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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 September 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 October 31, 1999, the Registrant had 17,911,477 shares of its common stock
outstanding.
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TABLE OF CONTENTS
Item 1. Financial Statements..................................................1
Consolidated Balance Sheets as of September 30, 1999 (Unaudited) and
December 31, 1998.........................................................1
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999 and 1998 (Unaudited).............................2
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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.................................5
Part II
Item 1. Legal Proceedings.....................................................16
Item 2. Changes in Securities................................................16
Item 6. Exhibits and Reports on Form 8-K.....................................17
SIGNATURES....................................................................23
PART I
Item 1. Financial Statements
Hagler Bailly, Inc.
Consolidated Balance Sheets
(in thousands)
September 30, December 31,
1999 1998
---------------------------------------
Assets (unaudited)
Current assets:
Cash & cash equivalents $ 13,495 $ 16,165
Accounts receivable, net of allowance of $4,839 and $3,888
at September 30, 1999 and December 31, 1998, respectively 65,246 59,092
Note receivable - 382
Prepaid expenses 2,763 2,620
Other current assets 865 304
------------------- -------------------
Total current assets 82,369 78,563
Property and equipment, net 8,278 6,463
Software development costs, net 349 898
Intangible assets, net 28,808 14,208
Other assets 1,226 1,290
------------------- -------------------
Total assets $ 121,030 $ 101,422
=================== ===================
=================== ===================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 12,425 $ 8,476
Accrued compensation and benefits 12,517 8,713
Billings in excess of cost 2,975 2,288
Current portion of long-term debt 333 345
Income taxes payable 908 2,547
Deferred taxes 1,900 1,900
------------------- -------------------
Total current liabilities 31,058 24,269
Long-term debt, net of current portion 674 681
Minority interest 260 177
Deferred income taxes 927 927
Other deferred 1,853 1,769
------------------- -------------------
Total liabilities 34,772 27,823
Stockholders' equity:
Common stock, $0.01 par value, 50,000 shares authorized;
17,927 and 16,483 issued and outstanding at September 30,1999 179 165
and December 31, 1998, respectively
Additional capital 81,028 72,322
Retained earnings 5,254 1,206
Foreign currency translation (203) (94)
------------------- -------------------
Total stockholders' equity 86,258 73,599
------------------- -------------------
=================== ===================
Total liabilities and stockholders' equity $ 121,030 $ 101,422
=================== ===================
See accompanying notes.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
--------------- ---------------- ----------------- ------------------
Revenues:
Consulting revenues $ 47,814 $ 44,201 $ 131,737 $ 127,339
Other revenues 314 2,289 1,178 4,743
--------------- ---------------- ----------------- ------------------
Total revenues 48,128 46,490 132,915 132,082
Cost of services 36,571 33,131 100,911 94,812
--------------- ---------------- ----------------- ------------------
Gross profit 11,557 13,359 32,004 37,270
Merger-related and other non-recurring costs - 2,493 - 4,212
Selling, general and administrative expenses 9,097 6,905 24,841 18,298
Stock and stock option compensation - - - 2,595
--------------- ---------------- ----------------- ------------------
Income from operations 2,460 3,961 7,163 12,165
Other income (expenses), net (122) 258 (31) 179
--------------- ---------------- ----------------- ------------------
Income before income tax expense and loss from
equity investment in joint venture 2,338 4,219 7,132 12,344
Income tax expense 981 1,713 2,853 6,008
--------------- ---------------- ----------------- ------------------
Income before loss from equity investment in joint
venture 1,357 2,506 4,279 6,336
Loss from equity investment in joint venture,
net of tax (1) - (231) -
--------------- ---------------- ----------------- ------------------
Net income $ 1,356 $ 2,506 $ 4,048 $ 6,336
=============== ================ ================= ==================
=============== ================ ================= ==================
Net income per share:
Basic $ 0.08 $ 0.15 $ 0.24 $ 0.38
Diluted $ 0.08 $ 0.15 $ 0.23 $ 0.36
Weighted average shares outstanding:
Basic 17,267 16,195 16,779 16,636
=============== ================ ================= ==================
=============== ================ ================= ==================
Diluted 17,457 16,939 17,246 17,427
=============== ================ ================= ==================
=============== ================ ================= ==================
See accompanying notes.
Hagler Bailly, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
in thousands
Nine months ended September 30,
1999 1998
------------------- --------------------
Operating activities
Net income $ 4,048 $ 6,336
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 4,367 3,480
Provision for deferred income taxes - 749
Provision for accounts receivable 2,168 (626)
Loss on equity investment in joint venture 231 -
Minority interest 83 -
Disposal of Fixed Assets - 175
Asset impairment - 456
Amortization of deferred stock compensation - 2,595
Changes in operating assets and liabilities:
Accounts receivable (6,371) (14,535)
Note receivable 382 -
Prepaid expenses (993) (4,957)
Other current assets (535) (1,914)
Other assets (55) 265
Accounts payable and accrued expenses 1,116 (1,718)
Accrued compensation and benefits 3,211 (5,115)
Billings in excess of cost 569 (541)
Income taxes payable (2,821) 1,253
Other deferred 84 -
------------------- --------------------
Net cash provided by (used in) operating activities 5,484 (14,097)
Investing activities
Acquisition of property and equipment (3,329) (3,596)
Purchase of acquired Companies, net of cash received (847) (1,100)
------------------- --------------------
Net cash used in investing activities (4,176) (4,696)
Financing activities
Issuance of common stock 137 -
Purchase of treasury stock (4,115) -
Sale of common stock - 12,676
Dividends paid by foreign subsidiary - (333)
Net borrowings from bank line of credit - 3,200
Payments on long term debt - (1,003)
------------------- --------------------
Net cash (used in) provided by financing activities (3,978) 14,540
Net decrease in cash and cash equivalents (2,670) (4,253)
Cash and cash equivalents, beginning of period 16,165 11,813
=================== ====================
Cash and cash equivalents, end of period $ 13,495 $ 7,560
=================== ====================
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 nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Net income $1,356 $2,506 $4,048 $6,336
================= =================== ================ ==================
================= =================== ================ ==================
Weighted average shares of common
stock outstanding during the period
17,267 16,195 16,779 16,636
Effect of dilutive securities:
Stock options 190 744 467 791
----------------- ------------------- ---------------- ------------------
----------------- ------------------- ---------------- ------------------
Weighted average shares of common
stock and dilutive securities
17,457 16,939 17,246 17,427
================= =================== ================ ==================
Note 3. Business Combinations
On February 8, 1999, the Company acquired all of the outstanding stock
of Lacuna Consulting Limited ("Lacuna"), a United Kingdom corporation, in
exchange for 65,000 shares of the Company's common stock. The acquisition was
accounted for as a purchase. Accordingly, the consolidated financial statements
reflect the results of operations of Lacuna since the date of acquisition. As a
result of the transaction, the Company recorded intangible assets of
approximately $1.4 million.
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 Company has the right to repurchase up to
26,210 of these shares at $ .01 cents per share if the price of the Company's
stock meets certain price targets during the three year period following the
acquisition. 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%.
On August 12, 1999, the Company acquired all of the outstanding stock
of GKMG, Inc. ("GMKG"), a Washington, D.C.-based consulting firm specializing in
the economic, strategic, financial, and regulatory analysis of the aviation
industry, in exchange for 1,420,000 shares of the Company's common stock. Under
the terms of the Share Exchange Agreement by and among the Company, GKMG and
former shareholders of GKMG, the Company is obligated to issue additional shares
of its common stock to the former shareholders of GKMG with a fair market value
(as defined in the Share Exchange Agreement) up to $15 million if certain
earnings targets for GKMG are met for the periods July 1, 1999-June 30, 2000 and
July 1, 2000-June 30, 2001. In addition, the Company is obligated to issue up to
192,857 additional shares of its common stock to the former shareholders of GKMG
if certain stock price performance contingencies are not met. The transaction
was accounted for as a purchase. Accordingly, the consolidated financial
statements reflect the results of operations of GKMG since the date of
acquisition. The Company has recorded intangible assets resulting from the
transaction of approximately $12.4 million, based on information available as of
the date of the financial statements.
The amount of goodwill resulting from the application of purchase accounting on
1999 acquisitions is tentative based on information available as of the date of
the financial statements.
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 September 30, 1999, the Company had repurchased 559,700
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 each of the three and nine months ended September 30, 1999 and 1998 is as
follows (in thousands):
For the three months ended For the nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Comprehensive Income:
Net income $ 1,356 $ 2,506 $ 4,048 $ 6,336
Foreign translation adjustment
5 19 (66) (129)
----------------- --------------- ---------------- -----------------
Total comprehensive income
$ 1,361 $ 2,525 $ 3,982 $ 6,207
================= =============== ================ =================
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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, which are incorporated by reference herein.
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 worldwide provider of strategy, economics and
operations consulting services to energy and network industries, including
electric power, natural gas and water utilities, fuel providers,
commercial litigation, the environment, aviation transportation and
telecommunications. As of September 30, 1999, Hagler Bailly employed a staff of
881, of which over two-thirds were consulting and technical professionals. The
Company'scommon 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 strategy and business operations consulting services to public
and commercial rate sector clients. 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 public and commercial rate sector
clients. 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
additional growth opportunities in the future.
On August 12, 1999, the Company acquired all of the outstanding stock
of GKMG, Inc. ("GMKG"), a Washington, D.C.-based consulting firm specializing in
the economic, strategic, financial, and regulatory analysis of the aviation
industry, in exchange for 1,420,000 shares of the Company's common stock. Under
the terms of the Share Exchange Agreement by and among the Company, GKMG and
former shareholders of GKMG, the Company is obligated to issue additional shares
of its common stock to the former shareholders of GKMG with a fair market value
(as defined in the Share Exchange Agreement) up to $15 million if certain
earnings targets for GKMG are met for the periods July 1, 1999-June 30, 2000 and
July 1, 2000-June 30, 2001. In addition, the Company is obligated to issue up to
192,857 additional shares of its common stock to the former shareholders of GKMG
if certain stock price performance contingencies are not met. The transaction
was accounted for as a purchase. Accordingly, the consolidated financial
statements reflect the results of operations of GKMG since the date of
acquisition. The Company has recorded intangible assets resulting from the
transaction of approximately $12.4 million, based on information available as of
the date of the financial statements.
On September 27, 1999, the Company announced that its Board of
Directors retained Banc of America Securities LLC to assist the Company in
exploring strategic and financial alternatives to maximize shareholder value,
including the potential sale or merger of the Company.
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 Nine months
ended ended September
September 30, 1999
30, 1999 compared to
compared to nine months
three months ended September
ended 30, 1998
September
30, 1998
Three months Nine months ended
ended September 30, September 30,
------------------ ----------------- --------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Consulting 99.3 95.1 99.1 96.4 8.2 3.5
Other 0.7 4.9 0.9 3.6 (86.3) (75.2)
Total revenues 100.0 100.0 100.0 100.0 3.5 0.6
Cost of services 76.0 71.3 75.9 71.8 10.4 6.4
Merger related and other
non-recurring costs - 5.4 - 3.2 (100.0) (100.0)
Selling, general, and administrative
expenses 18.9 14.9 18.7 13.9
31.7 35.8
Stock and stock option compensation
- - - 2.0 - (100.0)
Income from operations 5.1 8.5 5.4 9.2 (37.9) (41.1)
Other income (expenses), net (0.3) 0.6 0.0 0.1 (147.3) (117.2)
Income before income tax expense and
loss from equity investment in
joint venture 4.8 9.1 5.4 9.3 (44.6) (42.2)
Income tax expense 2.0 3.7 2.2 4.5 (42.7) (52.5)
Income before loss from equity
investment in joint venture 2.8 5.4 3.2 4.8
(45.8) (32.5)
Loss from joint venture 0.0 - (0.2) -
Net income 2.8 5.4 3.0 4.8 (45.8) (36.1)
Three months ended September 30, 1999 compared with three months ended September
30, 1998
Revenues for the three months ended September 30, 1999, increased by
approximately $1.6 million, or 3.5%, to $48.1 million from the three months
ended September 30, 1998. The increase resulted primarily from $4.5 million of
revenues from companies acquired since the third quarter of 1998 as well as
approximately $1.0 million of increased volume of pass through equipment sales
to the United States Agency for International Development ("USAID") in the
Company's public sector market. This increase was partially offset by a decrease
in revenues of approximately $2.0 million related to both the sale of certain
assets of the Company's public sector consulting practice in September, 1998,
and the Company's decision to cease operations in its financial advisory
services business in December, 1998, a decrease of approximately $0.8 million
because of reduced staff and a decrease of approximately $1.1 million because of
contract expiration and reduction.
Cost of services for the three months ended September 30, 1999,
increased by approximately $3.4 million or 10.4%, to $36.6 million from the
three months ended September 30, 1998. Cost of services as a percentage of
revenue increased from 71.3% in the three months ending September 30, 1998, to
76.0% in the three months ending September 30, 1999, primarily as the result of
an increase in cash compensation paid to consulting staff, as well as high
pass-through costs associated with the increase in volume of USAID equipment
sales, on which minimal margins are earned.
Selling, general and administrative expenses ("SG&A") for the three
months ended September 30, 1999, increased by approximately $2.2 million or
31.7%, to $9.1 million from the three months ended September 30, 1998. Expressed
as a percentage of total revenues, SG&A expenses increased from 14.9% in the
three months ended September 30, 1998 to 18.9% in the three months ended
September 30, 1999. This increase reflects increased business development costs
and integration costs related to the centralization of certain operating systems
and administrative functions.
There were no material merger related and other non-recurring costs for
the three months ended September 30, 1999, compared with approximately $2.5
million in the three months ended September 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"). The remainder were
expenses associated with 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").
Other income (expenses), net includes interest expense, interest
income, minority interest and other income and expenses. For the three months
ended September 30, 1999, net expenses were approximately $122,000, compared to
net other income of approximately $258,000 in the three months ended September
30, 1998. The net other income in 1998 was primarily related to the sale of
certain assets of the Company's public sector consulting practice.
The Company's effective tax rate increased to 42.0% in the three months
ended September 30, 1999 from 40.6% in the three months ended September 30,
1998. The higher effective income tax rate in the three months ended September
30, 1999, results from the associated goodwill amortization of recent business
combinations that will be non-deductible for income tax reporting purposes.
Net income for the three months ended September 30, 1999, decreased by
approximately $1.2 million, or 45.8%, to $1.4 million from the three months
ended September 30, 1998, for reasons discussed above.
Nine months ended September 30, 1999 compared with nine months ended September
30, 1998
Revenues for the nine months ended September 30, 1999, increased by
approximately $0.8 million or 0.6%, to $132.9 million from the nine months ended
September 30, 1998. The increase resulted primarily from approximately $9.1
million of revenues from companies acquired since the third quarter of 1998.
This increase was partially offset by a decrease in revenues of approximately
$7.4 million related to both the sale of certain assets of the Company's public
sector consulting practice in September, 1998, and the Company's decision to
cease operations in its financial advisory services business in December, 1998,
and an aggregate decrease of approximately $0.9 million company wide.
Cost of services for the nine months ended September 30, 1999,
increased by $6.1 million, or 6.4%, to $100.9 million from the nine months ended
September 30, 1998. Cost of services as a percentage of revenue increased from
71.8% in the nine months ending September 30, 1998, to 75.9% in the nine months
ending September 30, 1999. The increase resulted primarily from increased
staffing costs.
SG&A for the nine months ended September 30, 1999, increased by
approximately $6.5 million, or 35.8%, to $24.8 million from the nine months
ended September 30, 1998. Expressed as a percentage of total revenues, SG&A
expenses increased from 13.9% in the nine months ended September 30, 1998, to
18.7% in the nine months ended September 30, 1999. This increase reflects
increased business development costs and integration costs related to the
centralization of certain operating systems and administrative functions.
There were no material merger related and other non-recurring costs for
the nine months ended September 30, 1999, compared with approximately $4.2
million in the nine months ended September 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 nine
months ended September 30, 1999, compared with approximately $2.6 million in the
nine months ended September 30, 1998. All of these costs in the prior period
were related to the 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 acquisition of PHB by the Company.
Other income (expenses), net includes interest expense, interest
income, minority interest and other income and expenses. For the nine months
ended September 30, 1999, net expenses were approximately $31,000, compared to
net other income of approximately $179,000 in the nine months ended September
30, 1998. The net other income in 1998 was primarily related to the sale of
certain assets of the Company's public sector consulting practice.
The Company's effective tax rate decreased to 40.0% in the nine months
ended September 30, 1999 from 48.7% in the nine months ended September 30, 1998.
The effective tax rate for the comparable period was higher than the provisional
rate because of the non-deductibility for tax purposes of the stock compensation
charge discussed above.
Net income for the nine months ended September 30, 1999, decreased by
approximately $2.3 million, or 36.1%, to $4.0 million from the nine months ended
September 30, for the reasons discussed above.
Liquidity and Capital Resources
As of September 30, 1999, working capital decreased to $51.3 million
from $54.3 million at December 31, 1998 because of an increase in accrued
compensation.
Net cash of approximately $5.5 million was provided by operating
activities during the nine months ended September 30, 1999. The primary sources
of cash provided by operating activities were net income of approximately $4.0
million, non-cash depreciation of approximately $4.4 million and an increase in
accrued compensation and benefits of approximately $3.2 million. These cash
flows were partially offset by an increase in accounts receivable of $6.4
million.
Investment activities used approximately $4.2 million during the nine
months ended September 30, 1999. The Company invested approximately $3.3 million
in the purchase of office and computer related equipment, leasehold
improvements, and other resources necessary to improve operating efficiencies of
the Company, as well as approximately $0.8 million for the purchase of acquired
companies.
Financing activities used approximately $4.0 million for the nine
months ended September 30, 1999. The Company used approximately $4.1 million in
funds for the repurchase of 559,700 shares of the Company's common stock. Under
the stock buyback program established by the Board of the Directors, as of
September 30, 1999, the Company is authorized to repurchase 940,300 additional
shares of the Company's common stock.
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 Bank of America
(formerly NationsBank.) The amount available under the line of credit at
September 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 a supplier could disrupt
the Company's operations and could have a material adverse effect 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:
Audit, assessment, remediation, and testing of internal systems.
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.
Developing contingency plans, when practical, to address potential Year
2000 failures.
The Plan was materially complete as of October 31, 1999.
Year 2000 Readiness Report
The Company completed 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 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 mid-1999 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 4th quarter
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. Where the Company has supplemented these commercially
available software products 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 aid 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
with all new analytic engagements developed on compliant hardware and software.
The conversion of remaining active analytic applications was substantially
complete as of October 31, 1999.
Back office systems including financial accounting, project accounting,
fixed asset management, human resources, payroll, and conflict management have
been replaced. These were updated with vendor supplied Year 2000 fixes or
converted to compliant versions of the software. The Company has tested its
back office systems and expects these systems to present no material problems.
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 and
obtained proof of Year 2000 readiness or identified compliance issues which the
Company has addressed. 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, the remediation of international office systems was not
complete as of October 31, 1999. Remediation is underway in the case of mission
critical systems judged non-compliant, specifically, a network upgrade in
Indonesia. The assessment of the international offices revealed the need to
perform version upgrades and software patches similar to those being performed
as a result of the domestic audit. Remediation efforts for basic IT systems are
underway and substantially complete in most international offices. Some office
systems in the Company's international offices may 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, and federal, state, local and foreign government entities. The
Company has responded to Year 2000 compliance surveys from over 50 of its major
clients and shared its readiness information. 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 believe 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
other maintenance vendors of mission critical hardware and software. If one or
more of these 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 through the fourth quarter of 1999.
Contingency Planning
The Committee has developed a contingency plan in the event that a material
system or vendor will not be Year 2000 ready by December 31, 1999.
Costs
The Company budgeted $300,000 in fiscal years 1999 and 2000 to cover the
costs of: (i) evaluating systems, (ii) acquiring Year 2000 remediation software,
(iii) additional testing of hardware and software, (iv) hiring an outside Year
2000 consultant, and (iv) implementing of 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 these costs 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
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 other suppliers to operate their businesses. Year
2000-related failures far removed from the Company could trigger a chain of
events that could materially affect 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
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
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.
Express One International, Inc. ("Express One") sued Galland, Kharash,
Morse & Garfinkle, P.C., a predecessor of the Company's wholly owned subsidiary,
GKMG, Inc. ("GKMG"), and two of its shareholders, Robert W. Kneisley and David
K. Monroe, in a Texas state court in 1994 alleging (i) business disparagement or
injurious falsehood; (ii) business defamation; and (iii) tortious interference
with prospective contracts or business relationships and claiming over $200
million in actual damages and punitive (exemplary) damages of at least three
times actual damages. The case was removed to the United District Court for the
Northern District of Texas, Dallas Division, where it is currently pending. On
October 1, 1999 the court granted GKMG's motion for summary judgment as to
dismissal of claims of business disparagement and business libel per se. The
Company is unable to determine what effect, if any, this litigation 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. Except as described
above, 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 August 12, 1999, the Company acquired all of the outstanding shares
of GKMG, an aviation consulting company, and issued 1,420,000 shares of its
common stock to GKMG's former shareholders in exchange therefor. The shares of
common stock issued in connection with the acquisition were exempt form
registration pursuant to Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
Item 6. Exhibits and reports on form 8-K
(a) Exhibits
Exhibit No. Description
2.1 Sale Agreement between RCG International, Inc., and Hagler Bailly
Consulting, Inc. (1)
2.2 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)
2.3 Share Exchange Agreement dated as of August 12, 1999 by and among
Hagler Bailly, Inc., GKMG, Inc. and certain former shareholders of
GKMG, Inc. (11)
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'
Representative. (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)
4.5 Registration Rights Agreement dated as of August 12, 1999 by and
between Hagler Bailly, Inc. and James F. Miller, acting as
Stockholders' Representative. (11)
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 August 27, 1998. (7)
10.28Employment Agreement between the Company and William E. Dickenson,
dated August 27, 1998. (7)
10.29Employment Agreement between the Company and Howard W. Pifer III,
dated June 10, 1998. (7)
10.30Amended and Restated Hagler Bailly, Inc. Employee Incentive and
Non-Qualified Stock Option and Restricted Stock Plan. (10)
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. (8)
10.32Revolving Note by and between Hagler Bailly, Inc. and NationsBank,
N.A., dated November 20, 1998. (8)
10.33Swing 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)
10.35Form of Security Agreement by and between Hagler Bailly, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.36Security Agreement by and between Hagler Bailly Consulting, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.37Security Agreement by and between Hagler Bailly Services, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.38Security Agreement by and between HB Capital, Inc. and Nations Bank,
N.A., dated November 20, 1998. (8)
10.39Security Agreement by and between Putnam, Hayes & Bartlett, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.40Security Agreement by and between TB&A Group, Inc. and Nations Bank,
N.A., dated November 20, 1998. (8)
10.41Security Agreement by and between Theodore Barry & Associates and
NationsBank, N.A., dated November 20, 1998. (8)
10.42Security Agreement by and between PHB Hagler Bailly, Inc. and
NationsBank, N.A., dated February 22, 1999. (8)
10.43Security Agreement by and between Private Label Energy Services, Inc.
and NationsBank, N.A., dated November 20, 1998. (8)
10.44Security Agreement by and between Fieldston Publications, Inc. and
NationsBank, N.A., dated November 20, 1998. (8)
10.45Lease by and between One Memorial Drive Limited Partnership and
Putnam, Hayes & Bartlett, Inc. dated January 1, 1998. (8)
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. (8)
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. (8)
10.48Employment agreement between Hagler Bailly Consulting, Inc. and
Jasjeet S. Cheema dated February 2, 1998. (9)
10.49First 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)
10.50Lease by and between TrizecHahn, 1550 Wilson Blvd. Management and
Hagler Bailly Services, Inc. dated August 29, 1999.
10.51Second 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 August 11, 1999.
10.52Security Agreement by and between GKMG, Inc. and NationsBank, N.A.,
dated August 11, 1999.
10.53Security Agreement by and between GKMG Consulting Services, Inc. and
NationsBank, N.A., dated August 11, 1999.
24 Powers of Attorney (included on Signature Pages) (1)
27.1 Finacial Data Schedule - September 30, 1999
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(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 the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, and incorporated herein by
reference thereto.
(10) Included in the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, and incorporated herein by reference
thereto.
(11) Included in the Company's Current Report on Form 8-K filed on
August 26, 1999 and incorporated herein by reference thereto.
(b) Reports on Form 8-K
On August 26, 1999, the Company filed a current report on Form 8-K to
report its acquisition of all of the shares of GKMG, Inc., an aviation
consulting firm.
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.
Date: November 15, 1999 /s/ William E. Dickenson
------------------------
William E. Dickenson
President and Chief Executive Officer
Date: November 15, 1999 /s/ Geoffrey W. Bobsin
----------------------
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary