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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________
Commission File Number: 0-29292
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HAGLER BAILLY, INC.
(Exact name of registrant as specified in its charter)
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Delaware 54-1759180
(State or other jurisdiction of incorporation or organization) I.R.S. Employer
Identification Number
1530 Wilson Boulevard, Suite 400, Arlington, VA 22209
(Address of principal executive offices) (Zip Code)
703-351-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes {xx} No{ }
As of July 31, 1999, the Registrant had 16,503,866 shares of its common stock
outstanding.
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i
TABLE OF CONTENTS
PART I
ITEM 1. FINANCIAL STATEMENTS 1
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31,
1998 1
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 (UNAUDITED) 2
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND 1998 (UNAUDITED) 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 6
PART II
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 21
1
PART I
Item 1. Financial Statements
Hagler Bailly, Inc.
Consolidated Balance Sheets
(in thousands)
June 30, December 31,
1999 1998
-----------------------------------------
Assets (unaudited)
Current assets:
Cash & cash equivalents $ 11,587 $ 16,165
Accounts receivable, net of allowance of $3,895 and $3,888
in 1999 and 1998, respectively 60,376 59,092
Note receivable - 382
Prepaid expenses 2,845 2,620
Other current assets 649 304
------------------- ---------------------
Total current assets 75,457 78,563
Property and equipment, net 7,020 6,463
Software development costs, net 462 898
Intangible assets, net 16,798 14,208
Other assets 1,409 1,290
------------------- ---------------------
Total assets $ 101,146 $ 101,422
=================== =====================
Liabilities and stockholders' equity Current liabilities:
Accounts payable and accrued expenses $ 7,027 $ 8,476
Accrued compensation and benefits 10,092 8,713
Billings in excess of cost 2,268 2,288
Current portion of long-term debt 333 345
Income taxes payable 1,123 2,547
Deferred taxes 1,900 1,900
------------------- ---------------------
Total current liabilities 22,743 24,269
Long-term debt, net of current portion 674 681
Minority interest 257 177
Deferred income taxes 927 927
Other deferred 1,804 1,769
------------------- ---------------------
Total liabilities 26,405 27,823
Stockholders' equity:
Common stock, $0.01 par value, 50,000 shares authorized;
16,504 and 16,483 issued and outstanding at June 30, 1999 and December 165 165
31, 1998, respectively
Additional capital 70,889 72,322
Retained earnings 3,898 1,206
Foreign currency translation (211) (94)
------------------- ---------------------
Total stockholders' equity 74,741 73,599
------------------- ---------------------
=================== =====================
Total liabilities and stockholders' equity $ 101,146 $ 101,422
=================== =====================
See accompanying notes.
Hagler Bailly, Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
Revenues:
Consulting revenues $ 44,237 $45,207 $ 83,924 $ 83,138
Other revenues 320 1,139 863 2,454
----------------- ----------------- ----------------- -----------------
Total revenues 44,557 46,346 84,787 85,592
Cost of services 33,718 32,914 64,341 61,681
----------------- ----------------- ----------------- -----------------
Gross profit 10,839 13,432 20,446 23,911
Merger related and other non-recurring costs - 1,352 - 1,719
Selling, general and administrative expenses 8,161 6,509 15,744 11,393
Stock and stock option compensation - 430 - 2,595
----------------- ----------------- ----------------- -----------------
Income from operations 2,678 5,141 4,702 8,204
Other income (expenses), net 4 (31) 91 (79)
----------------- ----------------- ----------------- -----------------
Income before income tax expense and loss from equity
investment in joint venture 2,682 5,110 4,793 8,125
Income tax expense 1,085 2,220 1,871 4,294
----------------- ----------------- ----------------- -----------------
Income before loss from equity investment in joint
venture 1,597 2,890 2,922 3,831
Loss from equity investment in joint venture, net of tax (87) - (230) -
----------------- ----------------- ----------------- -----------------
Net income $ 1,510 $ 2,890 $2,692 $ 3,831
================= ================= ================= =================
================= ================= ================= =================
Net income per share:
Basic $ 0.09 $ 0.18 $ 0.16 $ 0.25
Diluted $ 0.09 $ 0.17 $ 0.16 $ 0.23
Weighted average shares outstanding:
Basic 16,508 15,777 16,533 15,599
================= ================= ================= =================
Diluted 16,701 16,619 17,041 16,415
================= ================= ================= =================
See accompanying notes.
