company's future performance depends in large part upon
its ability to attract, develop, motivate and retain highly skilled consultants,
research associates and administrative staff, particularly senior professionals
with business development skills.
In connection with its recruiting efforts, the Company seeks employees
from top graduate schools with prior relevant consulting experience and strong
project management, analytic and communications skills in competitive and
regulated industries, especially those with meaningful international experience.
The Company also hires professionals with senior executive experience directly
from industry.
Qualified consultants are in great demand, and there is significant
competition for employees with these skills from other consulting and investment
banking firms, research firms, energy companies and many other related
enterprises. Although the Company attracts and motivates its professional and
administrative staff by offering competitive packages of base and incentive cash
compensation, stock options, bonuses and attractive benefits, many of these
firms have greater financial resources than the Company, which they may use to
attract and compensate qualified personnel. There can be no assurance that the
Company will be able to attract and retain sufficient numbers of highly skilled
consultants in the future. The loss of the services of a significant number of
consultants, research associates or administrative personnel could have a
material adverse effect on the Company's business, operating results and
financial condition, including its ability to secure and complete engagements.
Concentration of Revenues. Over half of the revenues of the Company are
derived from private and institutional clients involved in the energy, network
and environmental industries. As a result of this focus, the Company's business,
financial condition and results of operations are influenced by factors
affecting these industries, including, but not limited to, changing political,
economic and regulatory influences that may affect the procurement practices and
operations of such industries. In particular, many electric and gas utilities
are consolidating to create larger organizations or strategic alliances. These
consolidations and alliances will reduce the number of potential customers for
the Company and may also create conflicts of interest between clients. In
addition, these consolidations and alliances may result in the acquisition of
certain of the Company's key clients, and such clients may scale back or
terminate their relationship with the Company following their acquisition.
Similarly, cutbacks in the energy, network industries and/or environmental
budgets of the United States and other governments could result in the scale
back or termination of some of the Company's public sector contracts. The impact
of these developments in the energy, utility, transportation and environmental
industries is difficult to predict and could have a material adverse effect on
the Company's business, financial condition and results of operations.
Ability to Sustain and Manage Growth. The Company has experienced rapid
growth in recent years. The Company completed five acquisitions in 1998,
including the acquisition of Putnam, Hayes and Bartlett, Inc. The Company
believes that sustaining such growth places a strain on operational, human and
financial resources. In order to manage its growth, the Company must continue to
improve its operating and administrative systems and to attract and retain
qualified management and professional, scientific and technical-operating
personnel. Foreign operations also may involve the additional risks of
assimilating differences in foreign business practices, hiring and retaining
qualified personnel, and overcoming language barriers. Failure to manage such
growth effectively could have a material adverse effect on the Company's
business.
Risks Related to Possible Acquisitions. An element of the Company's
strategy is to expand its operations through the acquisition of complementary
businesses. There can be no assurance that the Company will be able to identify,
acquire, profitably manage or successfully integrate any acquired businesses
into the Company without substantial expenses, delays or other operational or
financial problems. Moreover, competitors of the Company are also soliciting
acquisition candidates, which could result in an increase in the price of
acquisition targets and a decrease in the number of attractive companies
available for acquisition. Further, acquisitions may involve a number of special
risks, including diversion of management's attention, failure to retain key
acquired personnel, increased costs to improve managerial, operational,
financial and administrative systems, unanticipated events or circumstances,
legal liabilities, increased interest expense and amortization of acquired
intangible assets, some or all of which could have a materially adverse impact
on the Company's business, operating results and financial condition. Client
satisfaction or performance problems at a single acquired firm could have a
materially adverse impact on the reputation of the Company as a whole. In
addition, there can be no assurance that acquired businesses, if any, will
achieve anticipated revenues and earnings. The failure of the Company to manage
its acquisition strategy successfully could have a material adverse effect on
Hagler Bailly's business, operating results and financial condition.
Dependence on Key Clients. The Company derives a significant portion of
its revenues from a relatively limited number of clients. For example, revenues
from the Company's ten most significant clients accounted for approximately 39%,
35% and 42% of its total revenues in 1998, 1997 and 1996, respectively. A U.S.
government agency, USAID, is the Company's largest client, accounting for
approximately 22%, 20% and 18% of Hagler Bailly's total revenues in 1998, 1997
and 1996, respectively. Clients typically retain the Company as needed on an
engagement basis rather than pursuant to long-term contracts, and a client can
usually terminate an engagement at any time without a significant penalty.
Moreover, there can be no assurance that the Company's existing clients will
continue to engage it for additional assignments or do so at the same revenue
levels. The loss of any significant client could have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, the level of the Company's consulting services required by an
individual client can diminish over the life of its relationship with the
Company, and there can be no assurance that the Company will be successful in
establishing relationships with new clients as this occurs.
Professional and Other Liability. The Company's services involve risks of
professional and other liability. If the Company were found to have been
negligent or to have breached its obligations to its clients, it could be
exposed to significant liabilities and its reputation could be adversely
affected. In connection with many of its public sector engagements, the Company
employs the services of local staff and uses consultants who are independent
contractors. Negligent or illegal acts, or ethical violations by these
independent contractors could adversely affect the Company.
Public Sector Market and Contracting Risks. Approximately 31% of the
Company's total revenues in 1998 and 34% in 1997 were derived from contracts or
subcontracts with public sector clients. Providing consulting services to public
sector clients is subject to detailed regulatory requirements and public
policies as well as to funding priorities. Contracts with public sector clients
may be conditioned upon the continuing availability of public funds, which in
turn depends upon lengthy and complex budgetary procedures, and may be subject
to certain pricing constraints. Moreover, public sector contracts may generally
be terminated for a variety of factors, including when it is in the best
interests of the respective government. There can be no assurance that these
factors or others unique to contracts with governmental entities will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Intense Competition. The market for consulting services in the energy,
network and the environmental industries is intensely competitive, highly
fragmented and subject to rapid change, and such competition is likely to
increase in the future. Many of the Company's competitors have greater
personnel, financial, technical and marketing resources than the Company. The
Company also competes with its clients' internal resources, particularly where
such resources represent a fixed cost to the client. This source of competition
may heighten as consolidation of electric and gas utility and other energy
industry companies creates larger organizations. There can be no assurance that
the Company will be able to compete successfully with its existing competitors
or with any new competitors.
Risk of International Operations. The Company operates either permanent or
project offices in a total of 22 foreign countries. The Company expects to
continue to expand its international operations and offices primarily in Western
Europe, Latin America and the Pacific Rim. Expansion into new geographic regions
requires considerable management and financial resources and may negatively
impact the Company's near-term results of operations. The Company's
international operations are subject to numerous potential challenges and risks,
including war, civil disturbances, other political and economic conditions in
various jurisdictions such as tariffs and other trade barriers, longer accounts
receivable collection cycles, fluctuations in currency and potentially adverse
tax consequences. There can be no assurance that such international factors will
not have a material adverse effect on the Company's business, results of
operations and financial condition.
Dependence on Key Employees. The Company's business consists primarily of
the delivery of professional services and, accordingly, its future success is
highly dependent upon the efforts, abilities, business generation capabilities
and project execution of its consultants. The Company's success is also
dependent upon the managerial, operational and administrative skills of its
officers. The loss of the services of any consultant or the failure of the
Company's consultants to generate business or otherwise perform at or above
historical levels could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
have employment or non-competition agreements with many of its consultants or
officers; accordingly, such individuals may terminate their relationship with
the Company at will and without notice and immediately begin to compete with the
Company.
Concentration of Ownership. As of March 1, 1999, the directors and
executive officers of the Company beneficially owned approximately 31.3% of the
Company's outstanding shares of common stock. As a result, these stockholders
will have substantial influence over the outcome of matters requiring a
stockholder vote, including the election of the members of the Board of
Directors. Such control could adversely affect the market price of the Company's
common stock or delay or prevent a change of control of the Company at a price
which might represent a premium over the market price of its common stock.
Need to Develop New Offerings. The Company's future success will depend in
significant part on its ability to successfully develop and introduce new
service offerings and improved versions of existing service offerings. There can
be no assurance that the Company will be successful in developing, introducing
on a timely basis and marketing such service offerings, or that any service
offerings will be accepted in the market. Moreover, services offered by others
may render the Company's services non-competitive or obsolete.
Project Risks. Many of the Company's engagements involve projects which
are critical to the operations of its customers' businesses and which provide
benefits that may be difficult to quantify. The Company's failure or inability
to meet a customer's expectations in the performance of its services could
result in the incurrence by the Company of a financial loss and could damage the
Company's reputation and adversely affect its ability to attract new business.
In addition, an unanticipated difficulty in completing a project could have an
adverse effect on the Company's business and results of operations. Fees for the
Company's engagements can be based on the project schedule, the Company's
staffing requirements, the level of customer involvement and the scope of the
project as agreed upon with the customer at the project's inception. The Company
generally seeks to obtain an adjustment in its fees in the event of any
significant change in any of the assumptions upon which the original estimate
was based. However, there can be no assurance that the Company will be
successful in obtaining any such adjustment in the future.
Intellectual Property Rights. The Company's performance is in part
dependent upon its internal information and communication systems, databases,
tools, and the methods and procedures that it has developed specifically to
serve its clients. The Company relies on a combination of nondisclosure and
other contractual arrangements and copyright, trademark and trade secret laws to
protect its proprietary systems, information and procedures. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate to prevent misappropriation of such rights or that the Company
will be able to detect unauthorized use and take appropriate steps to enforce
its proprietary rights. The Company believes that its systems and procedures and
other proprietary rights do not infringe upon the rights of third parties. There
can be no assurance, however, that third parties will not assert infringement
claims against the Company in the future or that any such claims will not
require the Company to enter into costly litigation or materially adverse
settlements to litigation, regardless of the merits of such claims.
Government Regulation of Immigration. Certain of the Company's employees
are foreign nationals working in the United States under U.S. visas or work
permits. Congress and administrative agencies with jurisdiction over immigration
matters have periodically expressed concerns over the levels of legal and
illegal immigration into the U.S. These concerns have often resulted in proposed
legislation, rules and regulations aimed at reducing the number of work permits
that may be issued. Any changes in such laws making it more difficult to hire
foreign nationals or limiting the ability of the Company to retain foreign
employees could require the Company to incur additional unexpected labor costs
and expenses.
Fluctuations of Operating Results. The Company's future operating results
will continue to be subject to quarterly fluctuations based upon a wide variety
of factors, including the number and significance of client engagements
commenced and completed during a quarter, delays incurred in connection with an
engagement, the number of business days in a quarter, employee hiring and
utilization rates, the ability of clients to terminate engagements without
penalties, the size and scope of engagements, the nature of the fee arrangement,
the seasonality of the spending cycle of public sector clients (especially that
of the United States government), the timing of new office openings, return on
investment capital, and the general economy, such as recessionary periods,
political instability, changes in trade policies, fluctuations in interest or
currency exchange rates and other competitive factors. Seasonality also affects
the Company's operating results, particularly in the third and fourth quarters
of each fiscal year. In addition, the Company's operating expenses are
increasing as the Company continues to expand its operations, and future
operating results will be adversely affected if revenues do not increase
accordingly. Additionally, the Company plans to continue to evaluate and, when
appropriate, make acquisitions of complementary businesses. As part of this
process the Company will continue to evaluate the changing value of its assets,
and when necessary, make adjustments thereto. While the Company cannot predict
what effect these various factors may have on its financial results, the
aggregate effect of these and other factors could result in significant
volatility in the Company's future performance and stock price.
Fluctuations in the General Economy. The general level of economic
activity significantly affects demand for the Company's professional services.
When economic activity slows, clients may delay or cancel plans that involve the
hiring of consultants. The Company is unable to predict the level of economic
activity at any particular time, and fluctuations in the general economy could
adversely affect the Company's business, operating results and financial
condition.
Employment Liability Risks. The Company, as a provider of professional
services, employs and places individuals in the workplace of other businesses.
Inherent risks of such activity include possible claims of errors and omissions,
misuse of client proprietary information, misappropriation of funds,
discrimination and harassment, theft of client property, other criminal activity
or torts and other claims. Although historically the Company has not experienced
any material claims of these types, there can be no assurance that the Company
will not experience such claims in the future.
Certain Anti-takeover Effects. The Company's Amended and Restated
Certificate of Incorporation, By-laws, and the Delaware General Corporation Law
include provisions that may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt that stockholders might consider in
their best interests. These include a Board of Directors which is divided into
three classes, each of which is elected to serve staggered three-year terms, and
by-law provisions under which only the President, a majority of the Board of
Directors or stockholders owning at least 50% of the Company's capital stock may
call meetings of the stockholders. Also, the Board of Directors of the Company
is authorized to issue up to 5,000,000 shares of preferred stock and to
determine the price, rights, preferences and privileges of such shares, without
any further stockholder action. The existence of this "blank-check" preferred
stock could render more difficult or discourage an attempt to obtain control of
the Company by means of a tender offer, merger, proxy contest or otherwise.
Furthermore, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law that prohibits Hagler Bailly from
engaging in a "business combination" with an "interested stockholder" unless the
business combination is approved in a prescribed manner. These provisions could
also have the effect of delaying or preventing a change of control of the
Company, which could adversely affect the market price of the common stock.
Fluctuations in Stock Price. The market price of the Company's common
stock may fluctuate substantially due to a variety of factors, including
quarterly fluctuations in results of operations, announcements or terminations
of new services, offices, contracts, acquisitions or strategic alliances by the
Company or its competitors, as well as changes in the market conditions in the
energy, network and environmental industries, changes in earnings estimates by
analysts, changes in accounting principles, sales of the Company's common stock
by existing holders, loss of key personnel, a relatively small float of shares
that are freely tradable without restriction or registration under the
Securities Act of 1933 and other factors. The stock market has from time to time
experienced extreme price and volume fluctuations that have particularly
affected the market price for many companies and which, on occasion, have been
unrelated to operating performance. To the extent the Company's performance may
not meet expectations published by external sources, public reaction could
result in a sudden and significantly adverse impact on the market price of the
Company's securities, particularly on a short-term basis. In addition, such
stock price volatility may provoke the initiation of securities litigation,
which may divert substantial management resources and may have an adverse effect
on the management of business operations. Any of these results could have a
material adverse effect on the Company's business, operating results and
financial condition.
EXECUTIVE OFFICERS
The Company's Executive Officers and their respective ages, positions and
biographical information is as follows:
Name Age Positions
John R. Armstrong 54 Senior Vice President and Chief Operating
Officer of Hagler Bailly Services
Henri-Claude A. Bailly 52 President and Chief Executive Officer
of Hagler Bailly
Frederick T. Baird 50 Senior Vice President of PHB Hagler Bailly
John C. Butler, III 48 Senior Vice President of PHB Hagler Bailly
Jasjeet S. Cheema 54 Executive Vice President, U.S./Canada
Operations of Hagler Bailly and of PHB
Hagler Bailly
William E. Dickenson 50 Executive Vice President and Chief Operating
Officer of Hagler Bailly, and President and
Chief Executive Officer of PHB Hagler Bailly
Glenn J. Dozier 48 Senior Vice President,Chief Financial Officer,
Treasurer and Secretary of Hagler Bailly, PHB
Hagler Bailly and Hagler Bailly Services
Neill W. Freeman, III 54 Senior Vice President of PHB Hagler Bailly
Derek W. HasBrouck 38 Senior Vice President of PHB Hagler Bailly
James N. Heller 50 Senior Vice President of PHB Hagler Bailly
and President of Fieldston Publications, Inc.
David A. Keith 48 Senior Vice President of Hagler Bailly Service
Steven A. Mitnick 46 Senior Vice President of PHB Hagler Bailly
Howard W. Pifer, III 56 Chairman of the Board of Hagler Bailly and of
PHB Hagler Bailly
James M. Speyer 54 Senior Vice President of PHB Hagler Bailly
Alain M. Streicher 50 Executive Vice President, International
Operations of Hagler Bailly, and President and
Chief Executive Officer of Hagler Bailly
Services
Walter H. A. Vandaele 54 Senior Vice President of PHB Hagler Bailly
Kent D. Van Liere 46 Senior Vice President of PHB Hagler Bailly
Stephen V.R. Whitman 52 Senior Vice President and General Counsel of
Hagler Bailly, PHB Hagler Bailly and Hagler
Bailly Services
John R. Armstrong is a senior vice president and chief operating officer of
Hagler Bailly Services, Inc., a wholly-owned subsidiary of the Company. He has
over 24 years experience in designing and implementing state and national
programs to promote energy efficiency and renewable energy in the U.S. and
developing countries. Prior to joining Hagler Bailly, Mr. Armstrong was a
director of energy conservation and development for the Minnesota Department of
Energy and Economic Development, and director of the Wisconsin Energy Office.
Henri-Claude A. Bailly has served as the Company's chief executive officer since
its founding in 1980. From 1984 to 1987 and from May 1995 to date, Mr. Bailly
has been the firm's president; he served as chairman of the board of directors
from 1984 to August 1998 and continues to serve as a member of the board. From
1984 to 1995, RCG International, Inc., the consulting arm of Reliance Group
Holdings, employed Mr. Bailly in a series of management positions culminating in
senior vice president, and chairman of the board and chief executive officer of
RCG/Hagler Bailly, Inc. Prior to founding Hagler Bailly, Mr. Bailly was employed
in successive positions from associate to managing director of Resource Planning
Associates, an international energy, utilities and environmental management
consulting firm. Mr. Bailly serves on the board of directors of the United
States Energy Association, the Alliance to Save Energy, and is a member of the
National Coal Council.
Frederick T. Baird is a senior vice president of PHB Hagler Bailly. Since 1996,
he has worked primarily in Putnam, Hayes & Bartlett - Asia Pacific Ltd, the New
Zealand subsidiary of PHB Hagler Bailly. Prior to joining Putnam, Hayes &
Bartlett, Inc. ("PHB"), the predecessor of PHB Hagler Bailly, Mr. Baird was
managing director of CORE Management System Ltd ("CORE"), which specializes in
the design and development of complex computer-based business models using
optimization and simulation and which is now part of PHB Hagler Bailly- Asia
Pacific Ltd. Mr. Baird established CORE following a joint venture with Ernst &
Young LLP in which he headed a management science practice. From 1982 to 1988,
Mr. Baird was a member of the Faculty of Commerce at the University of
Canterbury.
John C. Butler III is a senior vice president of PHB Hagler Bailly. Formerly a
managing director of PHB, he specializes in the economic, financial and
strategic analysis of environmental, product liability and insurance coverage
issues. He has extensive experience analyzing both domestic and international
environmental and insurance issues, having served as a consultant to numerous
multinational companies, law firms and government agencies. Prior to joining
PHB, he worked with the Environmental Protection Agency, the United Nations
Environment Programme and the World Health Organization.
Jasjeet S. Cheema is executive vice president, U.S/Canada operations for
Hagler Bailly and PHB Hagler Bailly. Mr. Cheema joined Hagler Bailly through its
acquisition of TB&A Group, Inc. ("TB&A") in February 1998. At TB&A, he held
various positions and served as its president since 1980. Prior to joining TB&A,
he worked for Getty Oil Company as a manager of its corporate technical
applications group. Mr. Cheema was elected to the Company's board of directors
in March 1999.
William E. Dickenson is executive vice president and chief operating officer of
Hagler Bailly and president and chief executive officer of PHB Hagler Bailly. He
served as PHB's president and chief executive officer since 1992, and was the
managing director responsible for its litigation support practice from 1983
through 1992. From 1978 to 1983, Mr. Dickenson managed major antitrust
litigation and consulting assignments at Dickenson, O'Brien & Associates, which
he founded and served as its president. Prior to that he was employed at
Cambridge Research Institute and also served in a variety of positions at the
Tennessee Valley Authority. Mr. Dickenson was elected to the Company's board of
directors in March 1999.
Glenn J. Dozier has been senior vice president, chief financial officer,
treasurer and secretary of Hagler Bailly since joining the firm in September
1998. Mr. Dozier was a financial and management consultant from September 1996
to September 1998 and from April 1990 to September 1996 he was senior vice
president and chief financial officer of Owens & Minor, Inc. From January 1987
to April 1990, he was chief financial officer of AMF. For the prior 12 years, he
was employed by Dravo Corporation where his last position was vice president,
finance for Dravo Constructors, Inc.
Neill W. Freeman, III is a senior vice president of PHB Hagler Bailly. He was a
managing director and member of the board of directors of PHB since 1994, when
the consulting firm he founded and in which he was a principal, Freeman & Mills,
combined its consulting practice with PHB. Prior to founding Freeman & Mills in
1978, Mr. Freeman was an auditor consultant at several accounting firms. From
1966 to 1969, Price Waterhouse & Co. employed Mr. Freeman; from 1969-1974, Mr.
Freeman was employed by BDO Seidman; and from 1974-1978, he was employed by
Coopers & Lybrand. Mr. Freeman was also a founder of the 1st Business Bank of
Los Angeles.
Derek W. HasBrouck is a senior vice president of PHB Hagler Bailly. Mr.
HasBrouck joined Hagler Bailly through its acquisition of TB&A in February 1998.
At TB&A, he was a managing director in charge of the firm's retail utility
management practice, as well as a member of its board of directors. Mr.
HasBrouck joined TB&A in 1987, specializing in the issues facing retail energy
providers, both in the U.S. and internationally. Prior to joining TB&A, Mr.
HasBrouck was employed at Florida Power & Light and Jones & Laughlin Steel.
James N. Heller is a senior vice president of PHB Hagler Bailly and chief
operating officer of Fieldston Publications, Inc. In 1981, Mr. Heller founded
The Fieldston Company and Fieldston Publications, Inc. Prior to founding the
Fieldston companies, Mr. Heller was the senior analyst at Teknekron, Inc. of
Berkeley, California from 1979 to 1980. From 1975 to 1979, he was the director
of Management Studies of Energy and Environmental Analysis, Inc. and from 1972
to 1975, he was the section chief for the U.S. Environmental Protection Agency,
Office of Water Quality Planning and Standards.
David A. Keith is a senior vice president of Hagler Bailly Services. He has been
involved in energy research, development and consulting projects continuously
since 1974. From 1974-1983, at Georgia Tech Research Institute, he was project
director for some of the first industrial energy conservation programs and
renewable energy projects in the U.S. In 1983, Mr. Keith joined Hagler Bailly,
and from 1983-1989 served as resident advisor for national energy development
programs in Jamaica and Indonesia. Since 1990, he has served as project director
on energy sector institutional reform projects in more than 20 countries in
Central and Eastern Europe and the former Soviet Union.
Steven A. Mitnick is Senior Vice President and since February 1999 has
served as Co-Managing Director of PHB Hagler Bailly's Strategy Practice, which
provides strategic counsel to the executive leaderships of energy companies in
the U.S. or regional markets. Since 1993, Hagler Bailly has employed Mr. Mitnick
in various positions. From 1991-1993, Mr. Mitnick served as vice president and
chief economist to Science Applications International Corporation (SAIC). From
1989-1991, Mr. Mitnick served as senior consultant to Putnam, Hayes & Bartlett,
Inc. From 1980-1989, he was president of S.A. Mitnick & Associates. From
1980-1982, Mr. Mitnick was of member of Georgetown University's faculty, where
he taught courses in microeconomics, macroeconomics and statistics. From
1976-1980, Mr. Mitnick served as a consultant to various government agencies.
Mr. Mitnick is a member of the Editorial Advisory Board of The Electricity
Journal.
Howard W. Pifer, III has served as chairman of Hagler Bailly's board of
directors since August 1998. He served as chairman of the board of directors of
PHB since 1991, having previously served as PHB's president and chief executive
officer. Dr. Pifer also serves as chairman of PHB Hagler Bailly and leads its
energy global business sector. Dr. Pifer specializes in rigorous analysis of
corporate strategies and public policies and has advised senior management,
boards of directors and governments in Australia, Canada, England and Wales,
Hong Kong, New Zealand, Norway, Scotland, Singapore and Spain, as well as
throughout the United States. Prior to founding PHB in 1976, Dr. Pifer was a
member of the Harvard Business School faculty, where he taught courses in
managerial economics, finance, public policy and strategic planning. From 1973
to 1976, Dr. Pifer was a Vice President of the Energy & Environment Group at
Temple, Barker & Sloane, Inc.
James M. Speyer is a senior vice president of PHB Hagler Bailly. Formerly a
managing director and member of the board of directors of PHB, Mr. Speyer is an
expert in the strategic analysis of energy and environmental issues,
particularly those affecting the coal, gas, electric utility and independent
power industries. Prior to joining PHB, Mr. Speyer was a principal with ICF Inc.
from 1979 to 1982. Mr. Speyer has also held various positions in the federal
government, including working on President Carter's White House Energy Staff and
at the Department of Energy and the Environmental Protection Agency.
Alain M. Streicher is executive vice president, international operations for
Hagler Bailly and president and chief executive officer of Hagler Bailly
Services. He has been employed by Hagler Bailly in various management positions
including senior vice president and acting chief operating officer. Mr.
Streicher has served as a member of the Company's board of directors since May
1995. From 1976 to 1980, Mr. Streicher was chief energy analyst at the CEREN in
Paris.
Walter H. A. Vandaele is a senior vice president of PHB Hagler Bailly. Formerly
a managing director and member of the board of directors of PHB, Dr. Vandaele is
an expert in competition and regulatory policy analysis. Prior to joining PHB,
Dr. Vandaele was assistant director for regulatory evaluation at the Bureau of
Consumer Protection and an Economic Advisor at the Bureau of Competition,
Federal Trade Commission. He taught at the Harvard Business School, the
Department of Economics at Harvard University, and the University of Chicago.
Kent D. Van Liere is a senior vice president of PHB Hagler Bailly. Over the past
15 years he has directed a wide range of value of service, customer
loyalty/satisfaction, market segmentation, and new product assessment studies
with residential, commercial and industrial customers for clients in several
industries. Prior to its acquisition by Hagler Bailly, he was President of HBRS,
a nationally recognized market research firm. Before joining HBRS in 1985, he
was an associate professor of sociology at the University of Tennessee.
Stephen V.R. Whitman is senior vice president and General Counsel of Hagler
Bailly. Prior to joining the firm in July 1997, he spent four years in private
practice in his own firm, was associated with the law firms of Kelley Drye &
Warren and White & Case and served as attorney advisor (and regional legal
advisor in Lima, Peru) for the United States Agency for International
Development. He earned his J.D. in 1975 from the University of Virginia School
of Law.
ITEM 2 - PROPERTIES
The Company's headquarters is currently located in approximately 58,402
square feet of leased office space in Arlington, Virginia. The Company leases
office space as listed below. The Company believes that its facilities are
suitable for its current needs and that additional facilities can be leased to
meet future needs.
The Company maintains principal offices in the following locations:
United States International
- ------------------------------------------------------------------------
Arlington, VA Madison, WI Buenos Aires, Argentina
Cambridge, MA New York, NY Daventry, England
Boulder, CO Palo Alto, CA Dublin, Ireland
Chicago, IL San Francisco, CA Islamabad, Pakistan
Houston, TX Washington, DC Jakarta, Indonesia
Los Angeles, CA [2] Melbourne, Australia
London, England
Paris, France
San Paulo, Brazil
Sydney, Australia
Toronto, Canada
Wellington, New Zealand
Each principal office represents a permanent location servicing multiple
clients that is run by a member of Hagler Bailly's senior management. In
addition, from time to time the Company leases a project office to enable it to
service a specific international project involving a particular individual
client, in which case the office is paid for directly by the client. All of the
Company's principal and project offices are electronically linked together and
have access to all of the Company's capabilities and core consulting tools.
ITEM 3 -- LEGAL PROCEEDINGS
Apogee Research, Inc. ("Apogee"), a wholly owned subsidiary of the
Company, received a subpoena in July 1998 from the Office of the Inspector
General of the Environmental Protection Agency (the "EPA") requesting records
from April 1993 through October 1995 pertaining to a contract between Apogee and
the EPA. Apogee has provided records in response to the subpoena. The work under
this contract has been completed. The subpoena was served in connection with an
EPA investigation relating to the submission of potential false statements and
false claims under the contract. Hagler Bailly is unable to determine at this
time what effect, if any, the investigation will have on its business, financial
condition or results of operations.
The Company and its subsidiaries are from time to time parties to
litigation arising in the ordinary course of business. Neither the Company nor
any of its subsidiaries is a party to any pending material litigation nor are
any of them aware of any pending or threatened litigation that would have a
material adverse effect on the Company or its business.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock was first offered to the public on July 3,
1997, and since that time has been traded on the Nasdaq National Market under
the symbol "HBIX." The following table sets forth the range of reported high and
low closing sales price for the Company's common stock, for the periods
indicated, as reported by the Nasdaq National Market.
1998 High Low
- ----------------------------------------------------------------------------
January - March $25.000 $18.625
April - June $30.000 $22.500
July - September $30.250 $16.750
October - December $24.000 $13.563
1997 High Low
- ----------------------------------------------------------------------------
January - March N/A N/A
April - June N/A N/A
July 3 - September $25.250 $17.000
October - January $26.375 $18.250
On November 17, 1998, the Company issued an aggregate of 232,558 shares of
its common stock to James H. Heller and Debbie G. Heller in connection with the
acquisition of assets and the assumption of liabilities of The Fieldston Company
and the acquisition of all of the outstanding stock of Fieldston Publications,
Inc. The sale of these shares was exempt from registration under Section 4(2) of
the Securities Act of 1933 and the SEC's Regulation D.
The Company had 196 holders of record of its common stock at March 1,
1999, and approximately 946 beneficial owners. The Company has never paid a cash
dividend on its common stock and does not expect to pay a cash dividend on its
common stock in the foreseeable future.
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected financial data as of and for the year ended
December 31, 1994, have been derived from the financial statements of RCG/Hagler
Bailly, Inc. (the "Predecessor"), a wholly-owned subsidiary of RCG International
Inc. which was acquired on May 25, 1995, by the management of RCG/Hagler Bailly,
Inc. The selected consolidated financial data for the year ended December 31,
1995, combine the financial data of the Predecessor derived from its financial
statements from January 1, 1995 to May 25, 1995, and the consolidated financial
data of the Company from May 26, 1995 to December 31, 1995, derived from the
consolidated financial statements of the Company. The selected consolidated
financial data as of December 31, 1995, is derived from the consolidated
financial statements of the Company. The selected consolidated financial data as
of and for the years ended December 31, 1996, 1997 and 1998, have been derived
from the audited consolidated financial statements of the Company. The Company's
prior years have been restated to include the historical financial information
of Apogee, TB&A, Izsak, Grapin et Associes ("IGA") and PHB as a result of
business combinations accounted for as poolings of interests.
The results of operations for prior periods are not necessarily indicative
of the results that may be expected for future years. The information set forth
below should be read in conjunction with the Company's consolidated financial
statements and the notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Annual
Report on Form 10-K.
Years ended December 31,
----------------------------------------------------------------------
1994 (1) (2) 1995 (1) (2) 1996 (2) 1997 (2) 1998
------------- ------------- -------------- ------------- -------------
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
Revenues:
Consulting revenues $97,154 $120,566 $142,701 $158,863 $173,194
Other revenues - - 440 1,752 4,268
------------- ------------- -------------- ------------- -------------
Total revenues 97,154 120,566 143,141 160,615 177,462
Cost of services 72,122 94,163 110,500 120,585 126,204
------------- ------------- -------------- ------------- -------------
Gross profit 25,032 26,403 32,641 40,030 51,258
Liquidation of subsidiary (4) - - 662 328 -
Merger related and other nonrecurring costs(5) - - - 1,235 9,382
Selling, general and administrative expenses 21,904 21,810 26,047 26,868 25,112
Stock and stock option compensation (3) 360 - 6,172 9,965 2,595
------------- ------------- -------------- ------------- -------------
Income/(loss) from operations 2,768 4,593 (240) 1,634 14,169
Other income (expense) net (7) (406) (799) (853) (400) 269
------------- ------------- -------------- ------------- -------------
Income/(loss) before equity investment in
joint venture and income tax expense 2,362 3,794 (1,093) 1,234 14,438
Income tax expense 1,162 1,907 1,786 5,460 7,275
------------- ------------- -------------- ------------- -------------
Income/(loss) before equity investment in
joint venture and extraordinary gain 1,200 1,887 (2,879) (4,226) 7,163
(Loss) from equity investment in joint venture - - - - (463)
------------- ------------- -------------- ------------- -------------
Income (loss) before extraordinary gain 1,200 1,887 (2,879) (4,226) 6,700
------------- ------------- -------------- ------------- -------------
Extraordinary gain (6) - 1,055 145 2,336 -
---------------------------------------------- ------------- ------------- -------------- ------------- -------------
Net income (loss) (8) $1,200 $2,942 $(2,734) $(1,890) $6,700
============ ======== ========== ======== ========
Net income (loss) per share
Basic
Net (loss) income before extraordinary gain * * $(0.25) $(0.32) $0.42
Extraordinary gain * * $ 0.01 $ 0.17 -
Net (loss) income * * $(0.24) $(0.14) $0.42
Dilutive
Net (loss) income before extraordinary gain * * $(0.25) $(0.32) $0.40
Extraordinary gain * * $ 0.01 $ 0.17 -
Net (loss) income * * $(0.24) $(0.14) $0.40
Weighted average shares outstanding
Basic * * 11,321 13,361 15,992
Dilutive * * 11,321 13,361 16,772
* Due to the acquisition on May 25, 1995, and the change in capital
structure, earnings per share information for this period is not
meaningful and accordingly is not presented.
DECEMBER 31,
1994 1995 1996 1997 1998
BALANCE SHEET DATA (In Thousands)
Cash and cash equivalents $ 1,267 $ 1,753 $ 3,218 $ 5,261 $ 16,165
Working capital 1,644 5,054 7,382 34,122 54,294
Total assets 38,184 52,703 55,872 84,657 101,422
Total debt 6,470 20,606 16,790 2,752 1,026
Total stockholders' equity 3,538 3,772 9,958 48,849 73,599
(1) The operating data for the year ended December 31, 1994, reflect the
combined results of operations of the Predecessor, Apogee, TB&A and PHB.
The operating data for the year-ended December 31, 1995 reflect the
combined results of operations of the Predecessor from January 1, 1995 to
May 24, 1995, the Company from May 25, 1995 to December 31, 1995, and the
annual results of Apogee, TB&A, IGA and PHB.
(2) The statements of operations data for the years ended December 31, 1994,
1995, 1996 and 1997 include performance incentive compensation paid to PHB
senior staff members in excess of a standard bonus set for their
respective staff levels. The excess performance incentive compensation was
included in cost of services and selling, general and administrative
expenses was $2,931, $6,260, $9,588 and $7,294 for the years ended
December 31, 1994, 1995, 1996 and 1997, respectively. In addition, the
year ended December 31, 1994, also includes $1,802 of selling, general,
and administrative expenses, representing a note receivable from a related
party, and the year ended December 31, 1996, includes approximately $500
of cost of services, representing that portion of officer compensation
that exceeded the compensation that would have been paid had the
compensation plan adopted in January 1997 been in effect for all of 1996.
(3) In connection with an amendment to the Hagler Bailly, Inc. Employee
Incentive and Non-Qualified Stock Option and Restricted Stock Plan (the
"Stock Option Plan") and a reclassification of its common stock, each
effective December 31, 1996, Hagler Bailly incurred non-recurring,
non-cash charges to operations amounting to approximately $4,600 for
options and approximately $1,600 for stock in 1996. In connection with a
stock bonus to an employee, the Company incurred a non-cash compensation
charge to operations in the first quarter of 1997 of $65. PHB common stock
issued or subject to issuance under subscriptions receivable entered into
within 12 months preceding the closing of the merger were presumed to have
been issued in contemplation of the proposed transaction and were
accounted for at their fair market value at date of issuance. Accordingly,
PHB recognized a non-recurring, non-cash, non-tax deductible compensation
charges for the years ended December 31, 1997 and 1998 of approximately
$9,900 and $2,600, respectively, representing the difference between the
fair market and book value of shares of common stock then issuable.
(4) On December 31, 1996, PHB liquidated its wholly owned subsidiary in the
U.K. Of PHB's loss of $663 in 1996, $549 represented cumulative foreign
currency translation losses that had previously been recorded as a
separate component of the PHB's shareholders' equity. In 1997, $328 was
recorded as management's estimate of the uncollectable net proceeds
resulting from the liquidation.
(5) For the year ended December 31, 1997 and 1998, the Company recorded merger
related costs of $1,235 and $9,382, respectively, as a result of business
combinations and related costs and impairment of investments and
long-lived assets (see Note 19 to the 1998 financial statements).
(6) For the years ended December 31, 1995, 1996 and 1997, the Company recorded
extraordinary gains of $1,055, $145 and $2,336, respectively, as a result
of extinguishment of debt at beneficial terms at TB&A.
(7) Other income (expenses), net includes interest income, interest expense
minority interest, other income, and other expenses.
(8) Management considers the items stated in Notes 3, 4, 5 and 6 above to
be nonrecurring. The effect of excluding these nonrecurring charges and
extraordinary gains on the Company's statement of operations, net of tax,
would increase net income by approximately $6,200, $8,600 and $9,000,
to pro forma operating net income of approximately $3,400, $6,700 and
$15,700 for the years ended December 31, 1996,1997 and 1998, respectively.
The effect of excluding the nonrecurring charges and extraordinary gains
would increase dilutive EPS by $0.54, $0.61 and $0.53, for the years
ended December 31, 1996, 1997, and 1998, respectively. For purposes of
the increase in EPS caused by the exclusion of certain nonrecurring
transactions discussed above, tax expense was applied at a combined federal
and state income tax rate of 40.0% for the year ended December 31, 1996,
47.6% for the year ended December 31, 1997, and 39.7% for the year ended
December 31, 1998.
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The predecessor of the Company was founded in February 1980 as Hagler, Bailly
& Company, Inc. In July 1984, it was acquired by RCG International, Inc. ("RCG")
an indirect subsidiary of Reliance Group Holdings, Inc. and in 1987 was renamed
RCG/Hagler Bailly, Inc. In May 1995, the management of RCG/Hagler Bailly, Inc.
completed the purchase of RCG/Hagler Bailly, Inc. from RCG (the "Management
Buy-Out"), and the successor to RCG/Hagler Bailly, Inc. became a wholly-owned
subsidiary of the Company. In July 1997, the Company completed an initial public
offering (the "IPO").
Hagler Bailly, together with its wholly owned subsidiaries, PHB Hagler
Bailly, Hagler Bailly Services and several of its other domestic and foreign
wholly owned subsidiaries, is a leading worldwide provider of professional
services to corporate and government clients on energy, network industries and
the environment.
The Company's revenues consist of consulting revenues and other revenues.
Consulting revenues represent revenues associated with professional staff,
subcontractors and independent consultants, and client reimbursable expenses and
are associated with the Company's primary business of offering corporate clients
strategy and business operations consulting, economic counsel and litigation
support, and market research and survey analysis. Other revenues include those
derived from information-based product and services, financial advisory
services, and publication of newsletters, reference manuals, and data series for
the energy and transportation industries services. The Company's client base
includes both the public and private sector. Revenue from the private sector is
typically characterized by higher gross margins than the public sector, yet
generally requires a higher relative level of infrastructure support.
Consequently, the Company's operating performance is affected by its public
sector / private sector business mix. Through strategic acquisitions and
internal growth, the Company has increased its private sector client base, and
will continue to pursue such opportunities in the future.
Total revenues represent the total of all revenues related to contracts,
including revenues associated with professional staff, subcontractors and
independent consultants. Consulting revenues represent the amount of contract
revenue associated with billings by the Company's professional staff.
Subcontractor and other revenues represent revenues associated with
subcontractors and independent consultants, as well as travel and per diem
reimbursements from clients.
The Company derives substantially all of its revenues from fees for
professional services. Clients are typically invoiced on a monthly basis. The
majority of revenues are billed at standard daily rates, standard hourly rates,
or cost-plus fixed-fees. Revenues from standard daily rate contracts are
recognized at amounts represented by the agreed-upon billing amounts and costs
are recognized as incurred. Revenues from standard hourly rate engagements are
recognized as hours are recorded and costs are recognized as they are incurred.
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. The remainder of the revenues are billed on a
fixed-bid basis and by lump sum fee arrangements. Revenues from fixed-bid type
contracts are recognized on the percentage-of-completion method of accounting
with costs and estimated profits included in contract revenues 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. The Company's most significant
expenses are project personnel costs, which consist of consultant salaries and
benefits (including bonuses), and travel-related direct project expenses.
Project personnel are typically full-time professionals employed by the Company,
although the Company often supplements its professional project staff through
the use of subcontractors and independent consultants. The Company believes that
retaining subcontractors and independent consultants on a per-engagement basis
provides it with greater flexibility and reduced risk in adjusting professional
staff levels in response to changes in demand for its services.
Compensation Charges
Effective December 31, 1996, the Company adopted an amendment to its Stock
Option Plan which changed the exercise price of future options to be granted
thereunder to the market value of the underlying common stock. In addition, in
connection with the reclassification of its common stock, the Company
substituted 0.9 shares of Class A common stock for each share of Class B common
stock underlying 971,963 options vesting on January 1, 1997. At the same time,
options to purchase 971,963 shares of Class B common stock vesting on January 1,
1998 were canceled. As a result, the Company recorded a non-recurring, non-cash
charge to operations of approximately $6.2 million in December 1996 of which
approximately $4.6 million was for options to purchase common stock and
approximately $1.6 million 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.
The Company also recognized a non-recurring, non-cash charge to operations
of approximately $10.0 million in the year ended December 31, 1997, and
approximately $2.6 million in the year ended December 31, 1998. These charges
are required under generally accepted accounting principles for stock issued, or
obligated to be issued, during the twelve months preceding the closing of a
pending merger based on the presumption that such issuances were in
contemplation of the merger. Substantially all of these costs were related to
the PHB merger and represent the difference between the fair market and book
value of PHB common stock issuable under subscriptions within one year of the
merger's close.
Recent Mergers and Events
On December 1, 1997, the Company completed the merger of Apogee Research
Inc. ("Apogee"), whereby Apogee became a wholly-owned subsidiary of Hagler
Bailly. Apogee was a consulting firm specializing in the economic and financial
analysis of infrastructure, including all aspects of transportation and
environment. The Company issued 409,985 shares of its common stock in exchange
for all of the common stock of Apogee. The business combination is accounted for
as a pooling of interests. Accordingly, the Company's financial statements have
been restated to reflect the merger for all periods presented.
On January 28, 1998, the Company purchased the remaining minority interest
of its consolidated subsidiary, PT Hagler Bailly, a consulting firm located in
Jakarta, Indonesia, for $200,000 whereby PT Hagler Bailly became an indirect,
wholly-owned subsidiary of the Company. Total consideration of the acquisition
was $200,000 in cash. The acquisition was accounted for using the purchase
method. The consolidated financial statements have reflected the results of
operations of PT Hagler Bailly since its inception. As a result of the
transaction, the Company recorded intangible assets of approximately $200,000.
On February 23, 1998, the Company completed the merger of TB&A Group, Inc.
("TB&A"), whereby TB&A became a wholly-owned subsidiary of the Company. TB&A is
a management consulting firm to electric, gas and telecommunication companies.
The Company issued 454,994 shares of Hagler Bailly common stock, in exchange for
all of the common stock of TB&A. The business combination is accounted for as a
pooling of interests. Accordingly, the Company's financial statements have been
restated to reflect the merger for all periods presented.
On March 10, 1998, the Company purchased the remaining minority interest of
Hagler Bailly Indonesia, Inc., which holds all of the outstanding stock of PT
Hagler Bailly, whereby Hagler Bailly Indonesia, Inc. became an indirect
wholly-owned subsidiary of the Company. Total consideration of the acquisition
was $240,000 in cash. The acquisition was accounted for as a purchase. The
consolidated financial statements have reflected the results of operations of
Hagler Bailly Indonesia, Inc. since its inception. As a result of the
transaction, the Company recorded intangible assets of approximately $240,000.
On April 28, 1998, the Company completed the acquisition of Estudio Q
Ingenieros Asociados S.R.L., an Argentinean company ("Estudio Q"), whereby
Estudio Q became a wholly-owned subsidiary of the Company. Total consideration
for the acquisition was approximately $2.4 million in the form of $800,000 cash
and an aggregate of 64,306 shares of Hagler Bailly common stock. The acquisition
was accounted for using the purchase method. Accordingly, the consolidated
financial statements reflect the results of Estudio Q since the date of
acquisition. As a result of the transaction, the Company recorded intangible
assets of approximately $2.7 million.
On June 16, 1998, the Company and Cap Gemini S.A. and its wholly owned
subsidiary, Cap Gemini America, Inc., entered into an exclusive joint venture to
deliver information technology consulting services and solutions to electric,
gas and water utilities, and service providers in the U.S. and Canada. The
Company expects the joint venture, Cap Gemini Hagler Bailly, L.L.C., to turn
profitable sometime late in the fiscal year ending December 31, 1999. The joint
venture is owned equally by the Company and Cap Gemini America and each has
invested capital in the venture and transferred key senior professionals to it.
Concurrently with the creation of the joint venture, Cap Gemini purchased
470,975 newly issued shares of the Company's stock at the current market price
for total consideration, after commissions and fees, of $11.8 million.
On June 30, 1998, the Company completed the merger of IGA, whereby IGA
became a wholly-owned subsidiary of the Company. The Company issued 183,550
shares of its common stock in exchange for all the common stock of IGA. The
business combination was accounted for as a pooling of interests. Accordingly,
the Company's financial statements have been restated to reflect the merger for
all periods presented.
On August 28, 1998, the Company completed the merger of Putnam, Hayes &
Bartlett, Inc. ("PHB"), whereby PHB became a wholly-owned subsidiary of the
Company. Until the merger, PHB was the largest privately owned independent
economic and management consulting firm in the United States. The Company issued
6,548,953 shares of its common stock in exchange for all of the common stock of
PHB. The business combination was accounted for as a pooling of interests.
Accordingly, the Company's financial statements have been restated to reflect
the merger for all periods presented.
On September 30, 1998, the Company sold certain assets of its public sector
environmental consulting operations. As a result of the transaction, the Company
sold assets for approximately $2.9 million, resulting in a gain of approximately
$282,000.
On November 17, 1998, the Company completed the acquisition of certain
assets and the assumption of certain liabilities of The Fieldston Company
("TFC") and all of the outstanding stock of Fieldston Publications, Inc.
("FPI"). Total consideration of the acquisition was approximately $2.3 million
in cash and 232,558 shares of Hagler Bailly common stock. The acquisition was
accounted for using the purchase method. Accordingly, the consolidated financial
statements reflect the results of operations of TFC and FPI since the date of
acquisition. As a result of the transaction, the Company recorded intangible
assets of approximately $4.8 million.
In December 1998, the Company made the decision to cease operations in its
financial advisory services business, HB Capital, Inc., resulting in expenses of
approximately $1.8 million.
In connection with these and other transactions, the Company incurred
merger related and other nonrecurring costs of approximately $1.2 million and
$9.4 million in 1997 and 1998, respectively.
Results of Operations
The following table presents for the periods indicated the percentage of
revenues represented by certain income and expense items:
For the years ended December 31,
1996 1997 1998
---- ---- ----
Revenues:
Consulting 99.7% 98.9% 97.6%
Other 0.3 1.1 2.4
---------------- --------------- ---------------
Total revenues 100.0 100.0 100.0
Cost of services 77.2 75.1 71.1
Merger related and other nonrecurring costs - 0.8 5.3
Liquidation of assets 0.5 0.2 -
Selling, general, and administrative 18.2 16.7 14.2
expenses
Stock and stock option compensation 4.3 6.2 1.4
---------------- ---------------- ---------------
Income from operations (0.2) 1.0 8.0
Interest income 0.2 0.8 0.2
Interest expense (1.0) (0.8) (0.2)
Other income (expense), net 0.2 (0.2) 0.2
Minority interest - - (0.1)
---------------- ---------------- ---------------
Income (loss) before income tax
expense, equity investment in joint
venture and extraordinary gain (0.8) 0.8 8.1
Income tax expense 1.2 3.4 4.1
(Loss) from equity investment in joint - - (0.2)
venture
---------------- ---------------- ---------------
Net income (loss) before
extraordinary gain (2.0) (2.6) 3.8
Extraordinary gain 0.1 1.4 -
---------------- ---------------- ---------------
Net income (1.9) (1.2) 3.8
================ ================ ===============
1998 COMPARED TO 1997
Revenues for the year ended December 31, 1998, increased by $16.8 million,
or 10.5%, to $177.5 million from the year ended December 31, 1997. Of this
increase, $14.3 million was attributable to consulting revenues, and $2.5
million was attributable to other revenues. Consulting revenues increased 9.0%
for the year ended December 31, 1998, as compared to the year ended December 31,
1997. This increase was primarily driven by the Company's focus on the growth of
private-sector engagements resulting in an increase of $6.2 million and an
increase internationally of $8.1 million resulting from increased capacity and
capabilities through the purchase of Estudio Q, an Argentinean company, and
growth in PT Hagler Bailly Indonesia, Hagler Bailly Pakistan, Hagler Bailly
France, and IGA. Other revenues increased 143.6% for the year ended December 31,
1998, as compared to the comparable period of the prior year. This increase was
attributable to increased revenues from information-based products and services
associated with contracts the Company was awarded in the current fiscal year. In
the year ended December 31, 1998, approximately 97.6% of the Company's revenues
were derived from consulting revenues, as compared with 98.9% in the year ended
December 31, 1997.
Cost of services for the year ended December 31, 1998, increased by $5.6
million, or 4.7%, to $126.2 million from the year ended December 31, 1997. Cost
of services as a percentage of revenue decreased from 75.1 % for the year ended
December 31, 1997, to 71.1% for the year ended December 31, 1998, primarily the
result of a reduction in cash compensation resulting from the integration of the
Company's and merged firms' operations, particularly PHB.
Selling, general and administrative expenses ("SG&A") for the year ended
December 31, 1998, decreased by approximately $1.8 million, or 6.5%, to $25.1
million from the year ended December 31, 1997. Expressed as a percentage of
total revenues, SG&A expenses decreased from 16.7% for the year ended December
31, 1997, to 14.2% for the year ended December 31, 1998. This decrease is
primarily reflective of a reduction in cash compensation resulting from the
integration of the Company's and merged firms' operations, particularly PHB.
In the year ended December 31, 1998, there were no expenses related to the
liquidation of a subsidiary, compared to approximately $328,000 in expenses
related to the liquidation of a subsidiary in the year ended December 31, 1997.
Merger related and other nonrecurring costs for the year ended December 31,
1998, increased by $8.1 million to $9.4 million as compared to the comparable
period of the prior year. The majority of the merger related costs in the year
ended December 31, 1998, were associated with the merger of PHB and exiting from
the Company's financial advisory services business, as well as the business
combinations with TB&A, IGA, Apogee, FPI, TFC and Estudio Q.
Stock and stock option compensation for the year ended December 31, 1998,
decreased by $7.4 million from the year ended December 31, 1997, to $2.6
million. Substantially all of these costs in both periods related to PHB and
include non-cash, non-tax deductible compensation based on the difference
between the fair market and book values of PHB common stock issuable under
subscriptions within one year of the companies' merger.
Other income (expenses), net includes interest income, interest expense,
minority interest, and other income and expenses. Other income (expenses), net
increased by approximately $670,000 to approximately $270,000 in the year ended
December 31, 1998. The primary reasons for this increase was a gain of
approximately $282,000 from the sale of certain assets of the Company's
environmental consulting business, as well as a decrease in interest expense
from the year ended December 31, 1997, due to the use of IPO proceeds to repay
the Company's outstanding debt.
Loss from joint venture for the fiscal year ending December 31, 1998, was
approximately ($460,000), or (0.2%) expressed as a percentage of total revenues.
The joint venture, Cap Gemini Hagler Bailly LLC, was created to deliver
information technology consulting services and solutions to electric, gas and
water utilities and service providers in the U.S. and Canada. The Company
expects the joint venture to turn profitable sometime late in the fiscal year
ending December 31, 1999.
The Company's effective tax rate for the year ended December 31, 1998, was
50.4%. The 1998 provision for tax is higher than the provisional tax rate of
39.7% as a result of the non-deductibility for tax reporting purposes of the
compensation charge in connection with subscriptions for the issuance of common
stock, and certain non-deductible merger related costs.
Net income before extraordinary gains for the year ended December 31, 1998,
increased by approximately $10.9 million, to $6.7 million, as a result of a
combination of reasons discussed above.
For the year ended December 31, 1998, there were no extraordinary gains,
compared to approximately $2.3 million in extraordinary gains, net of income tax
expense, for the year ended December 31, 1997. The gains in 1997 were the result
of extinguishment of debt at beneficial terms to the Company.
Net income for the year ended December 31, 1998 increased by approximately
$8.6 million, to $6.7 million, as a result of the reasons discussed above.
1997 Compared to 1996
Revenues for the year ended December 31, 1997, increased by $17.5 million,
or 12.2%, to $160.6 million from the year ended December 31, 1996. Of this
increase, $16.2 million is attributable to consulting revenues, and $1.3 million
is attributable to other revenues. Consulting revenues increased by 11.3% for
the year ended December 31, 1997, as compared to the comparable period of the
prior year. A significant cause of this increase was the increased demand for
management consulting services associated with the restructuring and
deregulation of the electric and gas sectors outside the United States. The
overall increase was constrained by declining revenues generated from a
litigation case which represented approximately 7% of the Company's total
revenues in 1996 and approximately 1% in 1997 and the ending of two major
private sector engagements during the year. Management strategy of deploying
core-consulting staff to create and initiate sales of information-based products
and services also mitigated this growth. Other revenues increased 298.2% for the
year ended December 31, 1997, as compared to the comparable period of the prior
year. The increase in other revenues was the result of an increase in financial
advisory services, as well as the start of the Company's information-based
products and services business.
Cost of services for the year ended December 31, 1997, increased by $10.1
million, or 9.1%, to $120.6 million from the year ended December 31, 1996. Cost
of services as a percentage of revenue decreased from 77.2% in the year ended
December 31, 1996, to 75.1% in the year ended December 31, 1997. The increased
cost was primarily due to an increase from institutional clients, and the lower
percentage to sales was due to continued focus on higher margin private sector
revenues.
SG&A for the year ended December 31, 1997, increased by approximately
$820,000, or 3.2%, to $26.9 million from the year ended December 31, 1996.
Expressed as a percentage of total revenues, SG&A expenses decreased from 18.2%
in the year ended December 31, 1996, to 16.7% in the year ended December 31,
1997, primarily due to less marketing expenses relating to private sector
revenue generation as compared to the comparable period in the prior year. SG&A
expenses for the year ended December 31, 1996, were increased as the Company
focused on its marketing efforts to replace multiyear institutional contracts
which were ending during the year.
Expenses related to the liquidation of a subsidiary decreased by
approximately $334,000 in the year ended December 31, 1997, from the comparable
period in the prior year.
Merger related and other nonrecurring costs for the year ended December 31,
1997 were $1.2 million. There were no merger and related and other non-recurring
costs in the comparable period of the prior year. The majority of the merger
related costs in the year ended December 31, 1997, were associated with the
mergers with Apogee and TB&A.
Stock and stock option compensation for the year ended December 31,
1997, increased by approximately $3.8 million, from the year ended December 31,
1996, to approximately $10.0 million. Substantially all of these costs in the
year ended December 31, 1997 were related to PHB and include non-cash, non-tax
deductible compensation based on the difference between the fair market and book
values of PHB common stock issuable under subscriptions within one year of the
companies' merger. During the year ended December 31, 1996, the Company amended
its stock plan to change the exercise price of future options to be granted to
the market value of the common stock, as opposed to its book value plus an
adjustment for accretion. All of the costs in the year ended December 31, 1996,
represent the aggregate difference between the exercise price of outstanding
options, and the issuance price of common stock sold to employees during 1996,
and the appraised market value of the common stock on December 31, 1997.
Other income (expenses), net increased by approximately $450,000 to
approximately ($400,000) in the year ended December 31, 1997, primarily due to
interest income earned from the investment of IPO funds and a reduction in
interest expense resulting from use of IPO proceeds to pay off outstanding debt
in 1997.
The Company's effective tax rate for the year ended December 31, 1997, was
442.5%. The 1997 provision for tax is higher than the provisional tax rate of
40% as a result of the non-deductibility for tax reporting purposes of the
compensation charge in connection with subscriptions for the issuance of common
stock.
Net loss before extraordinary gains for the year ended December 31, 1997,
decreased by approximately $1.3 million, to ($4.2) million, as a result of the
reasons discussed above.
Extraordinary gains for the year ended December 31, 1997, increased by
approximately $2.2 million, to approximately $2.3 million, from the year ended
December 31, 1996. These gains were the result of the extinguishment of debt at
beneficial terms to the Company.
Net loss for the year ended December 31, 1997, increased by approximately
$840,000, to ($1.9) million, from the year ended December 31, 1996, for the
reasons discussed above.
Liquidity and Capital Resources
As of December 31, 1998, working capital was $54.3 million as compared to
$34.1 million at December 31, 1997. The increase was primarily due to an
increase in cash from the sale of the Company's investments, an increase in
accounts receivable, and a decrease in accrued compensation and benefits.
Net cash of approximately $341,000 was used in operating activities during
the year ended December 31, 1998. Cash provided by net income, depreciation and
amortization, deferred income taxes, and stock and stock option compensation
were offset by a significant increase in accounts receivable, as well as a
decrease in accrued compensation and benefits for the year ended December 31,
1998.
Investment activities provided $1.6 million during the year ended December
31, 1998. The sale of investments for approximately $6.5 million, and proceeds
from the disposition of certain public sector assets for approximately $2.9
million were largely offset by the investment of $4.0 million in office and
computer related equipment, leasehold improvements, and other resources
necessary for the growth of the Company, as well as $3.3 million used to
purchase the assets of TFC and the stock of FPI, the stock of Estudio Q, and the
balance of the Company's interest in a previously majority owned foreign
subsidiary.
Financing activities provided $9.7 million for the year ended December 31,
1998. Cash provided by the issuance of 470,975 shares of the Company's common
stock for consideration, net of proceeds, of $11.8 million to Cap Gemini
America, Inc., and approximately $900,000 from other stock issuance, were
partially offset by payments on net borrowings on the Company's line of credit
and principal payments on debt of approximately $1.5 million and $300,000,
respectively, and a payment of approximately $1.0 million for the purchase of
common stock from a dissenting shareholder resulting from a business combination
during 1998. Net proceeds from equity financing are invested in short-term,
interest-bearing investment grade securities.
The Company's primary source of liquidity for the past 12 months has been
cash flows from sales of common stock, periodically supplemented by borrowings
under a bank line of credit. During the year ended December 31, 1998, the
Company established $50 million in revolving credit facilities with NationsBank.
The balance available under the line of credit at December 31, 1998, was $50.0
million. The Company believes that current projected levels of cash flows and
the availability of financing, including borrowings under the Company's credit
facility, will be adequate to fund its anticipated cash needs, which may include
future acquisitions of complementary businesses, for the next 12 months and
foreseeable future. The Company, depending on market conditions, may consider
other sources of financing, including equity financing.
New Accounting 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 has adopted the effects of
this statement effecive January 1, 1998.
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. 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 operates in principally one
business segment and, accordingly, no additional disclosures are necessary to
comply with this statement.
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 standardizes the accounting for
derivative instruments by requiring that an entity recognize derivatives as
assets or liabilities in the statement of financial position and measure them at
fair value. This Statement is effective for all quarters of all fiscal years
beginning after June 15, 1999. This Statement is not expected to ahve an impact
on the Company's consolidated financial statements.
Year 2000
The Year 2000 issue is the result of computer hardware and software
being designed with the year field being set for two digits instead of four
digits. Computer programs and systems with this problem will be unable to
properly distinguish between the year 2000 and the year 1900. As a result, the
programs could fail or yield incorrect results. The Company's business, as well
of those of its principal suppliers and clients, is dependent on the ability of
its software and hardware systems to properly function. Failure of one or more
of these systems of the Company or a material client or supplier could disrupt
the Company's operations and cause a material adverse impact on the Company's
business, results of operations and financial condition.
The Company's Year 2000 Strategy
The Company has established the Year 2000 Readiness Plan (the "Plan") to
prepare for the Year 2000 issue. This Plan is comprised of the following
elements:
1. Audit, remediation, and testing of internal systems.
2. Obtaining assurance or information on the state of Year 2000 readiness
of our material clients and suppliers who exchange information electronically
with us or upon whom our work product may depend.
3. Developing contingency plans, when practical, to address potential Year
2000 failures.
The Company's goal is to complete implementation of the Plan by
September 30, 1999.
Detailed below are the status of progress and timetables for each of the phases
of the Plan.
Assessment Remediation Testing Implementation
-------------------- ---------------------- ----------------------- ----------------------
IT - Domestic 75% Complete Current Current By 3rd Quarter 1999
-------------------- ---------------------- ----------------------- ----------------------
IT - International By 2nd Quarter 1999 During 2nd Quarter During 2nd Quarter By 3rd Quarter 1999
1999 1999
-------------------- ---------------------- ----------------------- ----------------------
Business Operations Complete Complete Complete Complete
-------------------- ---------------------- ----------------------- ----------------------
Embedded 1st Quarter 1999 1st - 3rd Quarter 1st - 3rd Quarter 1999 By 3rd Quarter 1999
1999
-------------------- ---------------------- ----------------------- ----------------------
3rd Party 2nd Quarter 1999 During 2nd Quarter 2nd - 3rd Quarter 1999 By 3rd Quarter 1999
1999
Year 2000 Readiness Report
The Company made several acquisitions in 1998. It undertook a
comprehensive due diligence examination that identified general Year 2000
Readiness issues for itself and the companies it acquired. The Company recently
formalized its efforts by establishing a Year 2000 Working Committee (the
"Committee") led by its Chief Information Officer to oversee the integration of
its Year 2000 efforts and to implement the Plan. The Committee includes the COO,
CFO, General Counsel, and other Company executives and outside consultants as
required. The Company has engaged a consultant to complete the assessment of its
domestic offices and to assist in the assessment of its major international
offices.
The Company's front office systems (used for the delivery of services
to clients), both hardware and software, were replaced or significantly upgraded
in 1997 and 1998 and were manufactured to be Year 2000 ready (with minor,
vendor-identified problems). The Company currently expects that the process of
updating those systems that are not Year 2000 ready will be completed by the end
of the second quarter of 1999.
The Company does not employ any significant custom programming in its
front office, work product, or back office systems. The Company's work product
is generated almost exclusively with commercially available statistical,
econometric, word processing, spreadsheet, database, or mathematical software
for which the Company has obtained Year 2000 Readiness assurances. These
software products have been audited and updated where appropriate.
The Company will implement a firm wide software application to monitor
Year 2000 compliance of new work product and to provide a testing mechanism for
the re-use of models, spreadsheets, or databases. This application is a
commercially available Year 2000 audit and remediation product specifically
designed for Microsoft Windows compliant software applications.
A conversion was undertaken in 1998 to replace a significant and
non-compliant analytic system (used to service client analysis needs), including
hardware and software, with a compliant system. The implementation is complete
and the conversion of existing analytic applications will be complete by
September 30, 1999.
Back office systems including financial accounting, project accounting,
fixed asset management, human resources, payroll, and conflict management have
been replaced, updated with vendor supplied Year 2000 fixes, or converted to
compliant versions of the software. During the second quarter 1999, the Company
plans to undertake a comprehensive test of its back office systems. Certain
models of personal computers have been identified as non-compliant and will be
replaced in 1999. The number of Year 2000 replacements will not exceed the
normal annual personal computer turnover.
The Company is contacting the vendors of its principal office systems
in order to obtain proof of Year 2000 readiness. The Company's material office
systems include its telephone, communications and networking equipment, security
and facilities systems, copiers, pagers, voicemail, and faxing systems. Because
the Company is highly decentralized with over 22 domestic and international
offices, it does not expect the audit and remediation of these office systems to
be complete before September 30, 1999. Some office systems in the Company's
international offices will not be corrected by December 31, 1999, but the
Company does not expect such systems to materially affect the Company's ability
to complete its engagements.
Clients
The Company's clients include domestic and international companies,
private law firms, the United States and state, local and foreign governments
and governmental agencies and government-owned enterprises. The Company has
responded to Year 2000 compliance surveys from over 50 of its major clients and
shared the readiness information disclosed here. The Company is planning to
survey in the second quarter its top 25 clients (measured by revenue generated
for the Company in 1998) to determine their Year 2000 readiness. The Company
plans to survey other clients if circumstances warrant and to survey new clients
upon new engagements.
Material Vendors
The Company performs analytic work on time sensitive matters. Certain
vendors have been identified as critical to implementing the Plan. These vendors
include payroll, credit, transportation, information resources, and certain
maintenance providers of mission critical hardware and software. If one or more
of the Company's principal vendors experiences significant business disruption
as a result of the Year 2000 issue, it could have a material adverse effect on
the Company's business, results of operations and financial condition. For
example, if the Company's principal suppliers of real-time electricity data are
not functioning properly, the Company may be unable to perform analytic work for
clients. Similarly, if hardware used to perform modeling cannot be supported
because of a Year 2000 issue at the vendor, the Company's ability to meet client
demands for time sensitive analysis might be jeopardized. The Committee will be
contacting the Company's principal vendors during the second quarter of 1999.
Based on the responses, the Committee may need to develop contingency plans to
replace those vendors whose ability to certify Year 2000 readiness is in doubt.
The Committee expects that the process of evaluating and working with outside
vendors will continue into the third quarter of 1999.
Contingency Planning
The Committee is developing a contingency plan in the event that any
material system or vendor will not be Year 2000 ready by December 31, 1999. This
contingency plan is scheduled to be substantially complete by the end of the
third quarter of 1999, although it will be reviewed and refined thereafter as
the Committee continues to evaluate the Company's systems and vendors.
Costs
The Company will budget $300,000 in each of the next two fiscal years,
1999 and 2000, to cover the costs of evaluating systems, acquiring Year 2000
remediation software, additional testing of hardware and software, hiring an
outside Year 2000 consultant, and administrative costs associated with
implementing the Plan. Although the Company believes this amount will be
sufficient to meet the costs of the Company's Year 2000 readiness efforts, there
can be no assurance that the costs to implement the Plan will not significantly
exceed the Company's current estimates. To date, expenditures for Year 2000
readiness have been nominal and associated with the rapid implementation of
already planned front office and back office systems upgrades.
Risks
At present, the Company perceives that its greatest Year 2000 risk is
its dependence on an external network of information providers, vendors, and
experts to complete its engagements. Even if the Company can satisfy itself that
the systems of its material suppliers and partners are Year 2000 ready, those
suppliers and partners in turn rely on a myriad of suppliers to operate their
businesses. Year 2000-related failures far removed from the Company could
trigger a chain of events that could materially harm the Company's business.
Certain clients, despite their best efforts, may suffer the effects of Year 2000
failures of others and thus delay, cancel, or substantially alter work in
progress resulting in a negative effect on the operations of the Company,
including the failure to meet financial expectations or the loss of key
personnel. Such a chain of events could also lead to litigation against the
Company. There can be no assurance that Year 2000 problems will not have a
material adverse effect on the Company's business, results of operations, or
financial condition.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially. The
Company is exposed to market risk from changes in interest rates and foreign
exchange rates. Adverse changes in either interest rates or foreign exchange
rates can have a material effect on the Company's operations.
Interest Rate Risk: The Company is subject to risk from changes in
interest rates. The Company utilizes U.S. dollar denominated borrowings to fund
its operational needs, and as of December 31, 1998, had total outstanding debt
of approximately $1,000,000. A hypothetical 10% adverse change in interest rates
on the Company's total outstanding debt as of December 31, 1998 would not have
been material. Interest rates may move in the Company's favor. While the Company
does not expect to incur material losses as a result of this interest rate risk,
there can be no assurance that losses will not result.
Foreign Currency Exchange Risk: The Company is subject to risk from
changes in foreign exchange rates for its subsidiaries which use a foreign
currency as their functional currency and are translated into U.S. dollars. Such
changes could result in cumulative translation gains or losses that are included
in shareholders' equity.
In the year ended December 31, 1998, approximately 10.8% of the Company's
total revenues were derived from operations in foreign countries including
Argentina, Armenia, Australia, Canada, France, Ireland, Indonesia, Pakistan and
New Zealand. Exchange rate fluctuations between the U.S. dollar and the
currencies of these countries result in positive or negative fluctuations in the
amounts relating to foreign operations reported in the Company's consolidated
financial statements. None of the components of the Company's financial
statements were materially affected by exchange rate fluctuations in the years
ended December 31, 1996, 1997, or 1998.
The potential loss resulting from a hypothetical uniform 10% strengthening
in the value of the U.S. dollar relative to the foreign currencies in which some
of the Company's sales are denominated would have resulted in a decrease in
earnings of approximately $390,000. The potential impact of the same
hypothetical uniform change on the Company's cash flows would have resulted in a
decrease in cash flows of approximately $180,000. This calculation assumes that
each exchange rate would change in the same direction relative to the U.S.
dollar. Foreign exchange rates may move in the Company's favor.
The sensitivity of earnings and cash flows to fluctuations in exchange
rates is periodically assessed by management by applying an appropriate range of
potential rate fluctuations to the Company's assets, liabilities, and projected
results of operations denominated in foreign currency. Historically, the Company
has not used foreign currency options and forward contracts to hedge against the
earnings effects of such fluctuations. While the Company does not expect to
incur material losses as a result of this currency risk, there can be no
assurance that losses will not result.
ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Consolidated Financial Statements of Hagler Bailly are annexed to the
report as pages FS-1 through FS-28. An index to the Financial Statements is set
forth on page 40.
ITEM 9 -- CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCUSSIONS
Not applicable.
PART III
The information required by Items 10 through 13 of this Part III will be
provided in the definitive proxy statement for the Company's 1999 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 no later than April 30, 1999, and is incorporated herein by
reference to the extent provided below.
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF HAGLER BAILLY
Certain Information regarding Executive Officers of the Company is
included in Item 1 of Part I of this 1998 Annual Report on Form 10-K. Other
information in response to this item is incorporated by reference herein from
the sections of the Proxy Statement captioned "ELECTION OF DIRECTORS" and
"SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE."
ITEM 11 -- EXECUTIVE COMPENSATION
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "DIRECTOR COMPENSATION",
"COMPENSATION COMMITTEE REPORT ON COMPENSATION OF EXECUTIVE OFFICERS OF THE
COMPANY", "COMPENSATION INTERLOCKS AND INSIDER PARTICIPATION", "EXECUTIVE
COMPENSATION SUMMARY TABLE", "STOCK OPTION GRANTS DURING 1998", "STOCK OPTION
EXERCISES AND VALUES IN 1998", "EMPLOYMENT ARRANGEMENTS", "COMPARISON OF
FIVE-YEAR TOTAL RETURNS" AND "PERFORMANCE GRAPH".
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "SECURITY OWNERSHIP".
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS".
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
The consolidated financial statements filed as part of this report are
listed in the accompanying Index to Consolidated Financial Statements. The
exhibits filed as part of this report are listed in the accompanying Exhibit
Index, which follows the signature pages to this report.
On November 13, 1998, the Company filed with the Securities and Exchange
Commission, an interim report on Form 8-K/A showing certain optional unaudited
pro-forma combined financial information with respect to the Company and Putnam,
Hayes & Bartlett, Inc.
42
HAGLER BAILLY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors..........................................FS-1
Consolidated Balance Sheets at December 31, 1997
and 1998................................................................FS-2
Consolidated Statements of Operations for the years
ended December 31, 1996, 1997 and 1998..................................FS-3
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1997 and 1998....................FS-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1997 and 1998..................................FS-5
Notes to Consolidated Financial Statements..............................FS-6
FS-3
Report of Independent Auditors
Board of Directors and Stockholders
Hagler Bailly, Inc.
We have audited the accompanying consolidated balance sheets of Hagler Bailly,
Inc. as of December 31, 1997 and 1998, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hagler
Bailly, Inc. at December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
March 12, 1999
Vienna, Virginia
/s/ Ernst & Young LLP
HAGLER BAILLY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
1997 1998
------------------- ------------------
Assets
Current assets:
Cash and cash equivalents $ 5,261 $ 16,165
Investments 6,551 -
Accounts receivable, net of allowance for doubtful accounts of $3,873
and $3,888 as of December 31, 1997 and 1998, respectively 51,857 59,092
Note receivable 1,000 382
Prepaid expenses 1,502 2,620
Other current assets 1,867 304
------------------- ----------------
Total current assets 68,038 78,563
Property and equipment, net 5,513 6,463
Software development costs, net 2,463 898
Intangible assets, net 6,926 14,208
Other assets 1,598 1,290
Deferred income taxes 119 -
------------------- -----------------
Total assets $84,657 $101,422
=================== =================
Liabilities and stockholders' equity
Current liabilities:
Bank line of credit $ 1,500 $ -
Accounts payable and accrued expenses 7,969 8,476
Accrued compensation and benefits 13,467 8,713
Billings in excess of cost 3,126 2,288
Current portion of long-term debt 947 345
Deferred compensation 3,566 -
Income taxes payable 1,952 2,547
Deferred income taxes 1,389 1,900
------------------- ------------------
Total current liabilities 33,916 24,269
Long-term debt, net of current portion 305 681
Minority interest - 177
Deferred income taxes - 927
Other deferred 1,587 1,769
------------------- ------------------
Total liabilities 35,808 27,823
Stockholders' equity :
Common stock:
Class A par value $.01, 50,000 shares authorized, 15,474 and 16,483
issued and outstanding at December 31, 1997 and 1998, respectively 155 165
Additional capital 53,837 72,322
Retained (deficit) earnings (5,161) 1,206
Foreign currency translation 18 (94)
------------------- ------------------
Total stockholders' equity 48,849 73,599
------------------- ------------------
Total liabilities and stockholders' equity $ 84,657 $ 101,422
=================== ==================
See accompanying consolidated notes
HAGLER BAILLY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
For the years ended December 31,
1996 1997 1998
------------------- ------------------- ------------------
Revenues:
Consulting revenues $142,701 $ 158,863 $173,194
Other revenues 440 1,752 4,268
------------------- ------------------- ------------------
Total revenues 143,141 160,615 177,462
Cost of revenues 110,500 120,585 126,204
------------------- ------------------- ------------------
Gross profit 32,641 40,030 51,258
Merger related and other nonrecurring costs - 1,235 9,382
Liquidation of assets 662 328 -
Selling, general and administrative expenses 26,047 26,868 25,112
Stock and stock option compensation 6,172 9,965 2,595
------------------- ------------------- ------------------
(Loss) income from operations (240) 1,634 14,169
Other income (expense)
Interest income 334 1,192 349
Interest expense (1,450) (1,301) (410)
Other income (expense), net 263 (291) 411
Minority interest - - (81)
------------------- ------------------- ------------------
(Loss) income before income tax expense, equity
investment in joint venture and extraordinary gain (1,093) 1,234 14,438
Income tax expense 1,786 5,460 7,275
------------------- ------------------- ------------------
(Loss) income before equity investment in joint venture
and extraordinary gain (2,879) (4,226) 7,163
(Loss) from equity investment in joint venture - - (463)
------------------- ------------------- ------------------
(Loss) income before extraordinary gain (2,879) (4,226) 6,700
Extraordinary gain 145 2,336 -
------------------- ------------------- -----------------
Net (loss) income $ (2,734) $ (1,890) $ 6,700
=================== =================== ==================
Net income (loss) per share:
Basic
Net (loss) income per share before extraordinary gain $ (0.25) $ (0.32) $ 0.42
Net income per share extraordinary gain $ 0.01 $ 0.17 -
Net (loss) income per share $ (0.24) $ (0.14) $ 0.42
Diluted
Net (loss) income per share before extraordinary gain $ (0.25) $ (0.32) $ 0.40
Net income per share extraordinary gain $ 0.01 $ 0.17 -
Net (loss) income per share $ (0.24) $ (0.14) $ 0.40
Weighted average shares outstanding:
Basic 11,321 13,361 15,992
=================== =================== ==================
Diluted 11,321 13,361 16,772
=================== =================== ==================
See accompanying consolidated notes
HAGLER BAILLY, INC
CONSOLIDATED STATEMENTS OF STOCK HOLDERS' EQUITY (in thousands)
FS-4
See accompanying notes
Retained Other Total
Shares Additional Earnings Comprehensive Stockholders'
Class A Class B Amount Capital (Deficit) Income Equity
------- ------- ------ ------- --------- ------ ------
Balance, December 31, 1995 10,893 104 $110 $5,829 $(147) $(552) $5,240
Repayments of notes receivable for common stock - - - 97 - - 97
Issuance of common stock 1,483 - 15 1,323 - - 1,338
Repurchase of common stock (849) - (8) (539) (24) - (571)
Dividends paid - IGA - - - - (133) - (133)
Compensatory stock & options 93 (104) (1) 6,172 - - 6,171
Foreign currency translation - - - - - 549 549
Net loss - - - - (2,734) - (2,734)
------------- --------- ------- ----------- ------- ---------- -------
Comprehensive income (2,185)
-------
Balance, December 31, 1996 11,620 - 116 12,882 (3,038) (3) 9,957
Issuance of common stock - IPO 2,500 - 25 30,240 - - 30,265
Issuance of common stock - other 995 - 10 698 - - 708
Repurchase of common stock (126) - (1) (81) - - (82)
Dividends paid - IGA - - - - (233) - (233)
Compensatory stock & options - - - 9,965 - - 9,965
Exercise of stock options 485 - 5 133 - - 138
Foreign currency translation - - - - - 21 21
Net loss - - - - (1,890) (1,890)
------------ --------- ------- ------------ ------- ---------- -------
Comprehensive income (1,869)
-------
Balance, December 31, 1997 15,474 - 155 53,837 (5,161) 18 48,849
Sale of common stock - Cap Gemini 471 - 5 11,828 - - 11,833
Issue of common stock for purchase of TFC 233 - 2 2,521 - - 2,523
Issue of common stock for purchase of Estudio Q 64 - 1 1,599 - - 1,600
Compensatory stock & options - - - 2,595 - - 2,595
Issuance of common stock - other 193 - 2 544 - - 546
Purchase of common stock -dissenting shareholder (51) - (1) (967) - - (968)
Dividends paid - IGA - - - - (333) - (333)
Exercise of stock options 99 - 1 365 - - 366
Foreign currency translation - - - - - (112) (112)
Net income - - - - 6,700 - 6,700
------------ --------- ------ ------------ ----- ----------- -----
Comprehensive income 6,588
-----
Balance, December 31, 1998 16,483 - $165 $72,322 $1,206 $(94) $73,599
====== ======== ==== ======== ========= ========== =======
See accompanying consolidated notes
HAGLER BAILLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
FS-24
For the years ended December 31,
1996 1997 1998
------------------------------------------------------------
Operating activities
Net (loss) income $ (2,734) $(1,890) $6,700
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities
Depreciation and amortization 2,360 2,908 4,320
Provision for accounts receivable allowance 2,721 2,395 1,135
Extraordinary gain (145) (2,336) -
Gain on sale of public sector assets - - (282)
Provision for deferred income taxes 1,475 (383) 1,530
Stock and stock option compensation 6,171 9,965 2,595
Impairment of loan receivable - - 1,000
Minority interest - - 177
Asset impairment - - 1,107
Loss on equity investment in joint venture - - 463
Liquidation of subsidiary 662 328 -
Changes in operating assets and liabilities:
Accounts receivable (3,016) (18,538) (10,521)
Prepaid expenses (18) (328) (1,118)
Deferred compensation 800 1,050 (3,566)
Other deferred (365) 82 182
Other current assets 332 (1,411) 1,553
Other assets (328) (519) 470
Accounts payable and accrued expenses (302) 1,741 (106)
Accrued compensation and benefits 739 670 (5,362)
Income taxes payable 21 1,908 595
Billings in excess of cost 755 (409) (1,213)
------------------------------------------------------------
Net cash provided by (used in) operating activities 9,128 (4,767) (341)
------------------------------------------------------------
Investing activities
Sale of public sector assets - - 2,855
Amount (due) paid in connection with liquidation of subsidiary (2,172) 1,684 -
Purchase of minority interest in consulting business - (531) -
Investment in note receivable - (1,000) -
(Purchase) sale of investments - (6,551) 6,551
Purchase of acquired companies, net of cash received - - (3,336)
Expenditures for software development - (2,512) -
Purchase of equity investment in joint venture - - (500)
Acquisition of property and equipment (2,034) (3,209) (3,988)
------------------------------------------------------------
Net cash (used in) provided by investing activities (4,206) (12,119) 1,582
------------------------------------------------------------
Financing activities
Sale of common stock 1,338 31,111 912
Sale of common stock - Cap Gemini - - 11,833
Repurchase of common stock (474) (82) (968)
Net payments on bank line of credit (1,166) (2,500) (1,500)
Dividends paid (133) (233) (333)
Proceeds from long-term financing 267 - -
Principal payments on long-term debt (2,846) (9,368) (281)
------------------------------------------------------------
Net cash (used in) provided by financing activities (3,014) 18,928 9,663
------------------------------------------------------------
Net increase in cash and cash equivalents 1,908 2,042 10,904
Cash and cash equivalents, beginning of year 1,311 3,219 5,261
------------------------------------------------------------
Cash and cash equivalents, end of year $3,219 $5,261 $16,165
============================================================
See accompanying consolidated notes
HAGLER BAILLY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
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
Company is headquartered in Arlington, Virginia 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 used to pay off debt then outstanding, fund acquisitions,
and provide working capital needs.
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.
In 1997, the Company acquired a 7.8% minority ownership interest in a
consulting business in the United Kingdom for cash of $531. Due to the
uncertainty of recovery, the Company has established a valuation allowance for
this investment. During 1997 and 1998, the Company provided services to, and
purchased consulting services from, this consulting business of $38, $288, $405
and $2, respectively. At December 31, 1997 and 1998, the accounts receivable
from this consulting business amounted to $135 and $543, respectively.
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars using exchange rates at the balance sheet dates.
Income and expense items are translated at average exchange rates for the
respective periods. The effect of translating these amounts at
different rates is included as a component of comprehensive income in
stockholders' equity. Transaction gains and losses are charged to operations in
the period in which they occur. Transaction gain (losses) in 1996, 1997 and
1998, amounted to $240, ($373) and $420, respectively.
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 costs used in the earnings recognition process. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments, which have an
original maturity when acquired of three months or less. At December 31, 1998,
cash equivalents include $6,810 in money market funds.
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 component of comprehensive income in stockholders' equity, if
material.
Realized gains, 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 5).
Property and Equipment
Property and equipment are recorded at original cost and depreciated using
a combination of straight-line and accelerated methods over their estimated
useful lives of three to ten 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, and also includes subcontractor revenue that is principally related
to services provided by subcontractors and independent consultants which are
billed by the Company to its clients. Other revenue includes those derived from
information-based products and services, financial advisory services, and
publication services.
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 time and materials contracts is recognized in the period the
work is performed. Estimated losses, if any, are provided for at the time such
losses become known.
Revenue from standard daily rate contracts is recognized at amounts
represented by the agreed-upon billing amounts and costs are recognized as
incurred. Estimated losses, if any, are provided for at the time such losses
become known.
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.
Fair Value of Financial Instruments
The Company considers the recorded value of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, accounts
receivable, accounts payable, and accrued compensation to approximate the fair
value of the respective assets and liabilities at December 31, 1997 and 1998.
Intangibles
The purchase price of acquisitions is 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 is recorded as intangible assets, including goodwill, and is amortized
over 5 to 25 years on a straight-line basis. Intangible assets at December 31,
1997 and 1998 are net of accumulated amortization of $1,753 and $2,441,
respectively. Amortization expense for the years ended December 31, 1996, 1997
and 1998, was $683, $736 and $688, respectively.
Statement of Financial Accounting Standards No. 121
The Company assesses the impairment of long-lived assets including
intangible assets in accordance with Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of ("SFAS 121"). SFAS 121 requires impairment losses to be
recognized for long-lived assets when indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the assets' carrying
amount. Intangibles are also evaluated for recoverability by estimating the
projected undiscounted cash flows, excluding interest, of the related business
activities. The impairment loss of these assets, including goodwill, is measured
by comparing the carrying amount of the asset to its fair value with any excess
of carrying value over fair value written off. Fair value is based on market
prices where available, an estimate of market value, or determined by various
valuation techniques including discounted cash flow.
Merger Related and other Nonrecurring Costs
For the years ended December 31, 1996, 1997, and 1998, merger related and
other nonrecurring costs were approximately $0, $1,235 and $9,382, respectively.
Cost of effecting mergers and subsequently integrating the operations of the
various merged companies are recorded as merger related and other nonrecurring
costs when incurred. These costs consist primarily of direct merger costs such
as investment banking, legal, accounting and filing fees, as well as related
costs incurred to realign corporate, administrative, and personnel functions,
implement efficiencies with regard to information systems and offices, change
the corporate identity for the acquired companies, and other expenses incurred
to integrate operations. Also included were nonrecurring charges including
certain asset impairments relating to software development costs and notes
receivable, and the disposition of other investment assets as discussed in Note
18.
Reclassification
Certain amounts in the prior period's financial statements have been
reclassified to conform to the 1998 presentation.
New Accounting 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 has adopted the effects of
this statement effective January 1, 1998.
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. 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 operates in principally one
business segment and, accordingly, no additional disclosures are necessary to
comply with this statement.
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 standardizes the accounting for
derivative instruments by requiring that an entity recognize derivatives as
assets or liabilities in the statement of financial position and measure them at
fair value. This Statement is effective for all quarters of all fiscal years
beginning after June 15, 1999. This Statement is not expected to have an impact
on the Company's consolidated financial statements.
3. Business Combinations and Joint Ventures
On December 1, 1997, the Company exchanged 409,985 shares of its common
stock in exchange for all of the outstanding common stock of Apogee Research
Inc. ("Apogee"). The business combination was accounted for as a pooling of
interests. Accordingly, the consolidated financial statements include the
accounts of the Company, its subsidiaries and Apogee for all periods presented.
On January 28, 1998, the Company purchased the remaining minority interest
of PT Hagler Bailly, a consulting firm located in Jakarta, Indonesia, bringing
the Company's ownership to 100 percent. Total consideration of the acquisition
was $200 in cash. Accordingly, the consolidated financial statements reflect the
results of operations of PT Hagler Bailly since the date of acquisition. As a
result of the transaction, the Company recorded intangible assets of
approximately $200.
On February 23, 1998, the Company issued 454,994 shares of its common stock
in exchange for all the stock of TB&A Group ("TB&A"). The transaction was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements include the accounts of the Company, its subsidiaries and TB&A for
all periods presented. TB&A had revenue and net income of $2,491 and $534,
respectively, for the period from January 1, 1998, to the date of combination.
On March 10, 1998, the Company purchased the remaining minority interest of
Hagler Bailly Indonesia, Inc., and consolidated the subsidiary with PT Hagler
Bailly. Total consideration of the acquisition was $240 in cash. The acquisition
was accounted for as a purchase. The consolidated financial statements have
reflected the results of operations of Hagler Bailly Indonesia, Inc., since its
inception. As a result of the transaction, the Company recorded intangible
assets of approximately $240.
On April 30, 1998, the Company completed the acquisition of Estudio Q
Ingenieros Asociados S.R.L., an Argentinean company ("Estudio Q"), whereby
Estudio Q became a wholly-owned subsidiary of the Company. Total consideration
for the acquisition was approximately $2,400 in the form of $800 cash and an
aggregate of 64,306 shares of Hagler Bailly common stock. The acquisition was
accounted for using the purchase method. Accordingly, the consolidated financial
statements reflect the results of operations of Estudio Q since the date of
acquisition. As a result of the transaction, the Company recorded intangible
assets of approximately $2,700.
On June 16, 1998, the Company and Cap Gemini S.A. and its wholly owned
subsidiary, Cap Gemini America, Inc., entered into an exclusive joint venture to
deliver information technology consulting services and solutions to electric,
gas and water utilities, and service providers in the U.S. and Canada. The
Company has committed to provide $1,000 cash under the joint venture agreements
of which approximately $500 cash and approximately $200 in software development
costs were provided during the year ended December 31, 1998. The Company
accounts for its investment under the equity method and, accordingly, recognized
a loss on equity investment of $463 for the year ended December 31, 1998.
On June 30, 1998, the Company issued 183,550 shares of its common stock in
exchange for all of the stock of Izsak, Grapin et Associes ("IGA"). The
transaction was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements include the accounts of the Company, its
subsidiaries and IGA for all periods presented. IGA had revenue and net income
of $2,342 and $333, respectively, for the period from January 1, 1998, to the
date of combination.
On August 28, 1998, the Company issued 6,548,953 shares of its common stock
in exchange for all of the stock of Putnam, Hayes & Bartlett, Inc. ("PHB"). The
transaction was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements include the accounts of the Company, its
subsidiaries and PHB for all periods presented. PHB had revenue and net income
of $44,903 and $1,869, respectively, for the period from January 1, 1998, to the
date of combination.
On November 17, 1998, the Company completed the acquisition of certain of
the assets and the liabilities of The Fieldston Company ("TFC") and the stock of
Fieldston Publications, Inc. ("FPI"), which became a wholly-owned subsidiary
("Fieldson") of the Company. Total consideration of the acquisition was
approximately $1,300 in cash, 232,558 shares of Hagler Bailly common stock, and
a note payable of $1,000. The acquisition was accounted for as a purchase.
Accordingly, the consolidated financial statements reflect the results of
operations of TFC since the date of acquisition. As a result of the transaction,
the Company recorded intangible assets of approximately $4,800.
Combined and separate results of business combinations accounted for as
poolings of interests during the periods preceding the merger were as follows:
Hagler
Bailly Apogee TB&A PHB IGA Consolidated
------------- ------------ ----------- ------------ ---------- -----------------
Year ended December 31, 1996
Revenues $ 61,620 $ 6,324 $ 6,531 $ 67,745 $ 921 $ 143,141
Net (loss) income (3,622) 191 102 303 292 (2,734)
Year ended December 31, 1997
Revenues $ 77,035 $ 8,021 $ 11,043 $ 62,808 $ 1,708 $ 160,615
Net income (loss) 4,906 522 2,330 (9,966) 318 (1,890)
The combined financial results presented above include adjustments to
conform accounting policies of the companies.
Pro forma operating information reflecting the results of business
combinations accounted for as purchases as if these companies were acquired on
the first date of the respective periods were as follows:
Hagler Bailly (1) Fieldston Estudio Q Adjustments (2) Consolidated
---------------- ------------ ------------ ----------------- ------------------
Year ended December 31, 1997
Revenues $ 160,615 $ 4,352 $1,685 $ - $ 166,652
Net (loss) income (1,890) 451 310 (301) (1,430)
Dilutive weighted average shares 13,361 13,658
Dilutive earnings per share (0.14) (0.10)
Year ended December 31, 1998
Revenues $ 174,588 $ 5,562 $2,707 $ - $182,857
Net (loss) income 6,560 1,153 240 (301) 7,652
Dilutive weighted average shares 16,772 16,987
Dilutive earnings per share 0.39 0.45
(1) Hagler Bailly balance excludes 1998 results of purchased companies.
(2) Amortization of estimated goodwill.
4. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("Statement No. 128"). Statement No. 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 very similar 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 No. 128 requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
For the years ended December 31,
1996 1997 1998
---------------- ----------------- ----------------
Net (loss) income before extraordinary gain $ (2,879) $ (4,226) $ 6,700
Extraordinary gain 145 2,336 -
---------------- ----------------- ----------------
Net (loss) income $ (2,734) $ (1,890) $ 6,700
================ ================= ================
Weighted average shares of common stock
outstanding during the period 11,321 13,361 15,992
Effect of dilutive securities:
Stock options - - 780
---------------- ----------------- ----------------
Weighted average shares of common
stock and dilutive securities 11,321 13,361 16,772
================ ================= ================
Basic earnings per share
Net (loss) income before extraordinary gain $ (0.25) $ (0.32) $ 0.42
Extraordinary gain $ 0.01 $ 0.17 $ -
Net(loss)income $ (0.24) $ (0.14) $ 0.42
Dilutive earnings per share
Net (loss) income before extraordinary gain $ (0.25) $ (0.32) $ 0.40
Extraordinary gain $ 0.01 $ 0.17 $ -
Net (loss) income $ (0.24) $ (0.14) $ 0.40
5. Investments
The composition of available-for-sale investments at December 31, 1997, are
as follows:
Municipal debt security $ 1,001
Mortgage backed debt security 5,406
Equity securities 51
Other 93
-------------------
Total $ 6,551
===================
Interest income on all investments for the years ended December 31, 1996,
1997 and 1998, was approximately $334, $1,192 and $349, respectively.
6. Accounts Receivable
As of December 31 the components of accounts receivable are:
1997 1998
-------------------------------
Billed amounts $42,911 $38,914
Unbilled amounts currently billable 12,531 23,305
Retention not currently billable 288 761
Allowance for possible losses (3,873) (3,888)
------------------------------
Total $51,857 $59,092
===============================
The activity in the allowance for possible losses for years ended December
31 is as follows:
1997 1998
-----------------------------
Balance at beginning of year $2,901 $3,873
Provision for losses charged to expense 2,395 1,135
Charge-offs, net of recoveries (1,423) (1,120)
-----------------------------
Balance at end of year $3,873 $3,888
=============================
All billed and unbilled receivable amounts are expected to be collected
during the next fiscal year. Management has provided an allowance for amounts
that it believes are doubtful based on an analysis of estimated 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.
7. Property and Equipment
Components of property and equipment at December 31 are as follows:
1997 1998
------------------------------
Office equipment and furniture $14,212 $17,100
Leasehold improvements 2,364 3,189
------------------------------
16,576 20,289
Accumulated depreciation and amortization (11,063) (13,826)
-----------------------------
$5,513 $6,463
=============================
Depreciation and amortization expense on property and equipment for the
years ended December 31, 1996, 1997 and 1998, was approximately $1,677, $2,123
and $3,121, respectively. Costs of repairs and maintenance of property and
equipment are charged to expense as incurred.
8. Software Development Costs
At December 31, 1997 and 1998, the Company had $2,463 and $898 of
capitalized software development costs net of $49 and $560 of accumulated
amortization, respectively. Amortization expense for the years ended December
31, 1996, 1997 and 1998 was approximately $0, $49 and $511, respectively. The
Company accounts for these software development costs in accordance with FASB
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed".
Capitalized software 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. During
1998, management determined that certain software development costs were fully
impaired due to the duplication of technologies resulting from the Company's
1998 mergers and the Cap Gemini Hagler Bailly L.L.C. joint venture. As a result
of such impairment, the Company expensed approximately $1,107 as merger related
and other nonrecurring costs (see Note 18).
9. Note Receivable
During 1997, the Company entered into a bridge loan agreement for $1,000
with another company. The loan was due in six equal installments beginning June
1, 1998. The loan accrued interest at 15% and was secured by all of the assets
of the borrower. The loan agreement allowed the Company to purchase an ownership
interest of this company as defined in the loan agreement.
During 1998, the borrower defaulted on its obligation under the note
receivable. Management has determined that the loan is uncollectable and has
written off the entire amount of the original loan as other nonrecurring costs
(see Note 18).
10. Bank Line of Credit
At December 31, 1997, the Company had a line of credit arrangement with a
bank which provided funds up to $15,000 subject to sufficient collateral. The
line was secured primarily by the Company's accounts receivable and contract
rights. Under the terms of the line of credit, interest was payable monthly at
the bank's prime rate with an annual fee equal to 1/4 of 1% of the unused
portion of the available line of credit. The line of credit agreement contained
certain covenants which, among other things, restricted future borrowings and
required the Company to maintain certain financial ratios. At December 31, 1997,
the Company had available borrowing capacity of $15,000 under the line of
credit.
At December 31, 1997, PHB had a line of credit arrangement with a bank
which enabled PHB to borrow up to $4,000 subject to certain restrictions which
limited the borrowing base as defined in the respective lending agreement.
Interest was payable at the bank's base rate or the Federal Funds effective rate
plus 0.5%, and required a commitment fee of 0.5% on the average daily amount of
the unborrowed portion of the commitment, payable quarterly in arrears. At
December 31, 1997, PHB had available borrowing capacity of $2,500 under the line
of credit.
On November 20, 1998, the Company entered into a new line of credit
arrangement with a bank enabling the Company to borrow up to $50,000 subject to
certain restrictions. The Company paid all outstanding balances on its previous
lines of credit, which were terminated upon commencement of the new agreement.
Under the terms of the new agreement, interest is payable at the greater of the
bank's base rate or the Federal Funds effective rate plus 0.5%, or the
applicable London Inter-Bank Offered Rate ("LIBOR") plus an additional
percentage ranging from 0.8% to 1.75% depending on certain financial ratios. The
agreement also requires a commitment fee of 0.19% plus an additional percentage
ranging from 0.01% to 0.06% depending on certain financial ratios, based on the
average daily amount of the unborrowed portion of the commitment, payable
quarterly in arrears. The line of credit matures on November 20, 2001. The line
of credit agreement contains certain covenants, which among other things
restrict future borrowings and require the Company to maintain certain financial
ratios. On December 31, 1998, the Company had available borrowing capacity of
$50,000 under the line of credit.
11. Notes Payable
During 1997, the Company renegotiated the terms of a note payable to a
financial institution resulting in an extraordinary gain. As a result of the
1997 renegotiation, the Company paid the financial institution $360 in cash and
entered into a new note payable of $180, which was outstanding at December 31,
1997. The $180 note was paid in full in December 1998.
At December 31, 1997, TB&A had notes payable to related parties, primarily
employees and directors, of $620. These notes were paid in full in October 1998.
At December 31, 1997, PHB had notes payable to former employees of $431.
These notes were paid in full in October 1998.
The Company has a note payable, related to an acquisition of certain of the
assets and liabilities of The Fieldston Company, in the amount of $1,000. The
payments are due in three annual installments beginning in November 1999, and
the note accrues interest equal to the three month LIBOR rate plus 1.5%.
For the years ended December 31, 1996 and 1997, the Company settled several
notes payable with favorable terms to the Company, resulting in extraordinary
gains of approximately $145 and $2,336, respectively.
The Company incurred interest under all indebtedness of $1,450, $1,301 and
$410 for the years ended December 31, 1996, 1997, and 1998, respectively.
12. Income Taxes
Prior to the IPO of the Company's common stock in 1997 the Company had
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. In addition, prior to its merger with the Company, PHB had
also filed its consolidated federal income tax return on the cash basis. Under
this basis, 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 years ended December 31,
1996 1997 1998
-------------- ------------- -------------
Current:
Federal $120 $4,483 $4,113
State 30 1,098 726
Foreign 161 215 879
-------------- ------------- -------------
311 5,796 5,718
Deferred 1,475 (336) 1,557
-------------- ------------- -------------
Income tax expense $1,786 $5,460 $7,275
============== ============= =============
The Company paid income taxes of $248, $3,117 and $4,995 during 1996, 1997
and 1998, respectively.
Income tax expense varies from the amount computed using statutory rates
as follows:
For the years ended December 31,
1996 1997 1998
---------------- ---------------- ----------------
Tax computed at the Federal statutory rate $(355) $428 $4,909
State income taxes, net of Federal income tax benefit 210 35 722
Non-deductible charge for stock option compensation 1,661 4,000 1,012
Other allowances - 754 -
Non-deductible charge for merger related costs - - 876
Other 270 243 (244)
---------------- ---------------- ----------------
Income tax expense $1,786 $5,460 $7,275
================ ================ ================
The components of temporary differences are as follows:
December 31,
1997 1998
----------------- ------------------
Current deferred tax assets (liabilities):
Billings in excess of cost $ 342 $ -
Accounts receivable (1,421) (2,116)
Valuation allowances (218) -
Other (92) 216
----------------- ------------------
Total current deferred tax assets (liabilities) (1,389) (1,900)
Non-current deferred tax assets (liabilities):
Merger related costs - 448
Provisions for losses 359 954
Accrued compensation and benefits 1,226 1,427
Deferred compensation - 1,237
Other deferred 468 454
Property, equipment and leasehold improvements 367 555
Net operating loss carry forwards 131 20
Cash to accrual adjustment (2,420) (5,941)
Other (12) (81)
----------------- ------------------
Total non-current deferred tax assets (liabilities) 119 (927)
----------------- ------------------
Net deferred tax assets (liabilities) $ (1,270) $(2,827)
================= ==================
13. Stockholders' Equity
The Company in May 1995 issued 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 were subject to a repurchase
provision. Class B shares were not eligible for dividends and had no voting
privileges.
Under the Company's Employee Incentive and Non-Qualified Stock Option and
Restricted Stock Plan (the "Stock Option Plan"), the Company may grant qualified
and non-qualified stock options to employees, consultants and non-employee
members of the board of directors to purchase common stock. Prior to December
31, 1996, the Company's Stock Option 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 Option 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.
The issuance of common stock and repurchase of common stock for the years
ended December 31, 1996, 1997 and 1998 is primarily the result of equity
transactions at PHB and TB&A. These transactions were made under established
Company plans and in a manner consistent with historic patterns of stock
issuance or repurchase.
Effective at December 31, 1996, the Company (a) adopted an amendment to
its Stock Option 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 of which
$4,618 was for options to purchase common stock and $1,554 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.
In connection with the merger with the Company, PHB recognized non-cash,
non-tax deductible compensation charges as of December 31, 1997 and 1998, of
$9,885 and $2,595, respectively. These amounts reflect the difference between
the fair value and the book value of shares of common stock issuable within one
year of the mergers' close.
Options granted after 1996 vest over periods ranging from immediately to
three years and are exercisable for five 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 ten years.
In August of 1998, the Company's shareholders approved an amendment to the
Stock Option Plan that increased the total number of shares of common stock
reserved for issuance from 3,200,000 to 5,000,000. At December 31, 1998,
2,350,542 shares of common stock were available for grant under the Stock Option
Plan.
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 4 years.
For all options issued subsequent to July 9, 1997, in accordance with SFAS
123, the fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1998: 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 in 1997
and 4 years in 1998.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that 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:
For the years ended December 31,
1996 1997 1998
--------------------- --------------------- ---------------------
Net (loss) income $ (2,734) $ (1,890) $ 6,700
FAS 123 expense 37 217 1,045
--------------------- --------------------- ---------------------
Pro forma net (loss) income $ (2,771) $ (2,107) $ 5,655
===================== ===================== =====================
Pro forma (loss) earnings per share:
Basic $ (0.24) $ (0.16) $ 0.35
Diluted $ (0.24) $ (0.16) $ 0.34
The following summarizes option activity:
Class Class Weighted Average
A Options B Options Exercise Price
--------------- --------------- --------------------
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
1998
Granted 1,149,760 20.32
Exercised (99,380) 3.49
Canceled (126,046) 12.60
---------------
Outstanding at December 31, 1998 2,038,711 13.44
===============
Exercisable at December 31, 1998 529,956 $3.04
===============
The grant date weighted average fair value of options granted in 1996,
1997, and 1998 was $0.74, $1.98 and $20.32, respectively.
At December 31, 1998, the price range of options outstanding are as
follows:
Weighted
Average
Options Exercise Price Average Remaining
Outstanding Per Share Contractual Life
------------------- -- --------------- -- --------------------
Less than $0.99 370,473 $ 0.17 6.38
$1.00 - $9.99 427,285 6.21 7.16
$10.00 - $19.99 468,774 16.19 9.62
$20.00 - $29.99 763,179 22.04 9.39
$30.00 & Over 9,000 30.00 9.37
-------------------
Total 2,038,711 13.44 8.43
===================
14. Operating Leases
The Company leases office space and equipment located throughout the
United States and worldwide. Substantially all office space leases provide for
the Company to pay a pro rata 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 of the annual minimum rental payments required
under the operating leases that have initial or remaining non-cancellable lease
terms in excess of one year as of December 31, 1998:
Years ended December 31,
1999 $ 8,131
2000 8,088
2001 8,130
2002 6,017
2003 4,469
Thereafter 20,661
-----------------
Total minimum rental payments $ 55,496
=================
Total rental expense for the years ended December 31, 1996, 1997 and 1998,
was approximately $7,672, $7,468 and $8,451, 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. 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.
PHB sponsors two defined contribution plans for its employees: the PHB
Profit Sharing Plan and the PHB 401(k) plan. The plans cover all employees of
PHB who meet the eligibility requirements. The Profit Sharing Plan permits only
employer discretionary profit sharing contributions. Eligible participants of
the 401(k) savings plan may contribute up to 15% of their qualified compensation
annually, subject to federal limitations.
The Company is currently evaluating the current retirement plans mentioned
above as well as those plans under its other subsidiaries in order to combine
those of the merged subsidiaries with their own. The Company's expenses related
to its discretionary matching and other contributions under all plans for 1996,
1997 and 1998 were approximately $2,612, $2,628 and $925, respectively.
16. Divestitures / Sale of Assets
On December 23, 1996, the Company caused Putnam, Hayes & Bartlett Limited
("PHB Ltd"), the Company's U.K. subsidiary, to cease operations and appointed a
liquidator to wind up PHB Ltd's affairs. The operating results of PHB Ltd have
been included in the Company's consolidated statements of operations until the
liquidation date. The Company recognized the net amount due as of December 31,
1996, in connection with the liquidation of PHB Ltd as a current asset of
$2,172. This amount represented management's estimate of the net proceeds
ultimately expected to be recovered upon collection of accounts receivable from
clients and payments of obligations to creditors. As of December 31, 1997, the
Company estimated that $328 of the $2,172 was not collectable. Of the Company's
loss of $663 recognized in 1996 in connection with the liquidation of PHB Ltd,
$549 represented cumulative foreign currency transaction losses which had
previously been recorded as a separate component of the Company's stockholders'
equity.
On September 30, 1998, the Company sold certain assets of a portion of its
public sector consulting practice due to conflicts of interest resulting from
the Company's business combinations (see Note 3). As a result of the
transaction, the Company sold assets for approximately $2,855 resulting in a
gain of approximately $282 which was included in other income.
In December 1998, the Company made the decision to cease operations in its
financial advisory services business, HB Capital, Inc., resulting in expenses of
approximately $1.8 million (see Note 18).
17. 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, whose audits 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, 1997 or 1998.
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, 1997 and 1998, cash of approximately $2,502 and $4,087,
respectively, was located in foreign bank accounts.
Major Customers
At December 31, 1997 and 1998, included in accounts receivable was $9,143
and $12,017, 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 government agencies and
private companies within the United States and worldwide. During 1996, 1997 and
1998, the Company recognized approximately $25,997, $31,792 and $38,501,
respectively, of its revenue from the United States Agency for International
Development ("USAID"), a U.S. government agency. Revenues earned from foreign
customers, both commercial and governmental, were approximately $10,479, 14,031
and $19,232 for the years ended December 31 1996, 1997 and 1998, respectively.
18. Merger Related and Other Nonrecurring Costs
Merger related and other nonrecurring costs were recorded in connection
with the business combinations described in Note 2, and impairments resulting
from the Company's evaluation of certain assets. The following represents a
detail of merger related and other nonrecurring costs:
For the years ended December 31,
1997 1998
-------------- ----------------
Merger related costs $ 1,235 $ 6,495
Impairment of software development costs - 1,107
Impairment of investments and related infrastructure
related to termination of financial advisory services
operations
- 1,780
--------------- -----------------
Total $ 1,235 $ 9,382
=============== =================
Merger related costs consist primarily of direct costs such as investment
banking, legal, accounting, and filing fees as well as consolidation costs from
the closing of duplicate locations, realigning regional and corporate functions,
and reducing personnel. At December 31, 1998, the accompanying consolidated
balance sheet includes accrued merger related costs of $546, classified as
accrued expenses, consisting of involuntary employee termination costs of $171
and facility related expenses of $375.
Certain software development costs were impaired due to the duplication of
technologies resulting from the Company's business combinations and its joint
venture with Cap Gemini. Management determined that as a result of these
transactions certain capitalized software balances would not generate future
cash flows. Consequently, management determined that the value of the related
assets had been impaired and has recorded a write off of approximately $1,107.
During the fourth quarter of 1998, management determined that certain
investments held by the Company and the related infrastructure which managed
such investments, were impaired. Accordingly, management decided to cease
operations of its financial advisory services operations and determined that
certain investments were fully impaired and recognized a loss of $1,780, which
included the write off of a $1,000 note receivable (see Note 9). At December 31,
1998, the balance sheet included costs of $616 classified as accrued expenses,
consisting of legal expenses of $140, involuntary employee termination costs of
$170, lease termination and other facility costs of $200, and other general
accrued expenses of $106.
19. Subsequent Events
On February 8, 1999, the Company acquired all of the outstanding stock of Lacuna
Consulting Limited, a United Kingdom corporation, in exchange for 65,000 shares
of the Company's common stock. The acquisition was accounted for using the
purchase method.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 30, 1999 By:/s/ Henri-Claude A. Bailly
------------------------------------------------
Henri-Claude A. Bailly
President and Chief Executive Officer
Dated: March 30, 1999 By:/s/ Glenn J. Dozier
------------------------------------------------
Glenn J. Dozier
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
Dated: March 30, 1999 By:/s/ Howard W. Pifer, III
---------------------------------------------------
Howard W. Pifer, III
Chairman of the Board
Dated: March 30, 1999 By:/s/ Jasjeet S. Cheema
---------------------------------------------------
Jasjeet S. Cheema
Director
Dated: March 30, 1999 By:/s/ William E. Dickenson
---------------------------------------------------
William E. Dickenson
Director
Dated: March 30, 1999 By:/s/ R. Gene Brown
---------------------------------------------------
R. Gene Brown
Director
Dated: March 30, 1999 By:/s/ Robert W. Fri
---------------------------------------------------
Robert W. Fri
Director
Dated: March 30, 1999 By:/s/ Richard H. O'Toole
---------------------------------------------------
Richard H. O'Toole
Director
Dated: March 30, 1999 By:/s/ Fred M. Schriever
---------------------------------------------------
Fred M. Schriever
Director
Dated: March 30, 1999 By:/s/ Alain M. Streicher
---------------------------------------------------
Alain M. Streicher
Director
EXHIBIT INDEX
Exhibit
No. Description
2 Sale Agreement between RCG International, Inc., and Hagler Bailly
Consulting, Inc. (1)
2.1 Agreement and Plan of Merger by and among Hagler Bailly, Inc.,
PHB Acquisition Corp. and Putnam, Hayes and Bartlett, Inc., dated
as of June 11, 1998. (5)
3.1 By-Laws of the Company, as amended. (6)
3.2 Amended Restated Certificate of Incorporation of the Company. (7)
4 Specimen Stock Certificates. (1)
4.1 Registration Rights Agreement dated November 18, 1997 by and
between Hagler Bailly, Inc. and Richard R. Mudge, acting as
Stockholders' Representation. (3)
4.2 Form of Escrow Agreement by and among the Company, PHB
Acquisition Corp., William E. Dickenson as Stockholders'
Representative and State Street Bank and Trust Company, as Escrow
Agent. (5)
4.3 Registration Rights Agreement dated February 23, 1998 by and
between Hagler Bailly, Inc. and Michael J. Beck, acting as
Stockholders' Representative.
4.4 Registration Rights Agreement dated November 17, 1998 by and
between Hagler Bailly, Inc. and the stockholders of Fieldston
Publications, Inc. and The Fieldston Company.
10.2 Form of Non-Compete, Confidentiality and Registration Rights
Agreement between the Company and each stockholder. (1)
10.3 Lease by and between Wilson Boulevard Venture and RCG/Hagler
Bailly, Inc. dated October 25, 1991. (1)
10.4 First Amendment to Lease by and between Wilson Boulevard Venture
and RCG/Hagler Bailly, Inc., dated February 26, 1993. (1)
10.5 Second Amendment to Lease by and between Wilson Boulevard Venture
and RCG/Hagler Bailly, Inc., dated December 12, 1994. (1)
10.6 Lease by and between Bresta Futura V.B.V. and Hagler Bailly
Consulting, Inc. dated May 8, 1996. (1)
10.7 Lease by and between L.C. Fulenwider, Inc., and RCG/Hagler
Bailly, Inc. dated December 14, 1994. (1)
10.8 Lease by and between University of Research Park Facilities Corp.
and RCG/Hagler Bailly, Inc., dated April 1, 1995. (1)
10.9 Credit Agreement by and between Hagler Bailly Consulting, Inc.
and State Street Bank and Trust Company, dated May 17, 1995. (1)
10.10Amendment to Credit Agreement by and between Hagler Bailly
Consulting, Inc. and State Street Bank and Trust Company, dated
as of June 20, 1996. (1)
10.11Extension Agreement by and between Hagler Bailly Consulting,
Inc. and State Street Bank and Trust Company, dated as of August
1, 1996. (1)
10.12Amendment to Credit Agreement by and between Hagler Bailly
Consulting, Inc. and State Street Bank and Trust Company, dated
as of November 12, 1996. (1)
10.13Term Note by and between Hagler Bailly Consulting, Inc., and
State Street Bank and Trust Company, dated May 26, 1995. (1)
10.14Revolving Credit Note by and between Hagler Bailly Consulting,
Inc. and State Street Bank and Trust Company dated May 26, 1995.
(1)
10.15Amendment to Credit Agreement by and between Hagler Bailly
Consulting, Inc., and State Street Bank and Trust Company, dated
as of June 12, 1997. (1)
10.16Credit Agreement by and among Hagler Bailly Consulting, Inc.,
Hagler Bailly Services, Inc. and State Street Bank and Trust
Company, dated as of September 30, 1997. (2)
10.17Promissory Note by Hagler Bailly Consulting, Inc. and Hagler
Bailly Services, Inc. to State Street Bank and Trust Company,
dated September 30, 1997. (2)
10.18Security Agreement by and between Hagler Bailly Consulting, Inc.
and State Street Bank and Trust Company, dated as of September
30, 1997. (2)
10.19Security Agreement by and between Hagler Bailly Services, Inc.
and State Street Bank and Trust Company, dated as of September
30, 1997. (2)
10.20Guaranties by Hagler Bailly, Inc. to State Street Bank and Trust
Company, dated September 30, 1997. (2)
10.21Guaranties by HB Capital, Inc. to State Street Bank and Trust
Company, dated September 30, 1997. (2)
10.22Subordination Agreement and Negative Pledge/Sale Agreement by
and between Hagler Bailly, Inc. and State Street Bank and Trust
Company for Hagler Bailly Consulting, Inc., dated September 30,
1997. (2)
10.23Subordination Agreement and Negative Pledge/Sale Agreement by
and between Hagler Bailly, Inc. and State Street Bank and Trust
Company for Hagler Bailly Services, Inc., dated September 30,
1997. (2)
10.24Guaranty of Monetary Obligations to Bresta Futura V.B.V. by
Hagler Bailly, Inc., dated July 23, 1997. (2)
10.25Amendment to Credit Agreement by and between Hagler Bailly
Consulting, Inc. and State Street Bank and Trust
Company dated May 18, 1998. (6)
10.26Sublease Agreement by and between Coopers and Lybrand L.L.P. and
Hagler Bailly, Inc. dated December 5, 1997. (6)
10.27Employment Agreement between the Company and Henri-Claude A.
Bailly, dated June 10, 1998. (7)
10.28Employment Agreement between the Company and William E.
Dickenson, dated June 10, 1998. (7)
10.29Employment Agreement between the Company and Howard W. Pifer
III, dated June 10, 1998. (7)
10.30Hagler Bailly, Inc. Amended and Restated Employee Incentive and
Non-Qualified Stock Option and Restricted Stock
Plan. (7)
10.31Credit Agreement by and between Hagler Bailly, Inc. and The
Lenders From Time to Time a Party thereto, as Lenders and
NationsBank, N.A., dated November 20, 1998.
10.32Revolving Note by and between Hagler Bailly, Inc. and
NationsBank, N.A., dated November 20, 1998.
10.33Swing Line Note by and between Hagler Bailly, Inc. and
NationsBank, N.A., dated November 20, 1998.
10.34Subsidiary Guarantee by and among Hagler Bailly Services, Inc.,
Hagler Bailly Consulting, Inc., HB Capital, Inc., Putnam, Hayes &
Bartlett, Inc., TB&A Group, Inc., Theodore Barry & Associates,
Private Label Energy Services, Inc., Fieldston Publications, Inc.
and NationsBank, N.A., dated November 20, 1998.
10.35Form of Security Agreement by and between Hagler Bailly, Inc. and
NationsBank, N.A., dated November 20, 1998.
10.36Security Agreement by and between Hagler Bailly Consulting, Inc.
and NationsBank, N.A., dated November 20, 1998.
10.37Security Agreement by and between Hagler Bailly Services, Inc.
and NationsBank, N.A., dated November 20, 1998.
10.38Security Agreement by and between HB Capital, Inc. and
NationsBank, N.A., dated November 20, 1998.
10.39Security Agreement by and between Putnam, Hayes & Bartlett, Inc.
and NationsBank, N.A., dated November 20, 1998.
10.40Security Agreement by and between TB&A Group, Inc. and
NationsBank, N.A., dated November 20, 1998.
10.41Security Agreement by and between Theodore Barry & Associates and
NationsBank, N.A., dated November 20, 1998.
10.42Security Agreement by and between PHB Hagler Bailly, Inc. and
NationsBank, N.A., dated February 22, 1999.
10.43Security Agreement by and between Private Label Energy Services,
Inc. and NationsBank, N.A., dated November 20,
1998.
10.44Security Agreement by and between Fieldston Publications, Inc.
and NationsBank, N.A., dated November 20, 1998.
10.45Lease by and between One Memorial Drive Limited Partnership and
Putnam, Hayes & Bartlett, Inc. dated January 1,
1998.
10.46Lease by and between George H. Beuchert, Jr., Trustee, Thomas J.
Egan, Trustee, Oliver T. Carr, Jr., Trustee, William Joseph H.
Smith, Trustee, and the Kiplinger Washington Editors, Inc.,
Trustee, acting collectively as trustee on behalf of the
beneficial owner, The Greystone Square 127 Associates, and
Putnam, Hayes & Bartlett, Inc. dated March 31, 1997.
10.47First Amendment to Lease by and between Greystone Square 127
Limited Liability Company, as successor in interest collectively
to The Greystone Square 127 Associates, and George H. Beuchert,
Jr., Trustee, and The Kiplinger Washington Editors, Inc.,
Trustee, the owners of record who held legal title to the
Building as trustees on behalf of the Greystone Square 127
Associates, the former beneficial owners of the Building, and
Putnam, Hayes & Bartlett, Inc. dated February 10, 1998.
21 Subsidiaries
23.1 Consent of Option Plan Amendments by Ernst & Young LLP,
independent auditors
24 Powers of Attorney (included on Signature Pages) (1)
27.1 Financial Data Schedule - December 31, 1998
27.2 Restated Financial Data Schedule - December 31, 1997
- -------------------------------------------------------------------------------
(1) Included in the Company's Registration Statement on Form S-1 (No.
333-22207) and incorporated herein by reference thereto.
(2) Included in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein by
reference thereto.
(3) Included in the Company's Current Report on Form 8-K filed on
December 16, 1997 and incorporated herein by reference thereto.
(4) Included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference
thereto.
(5) Included in the Company's Proxy Statement for Special Meeting of
Stockholders dated July 24, 1998 on Form DEF 14A and incorporated
herein by reference thereto.
(6) Included in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference
thereto.
(7) Included in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 and incorporated herein by
reference thereto.