Hagler Bailly, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Six months ended June 30,
1999 1998
------------------- --------------------
Operating activities
Net income $ 2,692 $ 3,831
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization expense 2,865 3,459
Stock and stock option compensation - 2,595
Provision for deferred income taxes - 722
Provision for accounts receivable 850 133
Loss on equity investment in joint venture 230 -
Minority interest 80 -
Changes in operating assets and liabilities:
Accounts receivable (1,658) (10,923)
Note receivable 382 -
Prepaid expenses (1,075) (3,542)
Other current assets (319) 1,170
Other assets (337) 171
Deferred compensation - 85
Accounts payable and accrued expenses (1,563) 950
Accrued compensation and benefits 1,083 (329)
Billings in excess of cost (138) (132)
Income taxes payable (1,457) (1,952)
Other deferred 37 1,248
------------------- --------------------
Net cash provided by (used in) operating activities 1,672 (2,514)
Investing activities
Acquisition of property and equipment (1,506) (3,484)
Purchase of investments - (777)
Amount received in liquidation of subsidiary - 160
Purchase of acquired companies (903) (1,239)
------------------- --------------------
Net cash used in investing activities (2,409) (5,340)
Financing activities
Issuance of common stock 125 12,215
Purchase of treasury stock (3,947) -
Dividends paid by foreign subsidiary - (333)
Net payments on bank line of credit - (1,260)
Payments on long term debt (19) (627)
------------------- --------------------
Net cash (used in) provided by financing activities (3,841) 9,995
Net (decrease) increase in cash and cash equivalents (4,578) 2,141
Cash and cash equivalents, beginning of period 16,165 5,261
------------------- --------------------
Cash and cash equivalents, end of period $ 11,587 $ 7,402
=================== ====================
See accompanying notes.
HAGLER BAILLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of
Hagler Bailly, Inc. (the "Company") have been prepared pursuant to the rules of
the Securities and Exchange Commission ("SEC") for quarterly reports on Form
10-Q and do not include all of the information and note disclosures required by
generally accepted accounting principles. The information furnished herein
reflects all adjustments, of a normal recurring nature, which are, in the
opinion of management, necessary for a fair presentation of results for these
interim periods.
The interim results of operations are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31, 1999.
Note 2. Earnings per Share
Basic earnings per share is computed based on the weighted average
number of shares of common stock outstanding during the respective periods.
Diluted earnings per share is inclusive of the dilutive effect of unexercised
stock options using the treasury stock method. Weighted average share figures
are as follows (in thousands):
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Net Income $1,510 $2,890 $2,692 $3,831
----------------- ------------------- ---------------- ------------------
----------------- ------------------- ---------------- ------------------
Weighted average shares of common
stock outstanding during the period
16,508 15,777 16,533 15,599
Effect of dilutive securities:
Stock options 193 842 508 816
----------------- ------------------- ---------------- ------------------
----------------- ------------------- ---------------- ------------------
Weighted average shares of common
stock and dilutive securities
16,701 16,619 17,041 16,415
================= =================== ================ ==================
Note 3. Business Combinations
On April 30, 1999, the Company acquired all of the outstanding stock of
Washington International Energy Group, Ltd. ("WIEG"), a Washington D.C. based
worldwide provider of energy and environmental policy consulting research
services, in exchange for 144,210 shares of the Company's common stock and
approximately $850,000 in cash. The transaction was accounted for as a purchase.
Accordingly, the consolidated financial statements reflect the results of
operations of WIEG since the date of acquisition. As a result of the
transaction, the Company recorded intangible assets of approximately $1.5
million.
On June 1, 1999, the Company acquired the remaining minority interest
of its joint venture Hagler Bailly Risk Advisors LLC, a limited liability
company located in Houston, Texas, from Objective Resources Risk Advisors LLC
bringing the Company's ownership to 100%.
Note 4. Stock Repurchase Plan
The Company is authorized to repurchase up to 1.5 million shares of the
Company's common stock in the open market or in privately negotiated
transactions. As of June 30, 1999, the Company had repurchased 536,600 shares.
Note 5. Components of Comprehensive Income
Comprehensive income includes the Company's net earnings adjusted for
changes, net of tax, of cumulative translation adjustments. Comprehensive income
for the three and six months ended June 30, 1999 and 1998 are as follows (in
thousands):
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Comprehensive Income:
Net income $ 1,510 $ 2,890 $ 2,692 $ 3,831
Foreign translation
adjustment (42) (53) (71) (148)
----------------- --------------- ---------------- -----------------
Total comprehensive income
$ 1,468 $ 2,837 $ 2,621 $ 3,683
================= =============== ================ =================
================= =============== ================ =================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical in
nature, are intended to be, and are hereby identified as, "forward looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended by Public Law 104-67.
Forward-looking statements may be identified by words including "anticipate,"
"believe," "estimate," "expect" and similar expressions. The Company cautions
readers that forward-looking statements, including without limitation, those
relating to the Company's future business prospects, revenues, working capital,
liquidity, and income, are subject to certain risks and uncertainties that would
cause actual results to differ materially from those indicated in the
forward-looking statements, due to several important factors such as
concentration of the Company's revenues from a relatively limited number of
public and private clients involved in the energy and network industries, the
Company's ability to attract, retain and manage professional and administrative
staff, fluctuations in quarterly results, risks related to acquisitions, and the
fact that historical operations and performance are not necessarily indicative
of future operations and performance, among others, and other risks and factors
identified from time to time in the Company's reports filed with the SEC,
including the risk factors identified in the Company's Registration Statement
(No. 333-22207) on Form S-1 and the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
The Company, together with its wholly owned subsidiaries PHB Hagler
Bailly Inc., Hagler Bailly Services, Inc., and its domestic and foreign wholly
owned subsidiaries, is a leading provider of professional services to corporate
and government clients on energy, network industries, and the environment. As of
June 30, 1999, Hagler Bailly employed a staff of 845, of which over two-thirds
were consulting and technical professionals. The Company's common stock is
quoted on the NASDAQ National Market under the symbol, "HBIX".
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. These revenues are derived from 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 products and services, and
publication of newsletters, reference manuals and data series for the energy and
transportation industries. The Company's client base includes both the public
and commercial rate sector. Revenue from the commercial rate 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 / commercial
rate sector business mix. Through strategic acquisitions and internal growth,
the Company has increased its commercial rate sector client base, and will
continue to pursue such opportunities in the future.
On April 30, 1999, the Company acquired all of the outstanding stock of
WIEG, in a cash and stock transaction. The transaction was accounted for as a
purchase.
Results of Operations
The following table presents for the periods indicated the percentage
of revenues represented by certain income and expense items, and the percentage
period-to-period increase (decrease) in such items:
% Period-to-Period
Percentage of Revenues Increase (Decrease) of Dollars
--------------------------------------------- -----------------------------------
Three months Six months
ended June ended June
30, 1999 30, 1999
compared to compared to
three months six months
ended June ended June
30, 1998 30, 1998
---------------- ---------------
Three months ended Six months ended
June 30, June 30,
---------------------- ------------------- ---------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
---------------- ---------------
Revenues:
Consulting 99.3 97.5 99.0 97.1 (2.1) 0.9
Total revenues 100.0 100.0 100.0 100.0 (3.9) (.9)
Cost of services 75.7 71.0 75.9 72.1 2.4 4.3
Merger related and other
non-recurring costs - 2.9 - 2.0 (100.0) (100.0)
Selling, general, and administrative
expenses 18.3 14.0 18.6 13.3 25.4 38.2
Stock and stock option compensation
- 1.0 - 3.0 (100.0) (100.0)
Income from operations 6.0 11.1 5.6 9.6 (61.3) (62.4)
Other income (expenses), net 0.0 (0.1) 0.1 (0.1) 114.4 215.3
Income before income tax expense and
loss from equity investment in
joint venture 6.0 11.0 5.7 9.5 (61.1) (61.5)
Income tax expense 2.4 4.8 2.2 5.0 (60.5) (62.2)
Income before loss from equity
investment in joint venture 3.6 6.2 3.5 4.5 (61.5) (61.0)
Loss from joint venture (0.2) - (0.3) - (100.0) (100.0)
Net income 3.4 6.2 3.2 4.5 (63.6) (64.1)
Three months ended June 30, 1999 compared with three months ended June 30, 1998
Revenues for the three months ended June 30, 1999, decreased by
approximately $1.8 million, or 3.9%, to $44.6 million from the three months
ended June 30, 1998. Of this decrease, approximately $1.0 million was
attributable to consulting revenues and approximately $0.8 million was
attributable to other revenues. Consulting revenues decreased 2.1% for the three
months ended June 30, 1999, as compared to the comparable period of the prior
year. This decrease was primarily the result of the sale of certain assets of
the Company's public sector consulting practice in September 1998, partially
offset by increases resulting from acquisitions and internal growth in the
commercial rate sector. Other revenues decreased by 71.9 % for the three months
ended June 30, 1999 as compared to the comparable period of the prior year. This
decrease was the result of the Company's decision to cease operations in its
financial advisory services. In the three months ended June 30, 1999,
approximately 99.3% of the Company's revenues were derived from consulting
revenues, as compared with 97.5% in the three months ended June 30, 1998.
Cost of services for the three months ended June 30, 1999, increased by
approximately $0.8 million or 2.4%, to $33.7 million from the three months ended
June 30, 1998. Cost of services as a percentage of revenue increased from 71.0%
in the three months ending June 30, 1998, to 75.7% in the three months ending
June 30, 1999, primarily the result of an increase in staffing costs to support
an anticipated increase of business and an increase in cash compensation paid to
consulting staff.
Selling, general and administrative expenses ("SG&A") for the three
months ended June 30, 1999, increased by approximately $1.7 million or 25.4%, to
$8.2 million from the three months ended June 30, 1998. Expressed as a
percentage of total revenues, SG&A expenses increased from 14.0% in the three
months ended June 30, 1998 to 18.3% in the three months ended June 30, 1999.
This increase is reflective of increased business development costs and
duplication of certain administrative costs related to the Company's recent
business combinations.
There were no merger related and other non-recurring costs for the
three months ended June 30, 1999, compared with approximately $1.4 million in
the three months ended June 30, 1998. The majority of these costs in the
comparable period were associated with the Company's business combination with
Putnam Hayes & Bartlett, Inc. ("PHB") as well as the Company's business
combinations with TB&A Group, Inc. and its wholly-owned subsidiary Theodore
Barry & Associates (collectively "TB&A") and Izsak, Grapin et Associes ("IGA").
There were no stock and stock option compensation expenses for the
three months ended June 30, 1999, compared with approximately $430,000 in the
three months ended June 30, 1998. All of these costs in the prior period were
related to the Company's business combination with PHB and included non-cash,
non-tax deductible compensation based on the difference between the fair market
value and book values of PHB common stock issuable under subscriptions within
one year of the companies' merger.
Other income (expenses), net includes interest expense, interest
income, minority interest and other income and expenses. For the three months
ended June 30, 1999, other income (expenses), net increased approximately
$35,000 to income of approximately $4,000 from the three months ended June 30,
1998.
The Company's effective tax rate decreased to 40.5% in the three months
ended June 30, 1999 from 43.4% in the three months ended June 30, 1998. The
effective tax rate for the comparable period was higher than the provisional
rate as a result of the non-deductibility for tax purposes of the stock
compensation charge discussed above.
Net income for the three months ended June 30, 1999, decreased by
approximately $1.4 million, or 47.8%, to $1.5 million from the three months
ended June 30, 1998, due to reasons discussed above.
Six months ended June 30, 1999 compared with six months ended June 30, 1998
Revenues for the six months ended June 30, 1999, decreased by
approximately $0.8 million or 0.9%, to $84.8 million from the six months ended
June 30, 1998. An increase of approximately $0.8 million in consulting revenues
was offset by a decrease of approximately $1.6 million in other revenues.
Consulting revenues increased 0.9% for the six months ended June 30, 1999, as
compared to the comparable period of the prior year. This increase was primarily
the result of acquisitions and internal growth in the commercial rate sector,
partially offset by the sale of certain assets of the Company's public sector
consulting practice in September 1998. Other revenues decreased by 64.8% for the
six months ended June 30, 1999, as compared to the comparable period of the
prior year. The decrease in other revenues was driven by the Company's decision
to cease operations in its financial advisory services business. In the six
months ended June 30, 1999, approximately 99.0% of the Company's revenues were
derived from consulting revenues, as compared with 97.1% in the six months ended
June 30, 1998.
Cost of services for the six months ended June 30, 1999, increased by
$2.7 million, or 4.3%, to $64.3 million from the six months ended June 30, 1998.
Cost of services as a percentage of revenue increased from 72.1% in the six
months ending June 30, 1998, to 75.9% in the six months ending June 30, 1999,
primarily the result of an increase in staffing costs to support an anticipated
increase of business and an increase in cash compensation paid to consulting
staff.
SG&A for the six months ended June 30, 1999, increased by approximately
$4.4 million, or 38.2%, to $15.7 million from the six months ended June 30,
1998. Expressed as a percentage of total revenues, SG&A expenses increased from
13.3% in the six months ended June 30, 1998, to 18.6% in the six months ended
June 30, 1999. This increase is reflective of increased business development
costs, an increase in administrative staff in anticipation of increased business
and duplication of certain administrative costs related to the Company's recent
business combinations.
There were no merger related and other non-recurring costs for the six
months ended June 30, 1999, compared with approximately $1.7 million in the six
months ended June 30, 1998. The majority of these costs in the comparable period
were associated with the Company's business combination with PHB as well as the
Company's business combinations with TB&A and IGA.
There were no stock and stock option compensation expenses for the six
months ended June 30, 1999, compared with approximately $2.6 million in the six
months ended June 30, 1998. All of these costs in the prior period were related
to the business combination and included non-cash, non-tax deductible
compensation based on the difference between the fair market value and book
values of PHB common stock issuable under subscriptions within one year of the
companies' merger.
Other income (expenses), net includes interest expense, interest
income, minority interest and other income and expenses. For the six months
ended June 30, 1999, other income (expenses), net increased approximately
$169,000 to income of approximately $91,000 from the six months ended June 30,
1998.
The Company's effective tax rate decreased to 39.0% in the six months
ended June 30, 1999 from 52.9% in the six months ended June 30, 1998. The
effective tax rate for the comparable period was higher than the provisional
rate as a result of the non-deductibility for tax purposes of the stock
compensation charge discussed above.
Net income for the six months ended June 30, 1999, decreased by
approximately $1.1 million, or 29.7%, to $2.7 million from the six months ended
June 30, 1998, due to reasons discussed above.
Liquidity and Capital Resources
As of June 30, 1999, working capital was $52.7 million as compared to
$54.3 million at December 31, 1998.
Net cash of approximately $1.7 million was provided by operating
activities during the six months ended June 30, 1999. The primary sources
of cash provided by operating activities were net income of approximately
$2.7 million, non-cash depreciation of approximately $2.9 million and an
increase in accrued compensation and benefits of approximately $1.1
million. These cash flows were partially offset by increases in accounts
receivable and prepaid expenses as well as the payment of income taxes and
accounts payable.
Investment activities used $2.4 million during the six months ended
June 30, 1999. The Company invested $1.5 million in the purchase of office and
computer related equipment, leasehold improvements, and other resources
necessary for the growth of the Company, as well as $0.9 million for the
purchase of acquired companies.
Financing activities used approximately $3.8 million for the six months
ended June 30, 1999. Substantially all of these funds were used for the
repurchase of 536,600 shares of the Company's common stock by the Company. At
June 30, 1999, the Company was authorized to repurchase approximately 963,400
additional shares.
The Company's primary source of liquidity for the past 12 months has
been funds generated from operations periodically supplemented by borrowings
under a bank line of credit. During the year ended December 31, 1998, the
Company established $50.0 million in revolving credit with NationsBank. The
amount available under the line of credit at June 30, 1999 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 at least the next 12
months. The Company, depending on market conditions, may consider other sources
of financing, including equity financing.
Year 2000
The Year 2000 issue is the result of a computer hardware and software
design that defines the year field as 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, assessment, 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.
Except where noted below, the Company's goal is to complete
implementation of the Plan by September 30, 1999.
Audit and Remediation Testing Implementation
Assessment
------------------------------ ------------------ --------------------- --------------- --------------------
IT - Domestic Complete In Progress In Progress 3rd Quarter
------------------------------ ------------------ --------------------- --------------- --------------------
------------------------------ ------------------ --------------------- --------------- --------------------
IT - International 75% In Progress In Progress 4th Quarter
------------------------------ ------------------ --------------------- --------------- --------------------
------------------------------ ------------------ --------------------- --------------- --------------------
Business Operations Complete Complete In Progress 3rd Quarter
------------------------------ ------------------ --------------------- --------------- --------------------
------------------------------ ------------------ --------------------- --------------- --------------------
Embedded Complete In Progress N/A 4th Quarter
------------------------------ ------------------ --------------------- --------------- --------------------
------------------------------ ------------------ --------------------- --------------- --------------------
3rd Party Complete 3rd - 4th Quarter N/A 4th Quarter
Year 2000 Readiness Report
The Company made several acquisitions in 1998 and 1999. It undertook a
comprehensive due diligence examination that identified general Year 2000
Readiness issues for itself and the companies it acquired. The Company
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 CEO,
CFO, General Counsel, and other Company executives and outside consultants as
required. The Company engaged consultants 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). Due to the release of new Year 2000 "software"
fixes from Microsoft, the principal supplier of the Company's front office
software, the Company currently expects that the process of updating those
systems that are not Year 2000 ready will be performed in the 3rd quarter of
1999.
With some exceptions, the Company does not employ significant custom
programming in its front office, work product, or back office systems. The
Company's work product is generated for the most part 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 have been or will be
updated where appropriate. In the cases where the Company has supplemented these
commercially available softwares with custom programming, teams are being
established to assess the software. These situations do not represent a
significant percentage of the Company's work product. The Company is
implementing a software application to aide the monitoring of 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 active 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. The Company has undertaken tests of its back
office systems and expects these systems to present no material problem due to
Year 2000 issues. 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 contacted 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 21 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. In April 1999, the Company
initiated a survey of a cross section of its largest 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, where practical, to survey new clients upon new engagements. To date the
Company has not received responses from all the clients surveyed. Based on the
responses received, the Company does not beleive that any client failure to
comply with Year 2000 compliance requirements will have a material adverse
effect on it
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
continues to monitor the Company's principal vendors and 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 and fourth quarters of
1999.
Contingency Planning
The Committee is developing a contingency plan in the event that a
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. The
Company is considering other contingency initiatives with respect to office
systems, personnel, and new engagements.
Costs
The Company budgeted $300,000 in 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. The Company also performs work in regions deemed at high risk for Year
2000 disruptions, specifically, Latin America, Eastern Europe, and Asia. Lastly,
the Company perceives that the stability of technical and critical office staff
is important to the Plan and is considering steps to decrease the risk of losing
critical resources. Notwithstanding these efforts, 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.
PART II
Item 1. Legal Proceedings
One of the Company's subsidiaries, Apogee Research, Inc. ("Apogee")
has received a subpoena from the Office of the Inspector General of the
Environmental Protection Agency (the "EPA") requesting records for the
period 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, financial condition or
results of operations.
Item 2. Changes in Securities
On April 30, 1999, the Company acquired WIEG, a provider of energy and
environmental policy, for cash and stock. The Company issued 144,210 shares
of the Company's common stock to the shareholders of WIEG. The shares of
common stock issued in connection with the acquisition were exempt from
registration pursuant to Section 4[2] of the Securities Act of 1933 and
Regulation D promulgated thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 13, 1999,
the stockholders voted on the (i) election of three directors to serve
three-year terms ending at the 2002 Annual Meeting of Stockholders; (ii)
ratification and approval of an amendment to the Hagler Bailly, Inc.
Employee Incentive and Non-Qualified Stock Option and Restricted Stock Plan
(the "Stock Option Plan"); and (iii) the ratification of Ernst & Young LLP
as independent auditors for the fiscal year ending December 31, 1999.
The voting for each item was as follows:
The Election of Directors
NAME FOR WITHHELD
William E. Dickenson 9,937,397 626,244
Robert W. Fri 9,937,397 626,244
Richard H. O'Toole 9,937,397 626,244
The Ratification of the Amendment to the Stock Option Plan
FOR AGAINST ABSTAIN
9,414,575 1,147,357 1,709
The Ratification of Selection of Ernst & Young LLP as independent
auditors for the fiscal year ending December 31, 1999.
------------------- -------------------- -----------------------------
FOR AGAINST ABSTAIN
------------------- -------------------- -----------------------------
------------------- -------------------- -----------------------------
9,653,188 473,806 436,647
------------------- -------------------- -----------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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.
(9)
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. (9)
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)
10.10 Amendment to Credit Agreement by and between Hagler Bailly
Consulting, Inc. and State Street Bank and Trust Company, dated as of June 20,
1996. (1)
10.11 Extension Agreement by and between Hagler Bailly Consulting, Inc. and
State Street Bank and Trust Company, dated as of August 1, 1996. (1)
10.12 Amendment to Credit Agreement by and between Hagler Bailly
Consulting, Inc. and State Street Bank and Trust Company, dated as of November
12, 1996. (1)
10.13 Term Note by and between Hagler Bailly Consulting, Inc., and State
Street Bank and Trust Company, dated May 26, 1995. (1)
10.14 Revolving Credit Note by and between Hagler Bailly Consulting, Inc.
and State Street Bank and Trust Company dated May 26, 1995. (1)
10.15 Amendment to Credit Agreement by and between Hagler Bailly
Consulting, Inc., and State Street Bank and Trust Company, dated as of June 12,
1997. (1)
10.16 Credit 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)
10.17 Promissory Note by Hagler Bailly Consulting, Inc. and Hagler Bailly
Services, Inc. to State Street Bank and Trust Company, dated September 30, 1997.
(2)
10.18 Security Agreement by and between Hagler Bailly Consulting, Inc. and
State Street Bank and Trust Company, dated as of September 30, 1997. (2)
10.19 Security Agreement by and between Hagler Bailly Services, Inc. and
State Street Bank and Trust Company, dated as of September 30, 1997. (2)
10.20 Guaranties by Hagler Bailly, Inc. to State Street Bank and Trust
Company, dated September 30, 1997. (2)
10.21 Guaranties by HB Capital, Inc. to State Street Bank and Trust
Company, dated September 30, 1997. (2)
10.22 Subordination 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)
10.23 Subordination 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)
10.24 Guaranty of Monetary Obligations to Bresta Futura V.B.V. by Hagler
Bailly, Inc., dated July 23, 1997. (2)
10.25 Amendment to Credit Agreement by and between Hagler Bailly
Consulting, Inc. and State Street Bank and Trust Company dated May 18, 1998. (6)
10.26 Sublease Agreement by and between Coopers and Lybrand L.L.P. and
Hagler Bailly, Inc. dated December 5, 1997. (6)
10.27 Employment Agreement between the Company and Henri-Claude A. Bailly,
dated August 27, 1998. (7)
10.28 Employment Agreement between the Company and William E. Dickenson,
dated August 27, 1998. (7)
10.29 Employment Agreement between the Company and Howard W. Pifer III,
dated June 10, 1998. (7)
10.30 Amended and Restated Hagler Bailly, Inc. Employee Incentive and
Non-Qualified Stock Option and Restricted Stock Plan.
10.31 Credit 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. (8)
10.32 Revolving Note by and between Hagler Bailly, Inc. and NationsBank,
N.A., dated November 20, 1998. (8)
10.33 Swing Line Note by and between Hagler Bailly, Inc. and NationsBank,
N.A., dated November 20, 1998. (8)
10.34 Subsidiary 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. (8)
10.35 Form of Security Agreement by and between Hagler Bailly, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.36 Security Agreement by and between Hagler Bailly Consulting, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.37 Security Agreement by and between Hagler Bailly Services, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.38 Security Agreement by and between HB Capital, Inc. and NationsBank,
N.A., dated November 20, 1998. (8)
10.39 Security Agreement by and between Putnam, Hayes & Bartlett, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.40 Security Agreement by and between TB&A Group, Inc. and NationsBank,
N.A., dated November 20, 1998. (8)
10.41 Security Agreement by and between Theodore Barry & Associates and
NationsBank, N.A., dated November 20, 1998. (8)
10.42 Security Agreement by and between PHB Hagler Bailly, Inc. and
NationsBank, N.A., dated February 22, 1999. (8)
10.43 Security Agreement by and between Private Label Energy Services, Inc.
and NationsBank, N.A., dated November 20, 1998. (8)
10.44 Security Agreement by and between Fieldston Publications, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.45 Lease by and between One Memorial Drive Limited Partnership and
Putnam, Hayes & Bartlett, Inc. dated January 1, 1998. (8)
10.46 Lease 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. (8)
10.47 First 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. (8)
10.48 Employment agreement between Hagler Bailly Consulting, Inc. and
Jasjeet S. Cheema, dated February 2, 1998. (9)
10.49 First amendment to revolving credit agreement between Hagler Bailly,
Inc, the lenders from time to time a party thereto, as lenders, and NationsBank,
N.A., dated as of March 22, 1999. (9)
24 Powers of Attorney (included on Signature Pages) (1)
27.1 Financial Data Schedule - June 30, 1999
- --------------------------------------------------------------------------------
(1) Included in the Company's Registration Statement on Form S-1 filed on July
1, 1997 (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, filed on November 14, 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, filed on March 31, 1998 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 DEFS 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, filed on August 14, 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, filed on November 13, 1998 and incorporated
herein by reference thereto.
(8) Included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, filed on March 31, 1998 and incorporated herein by
reference thereto.
(9) Included in Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999, and incorporated herein by reference thereto.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ William E. Dickenson
----------------------------------------------------
Date: August 10, 1999 William E. Dickenson
President, Chief Executive Officer
Chairman of the Board
/s/ Glenn J. Dozier
-----------------------------------------------------
Date: August 10, 1999 Glenn J. Dozier
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary