SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended Commission File Number.
December 31, 1997 0-29292
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[GRAPHIC OMITTED] HAGLER BAILLY, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 54-1759180
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1530 Wilson Boulevard, Suite 900, Arlington, Virginia 22209
(Address of principal executive offices) (zip code)
(703) 351-0300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates* of
the registrant as of March 2, 1998 (based upon the closing sale price of $24.625
as quoted by the Nasdaq National MarketSM as of such date) was approximately
$148,351,490.
As of March 2, 1998, 8,869,291 shares of the registrant's common stock
were outstanding.
*The registrant considers the term "affiliate" to include executive officers,
directors and beneficial owners of more than 5 percent of the registrant's
outstanding common stock.
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<PAGE>
i
HAGLER BAILLY, INC. AND SUBSIDIARIES
FORM 10-K ANNUAL REPORT
FOR YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page
ITEM 1 -- BUSINESS.....................................................1
ITEM 2 -- PROPERTIES..................................................15
ITEM 3 -- LEGAL PROCEEDINGS...........................................15
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........15
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS............. ...............16
ITEM 6 -- SELECTED FINANCIAL DATA.....................................16
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS... ......18
ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTAL DATA.......................................24
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........25
ITEM 11 -- EXECUTIVE COMPENSATION.....................................29
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.........................................32
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............34
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS
ON FORM 8-K............................................35
SIGNATURES............................................................37
<PAGE>
PART I
ITEM 1 - BUSINESS
Forward Looking Statements
This Annual Report on Form 10-K of Hagler Bailly, Inc. and its
subsidiaries ("Hagler Bailly" or the "Company") contains forward-looking
statements. For this purpose, any statements contained herein that are not
statements of historical fact, are intended, and are hereby identified as,
"forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended by Public Law
104-67. Without limiting the foregoing, the words "anticipates," "believes,"
"estimates," "expects," "intends," "plans" and similar expressions are intended
to identify forward-looking statements. The important factors discussed below in
this Item 1 under the caption "Risk Factors", as well as other factors
identified in the Company's filings with the Securities and Exchange Commission
and those presented elsewhere by management from time to time, could cause
actual results to differ materially from those indicated by forward-looking
statements made herein.
Introductory Note
On March 22, 1998 the Company executed a non-binding Preliminary
Agreement to combine with Putnam, Hayes & Bartlett, Inc., an independent
economic and management consulting firm headquartered in Cambridge,
Massachusetts. See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
On February 23, 1998 the Company completed the acquisition of TB&A Group,
Inc. ("TB&A"), which became a wholly-owned subsidiary of the Company. TB&A,
through its wholly-owned subsidiary, Theodore Barry & Associates, supports
public and private clients in the gas, electric and telecommunications sectors
with business planning, market assessment and strategy, organizational
effectiveness, reengineering, operational improvement, bench-marking and best
practices, customer acquisition and aggregation, regulatory analysis and
strategy, affiliated interests reviews, technology commercialization,
procurement and materials management, product and service value analysis, new
product development, resource management and asset restructuring. Although the
acquisition of TB&A by the Company occurred after the end of the Company's
fiscal year end, this Annual Report on Form 10-K describes certain aspects of
the business of TB&A relevant to an understanding of the business of the
Company. The Consolidated Financial Statements for the Company contained in Item
8 do not, however, reflect the results of operations for TB&A for any of the
periods presented therein.
Hagler Bailly, Inc.
The predecessor of the Company was founded in 1980 as Hagler Bailly &
Company, Inc. In July 1984, it was acquired by RCG International, Inc.
("RCG"), an indirect subsidiary of Reliance Group Holdings, Inc. and in 1987
was renamed RCG/Hagler Bailly, Inc. In May 1995, the management of
RCG/Hagler Bailly, Inc. completed the purchase of RCG/Hagler Bailly, Inc.
from RCG and the successor to RCG/Hagler Bailly, Inc. became a wholly-owned
subsidiary of the Company. In July 1997, the Company completed its initial
public offering.
Today the Company, together with its primary wholly-owned
subsidiaries, Hagler Bailly Services, Inc. ("Hagler Bailly Services"),
Hagler Bailly Consulting, Inc. ("Hagler Bailly Consulting"),
HB Capital, Inc. ("HB Capital"), Apogee Research, Inc. ("Apogee") and, as of
February 23, 1998, TB&A, and several foreign wholly-owned subsidiaries,
is a worldwide provider of consulting, research and other professional
services to corporations and governments on energy, telecommunications,
transportation and the environment.
Revenues from the Company's consulting business are derived from
management consulting services provided through the Company's specialized
practices. The Company has 280 consultants on its professional staff who
typically work on engagements lasting from a few weeks to many years. In 1997,
the Company provided consultants to more than 400 clients in both private and
public sectors. Financial information about the Company called for by this Item
1 is incorporated herein by reference to the Consolidated Financial Statements,
and accompanying notes, which form a part of this Annual Report on Form 10-K.
Business Model
Hagler Bailly is a worldwide provider of consulting, research and other
professional services to corporations and governments. The Company offers
corporate clients strategy and business operation consulting, economic counsel
and litigation support, market research and survey analysis, information
technology and financial advisory services with a commitment to open electric,
gas and telecommunications markets. The Company also advises governments on
energy, water, transportation and environmental public policy.
Hagler Bailly provides solutions custom-tailored to the client's needs,
delivering tangible value through its unique, three-pronged, "CPR" approach.
This fully integrated approach provides depth of Content, including proprietary
databases and years of cumulative industry knowledge. These data are combined
with superior consulting Processes to develop appropriate customized solutions.
Most importantly, the Company offers Resource platforms, including management,
information technologies or financial support, that help clients to implement
the recommended solutions.
Industry Trends
The Company believes three industry trends to be most important
to its business: globalization, restructuring and digitization.
Globalization. Although the United States remains the single largest
energy market, many international markets are growing more rapidly. For
example, industry sources project that 88% of all new power generation
facilities through the year 2020 will be constructed outside of North
America. In addition, the electric power and gas industries are being
globalized as utilities and independent power producers move outside their
traditional markets. The Company believes that nearly 100 electric
companies are active outside their home country markets as over 100
countries are now open to non-utility ownership and operation in the power
sector. The Company believes this globalization of the electric power and
gas industries will continue to accelerate.
Restructuring. Worldwide, the Company believes the utility sector is
undergoing a fundamental restructuring driven primarily by an overabundance
of energy in the developed world and a scarcity of energy in the developing
world. In the United States, for example, the Company believes pressure to
deregulate and create "open access" in the electric sector similar to that
in the gas and telecommunications industries is mounting. Already several
energy consumer states, such as California, Massachusetts, Michigan, New
York Pennsylvania and Rhode Island, are moving to bring competition to the
electric industry and to permit entry by unregulated wholesalers and
retailers. Outside the United States, a comprehensive reorganization of the
electric utility sector is also underway as many countries move to
restructure, corporatize and privatize traditional public or quasi-public
functions and operations. Beginning in Europe with the privatization of the
non-nuclear portion of the United Kingdom's electric utility sector, this
trend has spread to Eastern Europe, the former Soviet Union and Latin
America, and is now expanding throughout Asia.
Digitization. The Company believes that industry restructuring, combined
with more competitive markets and new regulations, such as continuous
emission monitoring in the United States and the new international
environmental standard ISO 14000, requires new efficiencies in the energy,
utilities, transportation and environmental industries for companies to
stay competitive. The Company believes that the application of new and more
sophisticated information systems will be the cornerstone of the
efficiencies necessary to succeed in these industries. In addition, the
Company believes that the advances in computing and communication
technologies, as well as the convergence of industries such as
telecommunications with electric utilities, will have profound impacts on
the marketing and operations of energy, transportation and environmental
companies. The Company refers to these developments as digitization.
Services
Hagler Bailly believes that both in the private and public sectors, these
trends toward globalization, restructuring and digitization continue to create
an increasing demand for the services offered by the Company. To meet this
demand the Company offers its clients a broad array of consulting services, from
assisting the client to shape its vision to strategic planning, selection of
appropriate solutions, implementation, financing and on-going management. The
Company's services are designed to provide tangible value to clients. This
strategy entails less reliance on formulaic approaches and concepts, and more on
custom-tailored solutions based on an assessment of the client's unique
situation and needs. At the Company, we refer to this strategy as "CPR", which
is delivered to clients worldwide through seven main practices focused on the
energy, including electric and gas utilities, water, telecommunications and
transportation industries - often referred to as network industries:
Enhancing enterprise value by repositioning and reinventing businesses,
and creating new revenue streams and assets through the Corporate
Strategy practice.
Strengthening asset and organizational value by improving business
processes and practices through the Business Operations practices.
Counseling clients on public policy, regulatory economics and antitrust
strategy, conducting asset valuation and providing expert testimony
through the Economics practice.
Advising governments on ways and means to restructure and privatize
public services to improve economic and environmental efficiency
through the Energy Sector Reform practice.
Offering environmental economics, scientific, managerial and technical
research and services through the Environmental Management practice.
Delivering insights on customers, technologies, competitors, and
changing market dynamics using quantitative and qualitative data
collection and analyses through the Market Research practice.
Leveraging information technologies and financial and management
resources to help clients implement and sustain recommended solutions
through the Applications practice.
These practice areas are designed to work together synergistically to
provide clients the full range of services and capabilities of the Company. From
an operational standpoint, the Company regularly reviews and, as appropriate,
restructures these practice areas and services to address the changing business
problems, strategic alternatives and policy issues of its public and private
clients.
The Company currently conducts these services through five main
subsidiaries: Hagler Bailly Consulting, Hagler Bailly Services, HB Capital,
Apogee and TB&A.
Competitive Strengths
Hagler Bailly believes that it is in a strong position to take advantage
of these consulting opportunities. The Company believes that several factors
differentiate it from many of its potential competitors in the consulting
industry.
Industry Focus. Since its inception in 1980, the Company has maintained
its focus on providing a broad range of consulting services to the energy,
utility and the environmental industries. With the acquisition of Apogee in
December 1997, the Company has added the transportation sector to its areas
of focus. In addition, with the acquisition of TB&A in February 1998, the
Company strengthened its environmental practice and has added the
telecommunications sector to its areas of focus. This focus differentiates
the Company from general management consulting firms that serve a full
range of industries and firms with limited skill sets and capabilities. The
Company believes that the insights gained by working worldwide allow it to
customize leading-edge consulting concepts and tools to specific situations
and thus provide tangible value, rather than just theories, to its clients.
Full Service Capabilities. The Company's strategy is to partner with its
clients in conceptualizing and implementing solutions, which significantly
increase enterprise value, by building a broad range of consulting
platforms enabling it to meet its clients' consulting needs. These include
corporate strategy, marketing and sales, product development, energy supply
and logistics, operations management, information systems and technology,
economic analysis, environmental management and finance. In addition, the
Company conducts its own market research using a state-of-the-art survey
center equipped with 26 CATI (Computer-Assisted Telephone Interview)
stations.
Existing Global Infrastructure. The Company operates from nine principal
offices in the United States at the following locations: Arlington,
Virginia; Boston, Massachusetts; Boulder, Colorado; Chicago, Illinois;
Houston, Texas; Los Angeles, California; Madison, Wisconsin; New York, New
York; and San Francisco, California, and seven principal offices abroad at
the following locations: Buenos Aires, Argentina; Dublin, Ireland;
Islamabad, Pakistan; Jakarta, Indonesia; Paris, France; Sao Paulo, Brazil
and Toronto, Canada.
Established Client Relationships. In each of the last three fiscal years,
the Company received repeat business from approximately 50% of the clients
who had engaged the Company in the year prior. Further, in each of the last
three fiscal years, revenues from clients served in the previous year were
approximately 71% of the Company's total revenues. Over the past three
years, the clients have included approximately 100 electric or gas
utilities located throughout the world and five international development
banks. Relationships with clients, many of which date back over a decade,
span various levels within client organizations, ranging from corporate
boards, chief executive officers and other senior management to functional
managers.
Public Sector Insight. The Company has worked with a number of public
sector organizations, including the United States Agency for International
Development (USAID), the Environmental Protection Agency, the European
Union, the Asian Development Bank and the World Bank, for many years. This
gives the Company a special perspective on the energy, utility and
environmental industries and enhances the Company's reputation and ability
to compete successfully for consulting business.
Knowledge Base. Over 18 years, the Company has developed an extensive
knowledge and information base. The Company owns several proprietary
databases and software packages -- OPECSSM and NPESM, two nuclear power
plant operations databases, and IPPSM, a worldwide information base on
independent power producers. The Company has recently developed and is
aggressively marketing its proprietary database, RampUpSM, to provide
clients with unprecedented information on U.S. utility operations and cost
structure. Finally, through the Company's proprietary Business Information
and Knowledge Exchange Intranet ("BIKEnetSM"), Company personnel have
direct access to the Company's proprietary knowledge and warehouse of
information. This system is accessible from all of the Company's offices.
Experienced Team of Management and Consultants. The Company's management
and senior consultants have a wide range of energy, telecommunications,
transportation and environmental consulting expertise and experience. In
addition, many of the senior management and consultants have worked
extensively with one another. Management's average tenure with the Company
is approximately 15 years. This consistency of leadership and teamwork,
combined with training provided by the Company, has fostered a strong
company culture and employee loyalty.
Established Global Visibility. The Company's staff frequently publishes
articles and are invited to present at industry gatherings and conferences.
The staff are also active in several industry groups and professional
associations including elected or appointed positions to the United States
Energy Association (member of the Board of Directors), the National Coal
Council (member), the United States Environmental Protection Agency's
Science Advisory Board Committees (consultant) and the Association of
Energy Services Professionals (member of the Board of Directors).
As a result of these competitive strengths, the Company believes it has
emerged as one of the leading management consulting firms focused on the energy,
telecommunications, transportation and environmental industries.
Marketing and Sales
Hagler Bailly's client development activities are a mixture of marketing
efforts, client acquisition techniques and development of repeat business.
Marketing efforts are accomplished through brand development and brand
management. The Company maintains and enhances its name and reputation through
speeches, presentations, articles in industry, business, economic, legal and
scientific journals, and through other publications and press releases.
The Company establishes a client development goal for each of its
consulting officers and principals and systematically reviews individual and
group performance against these goals. The Company's compensation system,
particularly in the award of bonuses and stock options, is weighted towards
success in meeting these client development goals.
Private Sector. In the private sector, client acquisition techniques
include referrals and focused presentations to boards of directors, chief
executive and operating officers and other executives of prospective client
companies. Presentations generally focus on opportunities in the market
segments most relevant to the prospective clients, examples of the
Company's previous work in related industries and the Company's
international capabilities.
Public Sector. In the public sector, contracts are awarded primarily on
the basis of competitive solicitation. The Company has developed strong
capabilities to prepare proposals that respond to complex requests and
often require the integration and coordination of the services of several
subcontractors and independent consultants. The Company has also developed
a detailed understanding of government and other institutional procurement
regulations in the United States and internationally. In addition, in order
to obtain government contracts, consultants must adhere to stringent cost,
accounting and regulatory controls. In order to comply with such
requirements, the Company regularly holds training seminars to ensure
compliance with applicable government regulations and uses a sophisticated
computer-based accounting system that allows it to track costs in adherence
to government standards. The Company also meets public sector clients' cost
guidelines through competitive pricing.
Client and Representative Services
In 1997, Hagler Bailly performed over 1200 assignments for more than 400
clients in over 22 countries. Revenues from Hagler Bailly's ten most significant
clients accounted for approximately 56.6%, 66.9% and 64.5% of its total revenue
for the years ended December 31, 1997, 1996 and 1995, respectively. In the past
18 years, Hagler Bailly has grown from a single office to a worldwide network of
operations with principal offices in nine cities in the United States and seven
other countries. Over the past three years, Hagler Bailly's total revenues and
consulting revenues have grown at a compound annual rate of 26.7% and 23.5%,
respectively, and have grown 25.2% and 13.9%, respectively, from 1996 to 1997.
Because of the nature and scope of many of the Company's projects, the
Company derives a significant portion of its revenues from a relatively limited
number of clients that operate exclusively in the energy, telecommunications,
transportation and environment sectors.
Competition
The market for consulting services in the fields of energy,
telecommunications, transportation and the environment is intensely competitive,
highly fragmented and subject to rapid change. The market includes a large
number of participants from a variety of consulting market segments, both in the
United States and internationally, including general management consulting
firms, the consulting practices of accounting firms, consulting engineering
firms, technical and economic advisory firms and market research firms. Many
information technology consulting firms also maintain significant energy
practices and others may enter the field in the future. Many of these companies
are national and international in scope and have greater financial, technical
and marketing resources than the Company. In the private sector, the Company
believes the key competitive factors are quality and service, followed by price,
while in the public sector the Company believes the key competitive factors are
price and service. The Company believes that its experience, reputation,
industry focus, and broad range of services have and will continue to enable it
to compete effectively in the private and public sector both in the United
States and internationally.
Employees
As of March 2, 1998, the Company's personnel consisted of 418 full-time
employees, including 280 consultants, and 138 support personnel, and 59
part-time employees. The two largest offices of the Company are Arlington,
Virginia and Boulder, Colorado with 155 and 78 full-time employees,
respectively. Eighty nine (89) full-time employees are stationed outside the
United States. This number excludes the personnel of the Company's non-wholly
owned subsidiaries in Argentina, Indonesia and Pakistan which have,
respectively, 8, 12 and 28 full-time employees. It also excludes locally hired
independent contractors. The Company supplements its full-time staff with
outside consultants with proven experience in their respective fields. Several
of these outside consultants are well-known professors at leading universities.
The Company's 36 consulting officers average sixteen years of management
consulting experience, most of which has been in the energy, utility,
transportation and environmental industries. Several of its most experienced
consultants have worked together for over ten years. Hagler Bailly believes that
this long-term experience of working together as a team enables the Company to
respond quickly to changing market conditions and consistently deliver high
quality consulting services in response to the complex demands of its clients.
The Company believes its success depends in large part on attracting,
retaining and motivating talented, creative and professional employees at all
levels. The Company de-emphasizes hiring directly from graduate schools,
instead, seeking graduates from top schools with prior relevant consulting
experience and strong project management, analytic and communications skills in
competitive and regulated industries, especially those with meaningful
international experience. The Company also hires professionals with senior
executive experience directly from industry.
The Company attracts and motivates its professional and administrative
staff by offering competitive packages of base and incentive compensation, and
benefits. All full-time and part-time staff members are eligible for bonuses. A
significant percentage of the Company's income before bonuses and taxes is
distributed as bonuses to its staff, the majority of which is targeted towards
the Company's top performers -- usually its consulting officers, principals, and
managers. The bonus awards are the result of measurement of performance against
predetermined target compensation goals that balance individual and team
performance. This structure gives senior staff members a vested interest in the
Company's overall success and performance while still promoting individual
initiative and excellence. The Company appreciates the importance of recognition
and a promotion track for its administrative staff and fully integrates this
staff into the conduct of its business. The performance of all employees is
reviewed annually for compensation and promotion purposes.
Risk Factors
Attraction, Retention and Management of Professional and Administrative
Staff. The Company's business involves the delivery of professional services and
is labor intensive. The Company's future performance depends in large part upon
its ability to attract, develop, motivate and retain highly-skilled consultants,
research associates and administrative staff, particularly senior professionals
with business development skills. Qualified consultants are in great demand, and
there is significant competition for employees with these skills from other
consulting and investment banking firms, research firms, energy companies and
many other related enterprises. Many of these firms have substantially greater
financial resources than the Company, which they may use to attract and
compensate qualified personnel. There can be no assurance that the Company will
be able to attract and retain sufficient numbers of highly-skilled consultants
in the future. The loss of the services of a significant number of consultants,
research associates or administrative personnel could have a material adverse
effect on the Company's business, operating results and financial condition,
including its ability to secure and complete engagements.
Concentration of Revenues. Substantially all of the revenues of the
Company are derived from private and institutional clients involved in the
energy, telecommunications, transportation and environmental industries. As a
result of this focus, the Company's business, financial condition and results of
operations are influenced by factors affecting these industries, including
changing political, economic and regulatory influences that may affect the
procurement practices and operation of energy, telecommunications,
transportation and environmental service providers. In particular, many electric
and gas utilities are consolidating to create larger organizations or strategic
alliances. These consolidations and alliances will reduce the number of
potential customers for the Company's and may also create conflicts of interest
between clients. In addition, these consolidations and alliances may result in
the acquisition of certain of the Company's key clients, and such clients may
scale back or terminate their relationship with the Company following their
acquisition. Similarly, cutbacks in the energy, telecommunications,
transportation and/or environmental budgets of the United States and other
governments could result in the scale back or termination of some of the
Company's public sector contracts. The impact of these developments in the
energy, utility, transportation and environmental industries is difficult to
predict and could have a material adverse effect on the Company's business,
financial condition and results of operations.
Ability to Sustain and Manage Growth. The Company has experienced rapid
growth in recent years, including two acquisitions and an initial public
offering of its securities in the last year. The Company believes that its
sustained growth places a strain on operational, human and financial resources.
In order to manage its growth, the Company must continue to improve its
operating and administrative systems and to attract and retain qualified
management and professional, scientific and technical operating personnel.
Foreign operations also may involve the additional risks of assimilating
differences in foreign business practices, hiring and retaining qualified
personnel, and overcoming language barriers. Failure to manage growth
effectively could have a material adverse effect on the Company's business.
Risks Related to Possible Acquisitions. An element of the Company's
strategy is to expand its operations through the acquisition of complementary
businesses. There can be no assurance that the Company will be able to identify,
acquire, profitably manage or successfully integrate any acquired businesses
into the Company without substantial expenses, delays or other operational or
financial problems. Moreover, competitors of the Company are also soliciting
acquisition candidates, which could result in an increase in the price of
acquisition targets and a decrease in the number of attractive companies
available for acquisition. Further, acquisitions may involve a number of special
risks, including diversion of management's attention, failure to retain key
acquired personnel, increased costs to improve managerial, operational,
financial and administrative systems, unanticipated events or circumstances,
legal liabilities, increased interest expense and amortization of acquired
intangible assets, some or all of which could have a materially adverse impact
on the Company's business, operating results and financial condition. Client
satisfaction or performance problems at a single acquired firm could have a
materially adverse impact on the reputation of the Company as a whole. In
addition, there can be no assurance that acquired businesses, if any, will
achieve anticipated revenues and earnings. The failure of the Company to manage
its acquisition strategy successfully could have a material adverse effect on
Hagler Bailly's business, operating results and financial condition.
Dependence on Key Clients. The Company derives a significant portion of
its revenues from a relatively limited number of clients. For example, revenues
from the Company's ten most significant clients accounted for approximately
56.6%, 66.9% and 64.5% of its total revenues in 1997, 1996 and 1995
respectively. A U.S. government agency, USAID, is the Company's largest client,
accounting for approximately 37.3%, 38.3% and 34.3% of Hagler Bailly's total
revenues in 1997, 1996 and 1995 respectively. Clients typically retain the
Company as needed on an engagement basis rather than pursuant to long-term
contracts, and a client can usually terminate an engagement at any time without
a significant penalty. Moreover, there can be no assurance that the Company's
existing clients will continue to it for additional assignments or do so at the
same revenue levels. The loss of any significant client could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the level of the Company's consulting services required
by an individual client can diminish over the life of its relationship with the
Company, and there can be no assurance that the Company will be successful in
establishing relationships with new clients as this occurs.
Professional and Other Liability. The Company's services involve risks of
professional and other liability. If the Company were found to have been
negligent or to have breached its obligations to its clients, it could be
exposed to significant liabilities and its reputation could be adversely
affected. In connection with many of its public sector engagements, the Company
employs the services of local staff and consultants who are treated as
independent contractors. Negligent or illegal acts, or ethical violations by
these independent contractors could adversely affect the Company. The Company
maintains professional liability insurance to an aggregate maximum of $10.0
million.
Partnering Arrangements. Historically, the Company's revenues have been
generated either on a standard daily rates basis or a cost plus fixed-fee basis.
The Company anticipates an increasing portion of its management consulting
services will be billed pursuant to alternative pricing arrangements which may
include incentive and success-based fees. In addition, the Company is pursuing,
in certain select instances, opportunities to invest its own capital and other
resources in partnering arrangements involving early stage energy-related
technologies and projects in the energy, telecommunications, transportation and
environmental industries. Hagler Bailly has limited prior experience investing
its own funds in external ventures. Such compensation arrangements and
investments may result in significant time delays between the incurrence of
costs in delivering services and the receipt of the related fee or return on
invested capital, as the case may be.
Public Sector Market and Contracting Risks. Approximately 59.6% of the
Company's total revenues in 1997, and 52.3% in 1996 (approximately 45.9% and
37.2% of consulting revenues in 1997 and 1996, respectively) were derived from
contracts or subcontracts with public sector clients. Providing consulting
services to public sector customers is subject to detailed regulatory
requirements and public policies as well as to funding priorities. Contracts
with public sector customers may be conditioned upon the continuing availability
of public funds, which in turn depends upon lengthy and complex budgetary
procedures, and may be subject to certain pricing constraints. Moreover, public
sector contracts may generally be terminated for a variety of factors, including
when it is in the best interests of the respective government. There can be no
assurance that these factors or others unique to contracts with governmental
entities will not have a material adverse effect on the Company's business,
results of operations and financial condition.
Intense Competition. The market for consulting services in the energy,
telecommunications, transportation and environmental industries is intensely
competitive, highly fragmented and subject to rapid change, and such competition
is likely to increase in the future. Many of the Company's competitors have
greater personnel, financial, technical and marketing resources than the
Company. The Company also competes with its clients' internal resources,
particularly where such resources represent a fixed cost to the client. This
source of competition may heighten as consolidation of electric and gas utility
and other energy industry companies creates larger organizations. There can be
no assurance that the Company will be able to compete successfully with its
existing competitors or with any new competitors.
Risk of International Operations. The Company operates either permanent or
project offices in a total of 27 foreign countries. The Company expects to
continue to expand its international operations and offices. Expansion into new
geographic regions requires considerable management and financial resources and
may negatively impact the Company's near-term results of operations. The
Company's international operations are subject to numerous potential challenges
and risks, including war, civil disturbances, other political and economic
conditions in various jurisdictions such as tariffs and other trade barriers,
longer accounts receivable collection cycles, fluctuations in currency and
potentially adverse tax consequences. There can be no assurance that such
international factors will not have a material adverse effect on the Company's
business, results of operations and financial condition.
Dependence on Key Employees. The success of the Company is highly
dependent upon the efforts, abilities, business generation capabilities and
project execution of its officers and those of its subsidiaries, in particular
those of Henri-Claude Bailly, the Company's President, Chief Executive Officer
and Chairman of the Board. The loss of the services of any of these individuals
for any reason, in particular Mr. Bailly, could have a material adverse effect
upon the Company's business, operating results and financial condition,
including its ability to secure and complete engagements. With the exception of
Mr. Bailly, the Company does not have an employment agreement with many of these
individuals. The Company maintains a key-man life insurance policy on Mr. Bailly
in the amount of $2.0 million. The Company also has entered into non-competition
agreements with those of its officers who were selling stockholders in the
Company's initial public offering in July 1997, which provides that each will
not compete with the Company for a two-year period ending July 9, 1999.
Concentration of Ownership. As of March 2, 1998, the directors and
officers of the Company (including officers of subsidiaries) beneficially owned
approximately 56.77% of the Company's outstanding shares of common stock. As a
result, these stockholders will have substantial influence over the outcome of
matters requiring a stockholder vote, including the election of the members of
the Board of Directors. Such control could adversely affect the market price of
the Company's common stock or delay or prevent a change of control of the
Company at a price which might represent a premium over the market price of its
common stock.
Need to Develop New Offerings. The Company's future success will depend in
significant part on its ability to successfully develop and introduce new
service offerings and improved versions of existing service offerings. There can
be no assurance that the Company will be successful in developing, introducing
on a timely basis and marketing such service offerings, or that any service
offerings will be accepted in the market. Moreover, services offered by others
may render the Company's services non-competitive or obsolete.
Project Risks. Many of the Company's engagements involve projects which
are critical to the operations of its customers' businesses and which provide
benefits that may be difficult to quantify. The Company's failure or inability
to meet a customer's expectations in the performance of its services could
result in the incurrence by the Company of a financial loss and could damage the
Company's reputation and adversely affect its ability to attract new business.
In addition, an unanticipated difficulty in completing a project could have an
adverse effect on the Company's business and results of operations. Fees for the
Company's engagements typically are based on the project schedule, the Company's
staffing requirements, the level of customer involvement and the scope of the
project as agreed upon with the customer at the project's inception. The Company
generally seeks to obtain an adjustment in its fees in the event of any
significant change in any of the assumptions upon which the original estimate
was based. However, there can be no assurance that the Company will be
successful in obtaining any such adjustment in the future.
Intellectual Property Rights. Hagler Bailly's performance is in part
dependent upon its internal information and communication systems, databases,
tools, and the methods and procedures that it has developed specifically to
serve its clients. The Company relies on a combination of nondisclosure and
other contractual arrangements and copyright, trademark and trade secret laws to
protect its proprietary systems, information and procedures. There can be no
assurance that the steps taken by the Company to protect its proprietary rights
will be adequate to prevent misappropriation of such rights or that the Company
will be able to detect unauthorized use and take appropriate steps to enforce
its proprietary rights. The Company believes that its systems and procedures and
other proprietary rights do not infringe upon the rights of third parties. There
can be no assurance, however, that third parties will not assert infringement
claims against the Company in the future or that any such claims will not
require the Company to enter into costly litigation or materially adverse
settlements to litigation, regardless of the merits of such claims.
Government Regulation of Immigration. Certain of the Company's employees
are foreign nationals working in the United States under U.S. visas or work
permits. Congress and administrative agencies with jurisdiction over immigration
matters have periodically expressed concerns over the levels of legal and
illegal immigration into the U.S. These concerns have often resulted in proposed
legislation, rules and regulations aimed at reducing the number of work permits
that may be issued. Any changes in such laws making it more difficult to hire
foreign nationals or limiting the ability of the Company to retain foreign
employees could require the Company to incur additional unexpected labor costs
and expenses.
Fluctuations of Operating Results. The Company's future operating results
will continue to be subject to quarterly fluctuations based upon a wide variety
of factors, including the number and significance of client engagements
commenced and completed during a quarter, delays incurred in connection with an
engagement, the number of business days in a quarter, employee hiring and
utilization rates, the ability of clients to terminate engagements without
penalties, the size and scope of engagements, the nature of the fee arrangement,
the seasonality of the spending cycle of public sector clients (especially that
of the United States government), the timing of new office openings, return on
investment capital, and the general economy, such as recessionary periods,
political instability, changes in trade policies, fluctuations in interest or
currency exchange rates and other competitive factors. Seasonality also affects
the Company's operating results, particularly in the third quarter of each
fiscal year. In addition, the Company's operating expenses are increasing as the
Company continues to expand its operations, and future operating results will be
adversely affected if revenues do not increase accordingly. Additionally, the
Company plans to continue to evaluate and, when appropriate, make acquisitions
of complementary businesses. As part of this process the Company will continue
to evaluate the changing value of its assets, and when necessary, make
adjustments thereto. While the Company cannot predict what effect these various
factors may have on its financial results, the aggregate effect of these and
other factors could result in significant volatility in the Company's future
performance and stock price.
Fluctuations in the General Economy. Demand for the Company's professional
services is significantly affected by the general level of economic activity.
When economic activity slows, clients may delay or cancel plans that involve the
hiring of consultants. The Company is unable to predict the level of economic
activity at any particular time, and fluctuations in the general economy could
adversely affect the Company's business, operating results and financial
condition.
Employment Liability Risks. The Company as a provider of professional
services employs and places individuals in the workplace of other businesses.
Inherent risks of such activity include possible claims of errors and omissions,
misuse of client proprietary information, misappropriation of funds,
discrimination and harassment, theft of client property, other criminal activity
or torts and other claims. Although historically the Company has not experienced
any material claims of these types, there can be no assurance that the Company
will not experience such claims in the future.
Certain Anti-takeover Effects. The Company's Amended and Restated
Certificate of Incorporation, By-laws, and the Delaware General Corporation Law
include provisions that may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt that stockholders might consider in
their best interests. These include a Board of Directors which is divided into
three classes, each of which is elected to serve staggered three-year terms, and
by-law provisions under which only the Chairman of the Board, a majority of the
Board of Directors or stockholders owning at least 50% of the Company's capital
stock may call meetings of the stockholders and which require certain advance
notice procedures for nominating candidates for election to the Board of
Directors. Also, the Board of Directors of the Company is authorized to issue up
to 5,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of such shares, without any further stockholder
action. The existence of this "blank-check" preferred stock could render more
difficult or discourage an attempt to obtain control of the Company by means of
a tender offer, merger, proxy contest or otherwise. Furthermore, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law that prohibits Hagler Bailly from engaging in a "business
combination" with an "interested stockholder" unless the business combination is
approved in a prescribed manner. These provisions could also have the effect of
delaying or preventing a change of control of the Company, which could adversely
affect the market price of the Common Stock.
Shares Eligible for Future Sale. As of March 2, 1998, the Company has
8,869,291 shares of Common Stock outstanding, of which 3,622,500 shares are
freely tradeable without restriction or further registration under the
Securities Act of 1933 (the "Act"), unless such shares are acquired by
"affiliates" of the Company, as that term is defined in Rule 144 of the Act
("Rule 144"). Holders of the remaining shares will be eligible to sell such
shares pursuant to Rule 144 at prescribed times and subject to the manner of
sale, volume, notice and information restrictions of Rule 144. In addition,
1,246,137 shares of the Company's Common Stock are issuable upon the exercise of
outstanding stock options (of which options to acquire 504,038 shares are
currently exercisable).
Fluctuations in Stock Price. The market price of the Company's Common
Stock may fluctuate substantially due to a variety of factors, including
quarterly fluctuations in results of operations, announcements or terminations
of new services, offices, contracts, acquisitions or strategic alliances by the
Company or its competitors, as well as changes in the market conditions in the
energy, telecommunications, transportation and environmental industries, changes
in earnings estimates by analysts, changes in accounting principles, sales of
the Company's Common Stock by existing holders, loss of key personnel and other
factors. The stock market has from time to time experienced extreme price and
volume fluctuations which have particularly affected the market price for many
companies and which, on occasion, have been unrelated to operating performance.
To the extent the Company's performance may not meet expectations published by
external sources, public reaction could result in a sudden and significantly
adverse impact on the market price of the Company's securities, particularly on
a short-term basis. In addition, such stock price volatility may provoke the
initiation of securities litigation, which may divert substantial management
resources and may have an adverse effect on the management of business
operations. Any of these results could have a material adverse effect on the
Company's business, operating results and financial condition.
ITEM 2 - PROPERTIES
In aggregate, the Company leases approximately 186,586 square feet of
office space in the following principal offices: Arlington, Virginia
(headquarters); Boston, Massachusetts; Boulder, Colorado; Chicago, Illinois;
Houston, Texas; Los Angeles, California; Madison, Wisconsin; New York, New York;
and San Francisco, California. Hagler Bailly also leases an aggregate of
approximately 6,590 square feet of office space in the following principal
foreign offices: Buenos Aires, Argentina; Dublin, Ireland; Islamabad, Pakistan,
Jakarta, Indonesia, Paris, France, Sao Paulo, Brazil and Toronto, Canada. In
addition, the Company leases 1,955 square feet for branch offices in Brussels,
Belgium; Philadelphia, Pennsylvania; and Manila, Philippines. Each principal
office represents a permanent location servicing multiple clients which is run
by a member of Hagler Bailly's senior management. In addition, from time to time
the Company leases a project office to enable it to service a specific
international project involving a particular individual client, in which case
the office is paid for directly by the client. The Company currently has project
offices in 17 foreign locations totaling approximately 25,696 square feet. All
of the Company's principal, branch and project offices are electronically linked
together and have access to all of the Company's capabilities and core
consulting tools. The Company believes that its facilities are adequate for its
current needs and that additional facilities can be leased to meet future needs.
ITEM 3 -- LEGAL PROCEEDINGS
The Company's indirect subsidiary, Theodore Barry & Associates, is a
defendant in a lawsuit brought in the United States District Court for the
Northern District of Illinois, Michael A. Laros v. Theodore Barry & Associates,
No. 95-C4175, by one of its former executives seeking payment of a bonus and
salary allegedly due him and payment of principal and interest on a subordinated
note of TB&A held by Mr. Laros, prejudgment interest and costs and fees. TB&A is
defending the suit. The Company does not believe that the resolution of this
lawsuit will have a material adverse effect on its business, financial condition
or results of operations.
The Company and its subsidiaries are from time to time a parties to
litigation arising in the ordinary course of business. Neither the Company nor
any of its subsidiaries is a party to any pending material litigation nor are
any of them aware of any pending or threatened litigation that would have a
material adverse effect on the Company or its business.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock, $.01 par value, was first offered to the
public on July 3, 1997 and since that time has been traded on the Nasdaq Stock
MarketSM ("Nasdaq") under the symbol "HBIX". The following table sets forth,
during the period indicated, high and low closing prices as reported by Nasdaq
for the last fiscal year.
Fiscal Year Ended December 31, 1997 High Low
January - March ____________________ N/A N/A
April - June ______________________ N/A N/A
July 3 - September _________________ $25.250 $17.000
October - December _________________ $26.375 $18.250
Dividends
The Company has never paid a cash dividend on its Common Stock and does
not expect to pay a cash dividend on its Common Stock in the foreseeable future.
Holders of Record of Hagler Bailly Common Stock
The Company had 77 holders of record of its Common Stock as of March 2,
1998 and approximately 700 beneficial owners.
The Company issued an aggregate of 409,985 shares of its Common Stock on
December 1, 1997 to approximately 30 former shareholders (and holders of
unvested options to purchase the common stock) of Apogee in connection with the
Company's acquisition of Apogee. The offering was exempt under Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1993 and 1994
have been derived from the audited Financial Statements of the Predecessor. The
selected consolidated financial data as of December 31, 1995 includes the
combined financial data of the Predecessor derived from the audited Financial
Statements from January 1, 1995 to May 25, 1995 and the consolidated financial
data of the Company from May 26, 1995 to December 31, 1995 derived from the
audited Consolidated Financial Statements of the Company. The selected
consolidated financial data as of December 31, 1996 and 1997 have been derived
from the audited Consolidated Financial Statements of the Company. The Company's
prior years have been restated to include the Apogee acquisition.
The results of operations for prior periods are not necessarily indicative
of the results that may be expected for future years. The information set forth
below should be read in conjunction with the Company's Consolidated Financial
Statements and the Notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K Annual Report and the Predecessor Financial Statements, which is filed in
the Financial Statements in Amendment No. 2 to the Company's Registration
Statement Form S-1 filed with the Securities and Exchange Commission on June 12,
1997, and is incorporated by reference herein.
<TABLE>
<CAPTION>
The Predecessor (1) The Company (1)
Jan. 1, May 26,
--------- 1995 to
Years ended 1995 to Dec. 31, Years ended
December 31, May 25, December 31,
- ---------------------------------------------
1993 1994 1995 1995 1996 (2) 1997
- ---------------------------------------------
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Consulting revenues $22,226 $28,347 $13,712 $22,021 $45,123 $51,412
Subcontractors and other revenues 10,276 13,437 8,897 11,119 22,821 33,645
Total revenues 32,502 41,784 22,609 33,140 67,944 85,057
Cost of services 26,645 33,998 18,814 27,010 54,091 64,097
Gross profit 5,857 7,786 3,795 6,130 13,853 20,960
Selling, general and administrative 4,006 5,384 2,710 3,591 9,139 12,319
expenses (4)
Stock and stock option compensation (3) - - - - 6,172 80
Income/(loss) from operations 1,851 2,402 1,085 2,539 (1,458) 8,561
Other income(expense) net (47) (18) (59) (693) (1,012) 219
Income/(loss) before income tax expense 1,804 2,384 1,025 1,847 (2,470) 8,780
Income tax expense 729 1,002 422 810 961 3,352
Net Income (loss) 1,075 1,382 602 1,036 (3,431) 5,428
- --------------------------------------------- =========== =========== =========== =========== =========== ===========
Net Income (loss) per share
Basic * * * * (0.67) 0.78
Dilutive * * * * (0.67) 0.70
Weighted average shares outstanding
Basic * * * * 5,119,054 6,976,387
Dilutive * * * * 5,119,054 7,809,967
* Due to the acquisition on May 25, 1995, and the change in capital
structure, earnings per share information for this period is not meaningful
and accordingly is not presented.
YEARS ENDED DECEMBER 31,
1993 1994 1995 1996 1997
- ---------------------------------------------
BALANCE SHEET DATA (In Thousands)
- ---------------------------------------------
Cash and cash equivalents 963 620 706 1,686 3,035
Working capital 2,149 3,621 3,189 4,625 30,672
Total assets 14,027 17,311 27,722 30,704 57,437
Total debt - - 13,455 11,267 -
Total Stockholders' equity 4,760 6,219 4,785 8,209 44,505
Common stock and cash dividends declared - - - - -
<FN>
(1) Effective May 25, 1995, the management of RCG/HB, a wholly-owned
subsidiary of RCG International, Inc. ("RCG"), acquired all of the voting
stock of RCG/HB. The statements of operations data include the operations
of Apogee Research, Inc. for all periods presented.
(2) The statements of operations data for the year ended December 31, 1996
includes the following expenses: (a) approximately $0.5 million of cost of
services, representing that portion of officer compensation that exceeded
the compensation that would have been paid have the compensation plan
adopted in January 1997 been in effect for all of 1996; (b) approximately
$6.2 million stock and stock option compensation representing the
non-recurring, non-cash compensation expense in connection with the
amendment to the Stock Plan and a reclassification of the Company's Common
Stock described in footnote 3 below. The net impact of the foregoing on
the Company's Statement of Operations for the year ended December 31, 1996
was to decrease income before income tax expense by approximately $7.7
million and net income by approximately $6.6 million, with income tax
expense calculated at a combined federal and state income tax rate of
40.0%. Excluding the foregoing, income before income tax expense for the
year ended December 31, 1996 would have been approximately $4.9 million
and net income would have been approximately $2.9 million.
(3) In connection with an amendment to the Stock Plan and a reclassification
of its Common Stock, each effective December 31, 1996, the Company
incurred non-recurring, non-cash charges to operations amounting to $4.6
million for options and $1.6 million for stock, respectively, in 1996. In
connection with a stock bonus to an employee, the Company incurred a
non-cash compensation charge to operations in the first quarter of 1997 of
$65,000.
(4) The selling, general and administrative expenses included $1.2 million
acquisition related expenses for the year ended December 31, 1997.
</FN>
</TABLE>
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The predecessor of the Company was founded in February 1980 as Hagler
Bailly & Company, Inc. In July, 1984 it was acquired by RCG International, Inc.
("RCG") an indirect subsidiary of Reliance Group Holdings, Inc. and in 1987 was
renamed RCG/Hagler Bailly, Inc. In May 1995, the management of RCG/Hagler Bailly
completed the purchase of RCG/Hagler Bailly from RCG (the "Management Buy-Out"),
and the successor to RCG/Hagler Bailly became a wholly-owned subsidiary of the
Company. In July 1997, the Company completed an initial public offering (the
"IPO").
Hagler Bailly is a worldwide provider of consulting, research and other
professional services to corporate and government clients on energy,
telecommunication, transportation and the environment.
Total revenues represent the total of all revenues related to contracts,
including revenues associated with professional staff, subcontractors and
independent consultants. Consulting revenues represent the amount of contract
revenue associated with billings by the Company's professional staff.
Subcontractor and other revenues represent revenues associated with
subcontractors and independent consultants, as well as travel and per diem
reimbursements from clients.
The Company derives substantially all of its revenues from fees for
professional services. Clients are typically invoiced on a monthly basis. The
majority of revenues are billed at standard daily rates or cost-plus fixed-fees.
Revenues from standard daily rate contracts are recognized at amounts
represented by the agreed-upon billing amounts and costs are recognized as
incurred. Revenue from cost-plus fixed-fee contracts is recognized as costs are
incurred on the basis of direct costs plus allowable indirect costs and a pro
rata portion of estimated fee. The remainder of the revenues are billed on a
fixed-bid basis. Revenues from fixed-bid type contracts are recognized on the
percentage-of-completion method of accounting with costs and estimated profits
included in contract revenues based on the relationship that contract costs
incurred bear to management's estimate of total contract costs. Losses, if any,
are accrued when they become known and the amount of the loss is reasonably
determinable. The Company's most significant expenses are project personnel
costs, which consist of consultant salaries and benefits (including bonuses),
and travel-related direct project expenses. Project personnel are typically
full-time professionals employed by the Company, although the Company often
supplements its professional project staff through the use of subcontractors and
independent consultants, predominantly for public sector work. The Company
believes that retaining subcontractors and independent consultants on a
per-engagement basis provides it with greater flexibility and reduced risk in
adjusting professional staff levels in response to changes in demand for its
services.
Management Buy-out
From 1984 to May 1995, when the management of the Company completed the
Management Buy-Out, the Company was a wholly-owned subsidiary of RCG. The
results of operations since May 25, 1995 have been affected by an increase in
overhead as a result of becoming an independent corporation and an increase in
interest expense relating to indebtedness incurred in connection with the
Management Buy-Out. In addition, results of operations of the Company subsequent
thereto have been affected by the amortization of approximately $9.0 million of
certain intangibles, including goodwill, which were recorded in connection with
the Management Buy-Out. The data for 1995 in the period to period discussions
below reflects the results of operations of the Company for the period May 26,
1995 through December 31, 1995, and the restatement for the 1997 pooling of
interests as described below.
Compensation Charges
Prior to December 31, 1996, the Company's Stock Plan was formula based,
pursuant to which the exercise price of options granted were based upon the book
value per share as of May 26, 1995, adjusted for accretion of formula value
during any interim period up to the grant date.
Effective at December 31, 1996, the Company adopted an amendment to its
Stock Plan which changed the exercise price of future options to be granted
thereunder to the market value of the underlying Common Stock. In addition, in
connection with the reclassification of its Common Stock, the Company
substituted 0.9 shares of Class A Common Stock for each share of Class B Common
Stock underlying 971,963 options vesting on January 1, 1997. At the same time,
options to purchase 971,963 shares of Class B Common Stock vesting on January 1,
1998, were canceled. As a result, the Company recorded a non-recurring, non-cash
charge to operations of $6.2 million in December 1996 of which $4.6 million was
for options to purchase Common Stock and $1.6 million was for 394,160 shares of
Common Stock sold to employees during 1996. These charges represent the
aggregate difference between the exercise price of such outstanding options or
the issuance price of Common Stock sold to employees during 1996, as the case
may be, and the appraised market value of the underlying Common Stock at
December 31, 1996.
Recent Acquisitions
On December 1, 1997, the Company completed the acquisition of Apogee
Research, Inc. ("Apogee"), whereby Apogee became a wholly-owned subsidiary of
Hagler Bailly. Apogee is a consulting firm specializing in the economic and
financial analysis of infrastructure, including all aspects of transportation
and environment. Total consideration for the acquisition was approximately $8.3
million, in the form of an aggregate of 409,985 shares of Hagler Bailly Common
Stock. The acquisition is accounted for as a "pooling-of-interests" under
generally accepted accounting principles. Accordingly, the Company's financial
statements have been restated to reflect the acquisition on a historical basis.
On February 23, 1998, the Company completed the acquisition of TB&A Group, Inc.
("TB&A") and its wholly-owned subsidiary, Theodore Barry & Associates, whereby
TB&A became a wholly-owned subsidiary of the Company. TB&A is a management
consulting firm to electric, gas and telecommunication companies. Total
consideration for the acquisition was approximately $10.9 million in the form of
an aggregate of 454,994 shares of Hagler Bailly Common Stock. The acquisition
will be accounted for as a pooling of interests. In connection with these and
other transactions, the Company incurred merger related costs of approximately
$1.2 million in 1997.
Results of Operations
The following table sets forth, for the periods indicated, the relative
composition of revenues and selected statements of operations data as a
percentage of revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Revenues 100% 100% 100%
Cost of services 75% 80% 82%
-----------------------------------------------------------
Gross profit 25% 20% 18%
Selling, general and
administrative 14% 13% 11%
Stock & stock option compensation - 9% -
-----------------------------------------------------------
Operating income 10% (2)% 7%
Other expense (income), net - 1% 2%
-----------------------------------------------------------
Income (loss) before income tax
expense (benefit) 10% (4)% 5%
Income tax expense 4% 1% 2%
-----------------------------------------------------------
Net income 6% (5)% 3%
</TABLE>
1997 Compared to 1996
Revenues. The Company's total revenues increased 25.2% to $85.1 million in
1997 from $67.9 million in 1996. A significant cause of this increase was the
increased demand for management consulting services associated with the
restructuring and deregulation of the electric and gas sectors outside the
United States. Consulting revenues increased 13.9% to $51.4 million in 1997 from
$45.1 million in 1996. There was higher than anticipated growth in consulting
revenues for institutional clients while the overall growth was constrained by
the ending of two major private sector engagements and the management strategy
of deploying core consulting staff to create and initiate sales of
information-based products and services.
Cost of Services. Cost of services increased 18.5% to $64.1 million in
1997 from $54.1 million in 1996. The Company attributes the increase in cost of
services to the increases in the number of in-house professional staff and
related other direct costs.
Gross Profit. Gross profit increased 51.3% to $21.0 million in 1997 from
$13.9 million in 1996. Gross profit as a percentage of revenues increased to
24.6% in 1997 from 20.4% in 1996. The improvement in the margins is due
primarily to higher growth in institutional clients revenues and a continued
increase in higher margin private revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 34.8% to $12.3 million in 1997 from $9.1
million in 1996. This increase is primarily attributable to merger related costs
of $1.2 million with the remainder due to the relative increase in revenues. The
net effect is a reduction of selling, general and administrative expenses,
excluding merger related costs, as a percentage of revenues to 13.0% from 13.4%
for 1997 and 1996, respectively.
Income(loss) from Operations. Income from operations was $8.6 million for
1997 compared to $(1.5) million for 1996. The loss from operations in 1996 is
primarily attributable to the approximately $6.7 million non-recurring, non-cash
stock and stock option compensation charge and that portion of officer
compensation that exceeded the compensation that would have been paid had the
compensation plan adopted on January 17, 1997 been in effect for all of 1996.
Other (Income)/Expense. Other (income)/expense increased to $(0.2) million
income for 1997 due to the interest income earned from reduction of debt and the
investment of IPO funds compared to $1.0 million expense for 1996 attributable
to the interest expense related to the debt incurred in connection with the
Management Buy-Out.
Income Tax Expense. Income tax expense was $3.4 million in 1997 compared
to $1.0 million in 1996.
Net Income(Loss). As a result of the preceding, net income for 1997 was
$5.4 million, ($6.2 million, including the tax-effected add-back of merger
related costs of $0.7 million) compared to $(3.4) million loss for 1996,
(excluding the one-time, non-cash, compensatory item of $6.2 million for stock
and stock option compensation net income for 1996 was $2.7 million).
1996 Compared to 1995
Revenues. The Company's total revenues increased to $67.9 million in 1996
from $35.9 million in 1995. Consulting revenues increased to $45.1 million in
1996 from $24.8 million in 1995. These revenue increases can be attributed
principally to the difference in months reported, strong growth in consulting to
the U.S. utility sector and the introduction of several new corporate strategy
consulting services.
Cost of Services. Cost of services increased by $24.8 million in 1996
compared with 1995 but decreased in relation to total revenues from 81.7% of
total revenues in 1995 to 79.6% of total revenues in 1996. Of this amount
approximately $0.5 million represents that portion of officer compensation that
exceeded the compensation that would have been paid had the compensation plan
adopted in January 1997 been in place for all of 1996.
Gross Profit. Gross profit increased to $13.9 million in 1996 from $6.6
million in 1995. Gross profit as a percentage of total revenues increased to
20.4% in 1996 from 18.3% in 1995. This can be principally attributed to the
difference in months reported and an increase in consulting to the U.S. utility
sector and increased utilization rates resulting, in part, from productivity
gains associated with technology improvements.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9.1 million in 1996 from $4.0 million in
1995. As a percentage of total revenues, selling, general and administrative
expenses increased to 13.5% in 1996 from 11.1% in 1995. This increase was due
primarily to the difference in months reported and increases in certain overhead
costs associated with the Management Buy-Out, increases in loss reserves and
increases in proposal development expenses.
Income(loss) from Operations. Loss from operations was $(1.5) million in
1996 compared to income from operations of $2.6 million in 1995. The loss from
operations in 1996 is primarily attributable to the approximately $6.7 million
non-recurring, non-cash stock and stock option compensation charge and that
portion of officer compensation that exceeded the compensation that would have
been paid had the compensation plan adopted on January 17, 1997 been in effect
for all of 1996. These expenses negatively impacted income from operations by
approximately $6.2 million in 1996. Excluding the foregoing, income from
operations for 1996 would have been approximately $4.7 million, an 82.2%
increase from 1995, and would have been 6.9% of total revenues in 1996, as
compared to 7.2% in 1995. Such improvement is primarily attributable to the
difference in months reported and increased revenues and the decrease in the
cost of services (as a percentage of total revenues), partially offset by the
selling, general and administrative expenses.
Other Income/(Expense). Other income (expense) was $(1.0) million in 1996
compared to $(0.7) million for 1995. The increase is attributable to a full year
of interest expense in 1996, related to debt incurred in connection with the
Management Buy-Out versus seven months of interest expense in 1995. The debt was
repaid with the proceeds from the IPO.
Income Tax Expense. The Management Buy-Out in 1995 provided the Company
with the opportunity to make a tax election to be treated as a cash basis
taxpayer. For financial reporting purposes, the Company recognizes income tax
expense on an accrual basis. The difference between cash basis and accrual basis
created a deferred income tax liability which represents a temporary difference.
Income tax expense was $1.0 million for 1996 compared to $0.9 million for 1995.
The Company incurred income tax expense in 1996 even with an operating loss
because a portion of the stock and stock option compensation charge was not
deductible for tax purposes.
Net Income(Loss). As a result of the preceding, net loss was $(3.4)
million in 1996 as compared to net income of $1.0 million in 1995, primarily as
a result of the non-recurring stock and stock option compensation charge
discussed above. Net income (loss) as a percentage of total revenues was (5.0%)
in 1996 as compared to 2.7% in 1995. Excluding expenses related to (a) the
excess officer compensation described above, (b) the interest expense described
above, and (c) the non-recurring, non-cash compensation charge described above,
net income would have been approximately $2.7 million with income tax expense
calculated at a combined federal and state income tax rate of 40.0%.
Liquidity and Capital Resources
In July 1997, the Company completed an initial public offering of its
common stock, which raised net proceeds of approximately $30.3 million. $12.5
million of the net proceeds were used to repay borrowings from RCG and under the
Company's credit facility. Prior to the IPO, the Company's primary source of
liquidity has been cash flows from operations, periodically supplemented by
borrowings under a bank line of credit. During the year, ended December 31,
1997, the Company, through two of its subsidiaries, established a new $15
million revolving credit facility and began borrowing under the facility. All
such borrowings were repaid at year-end.
At December 31, 1997 and 1996, the Company had working capital of $30.7
million and $4.6 million, respectively. Working capital at December 31, 1997
represents an increase of $26.0 million from December 31, 1996. The increase in
1997 is primarily due to net proceeds received from the IPO. The increase was
partially offset by purchases of property, equipment and merger related costs.
Net cash provided by or used in operations consisted primarily of net
income (loss) plus elements of cash flows related to accounts receivable and
related billings, accounts payable and accrued compensation adjusted for
non-cash items including depreciation, provision for possible losses, deferred
income taxes, and stock and stock option compensation. The use of funds by
operations of $7.0 million for the year ended December 31, 1997 can be
attributed to the growth in accounts receivable due to increased sales volume,
increased tax payments due to the change from cash basis to accrual basis, and
other changes in the Company's working capital. Operating activities provided
$3.5 million of the Company's cash resources for the year ended 1996, compared
to $2.1 million in 1995. The Company realized a cash flow benefit from deferred
federal and state income taxes for the two years ended December 31, 1996 and
1995. Since the IPO, the Company was required to change from the cash method of
income tax reporting to the accrual method which resulted in a recapture of
deferred federal and state income taxes in 1996 and 1995.
The Company used $11.2 million, $1.1 million and $12.4 million for
investing activities for the years ended December 31, 1997, 1996 and 1995,
respectively. The Management Buy-Out used $11.8 million of cash from investing
activities in 1995. Investment activities for the year ended 1997 have primarily
been capital expenditures for information technology and other resources
necessary for growth of the Company.
Net cash provided by financing activities of $19.5 million for the year
ended 1997 was principally the result of the proceeds received from the issuance
of common stock in connection with the IPO. Net cash used by financing
activities for the year ended December 31, 1996 of $1.4 million was principally
the result of payment of long-term debt. During 1995, cash provided by financing
activities of $11.0 million was primarily attributable to the issuance of stock
and the debt incurred in conjunction with the Management Buy-Out.
The Company believes the net proceeds from its IPO, together with funds
generated by operations and funds provided under the credit facility, will
provide adequate cash to fund its anticipated cash needs, which may include
future acquisitions of complementary businesses, for at least the next twelve
months. The Company, depending on market conditions, may consider other sources
of financing, including equity financing. Pending such uses, the net proceeds
are invested in short-term, interest-bearing investment grade securities. The
Company currently anticipates that it will retain all of its earnings for
development of the Company's business and does not anticipate paying any cash
dividends in the foreseeable future.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), and Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for reporting comprehensive income and its components in
the consolidated financial statements. SFAS 131 establishes standards for
reporting information on operating segments in interim and annual financial
statements. SFAS 130 and SFAS 131 will become effective for the Company
beginning in 1998. SFAS 130 and SFAS 131 require disclosure only and will have
no impact on the Company's consolidated financial position and results of
operations.
Year 2000
The Company relies on software technology to deliver its services and has
taken actions to evaluate the nature and extent of the work required to make its
systems and infrastructure "Year 2000" compliant. The Company believes this will
not have a material impact on its financial position or results of operations.
Recent Event
On March 22, 1998 the Company signed a non-binding Preliminary Agreement
to combine with Putnam, Hayes & Bartlett, Inc. ("PHB"). The Company anticipates
issuing 6.8 million shares of its Common Stock to PHB shareholders in connection
with the transaction. PHB had gross revenues of approximately $63 million in
1997.
ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Consolidated Financial Statements of Hagler Bailly are annexed to the
report as pages FS-1 through FS-23. An index to the Financial Statements is set
forth on page 35.
ITEM 9 -- CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCUSSIONS
Not applicable.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Directors and Executive Officers and their respective ages
and positions follows:
Name Age Positions
Henri-Claude Bailly (1) 51 President, Chief Executive
Officer and Chairman of the Board
(Term Expiring 1999).
Jassi S. Cheema 57 Chief Executive Officer of
Hagler Bailly Consulting, Inc.
and President and Chief Executive
Officer of TB&A Group,Inc., both
wholly-owned subsidiaries of
Hagler Bailly, Inc.
Vinod K. Dar 47 Director (Nominee for Election,
Term Expiring 2001); Senior Vice
President and Managing Director of
Hagler Bailly Consulting, Inc.,
a wholly-owned subsidiary of
Hagler Bailly, Inc.
Daniel M. Rouse 47 Vice President, Chief Financial
Officer and Treasurer
Alex M. Steinbergh 57 Chief Executive Officer, HB
Capital, Inc., a wholly-owned
subsidiary of Hagler Bailly, Inc.
Alain M. Streicher 49 Director (Term Expiring 2000),
Acting Chief Operating Officer and
Senior Vice President; Chief
Executive Officer of Hagler Bailly
Services, Inc., a wholly-owned
subsidiary of Hagler Bailly, Inc.
Stephen V.R. Whitman 51 Vice President and General Counsel
Michael D. Yokell 51 Director (Term Expiring 1999);
Senior Vice President and Managing
Director of Hagler Bailly
Consulting, Inc., a wholly-owned
subsidiary of Hagler Bailly, Inc.
Robert W. Fri (1)(2)(3) 61 Director (Term Expiring 1999).
Fred M. Schriever (1)(2)(3) 67 Director (Nominee for Election,
Term Expiring 2001).
Richard H. O'Toole 51 Director (Term Expiring 2000).
- ----------------------------------
(1) Member of the Executive Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
(3) Member of the Stock Option Committee of the Board of Directors.
Henri-Claude Bailly has served as the Company's Chief Executive Officer
since the Company was founded in 1980, and as President of the Company from 1984
to 1987 and from May 1995 to date, and as Chairman of the Board from 1984 to
date. From September 1984 to May 1995, Mr. Bailly was also employed by RCG in a
series of management positions, and ended his tenure there as Senior Vice
President and director of RCG and Chairman of the Board and Chief Executive
Officer of RCG/Hagler Bailly, Inc.. From 1972 to 1980, Mr. Bailly was employed
in successive positions from Associate to Managing Director of Resource Planning
Associates, an international energy, utilities and environmental management
consulting firm. Mr. Bailly holds a Masters of Business Administration degree
from Harvard University and Bachelor and Master of Architecture degrees from the
University of Washington. Mr. Bailly serves on the Board of Directors of the
United States Energy Association and was appointed as a member of the National
Coal Council.
Jassi S. Cheema has been employed by TB&A Group, Inc. ("TB&A") in
various positions since 1980. Mr. Cheema currently serves as the President
of TB&A and as of February 23, 1998, the Chief Executive Officer of Hagler
Bailly Consulting, Inc. Prior to joining TB&A, Mr. Cheema worked for Getty
Oil Co. as a Manager of its Corporate Technical Applications group. Mr.
Cheema has his Master of Science degree from the University of Wisconsin and
his Masters of Business Administration from the University of Southern
California.
Vinod K. Dar is one of the original founders of the Company. He
rejoined the Company in 1995 and leads its corporate strategy and management
consulting practice. After leaving the Company in 1984, Mr. Dar was employed
in various senior executive positions in the energy industry. From 1984 to
1989, Mr. Dar was Executive Vice President and a director of Hadson
Corporation and Chief Executive Officer of Hadson Gas Systems. In 1990, Mr.
Dar was Senior Vice President of American Exploration Company. From mid
1990 to 1992, Mr. Dar was a Managing Director of Dar & Company. From 1992 to
1994, Mr. Dar was the Chairman of Sunrise Energy Services. From 1994 to
1995, Mr. Dar was Senior Advisor to the Company. From 1978 to 1980, Mr. Dar
was a Senior Associate with Resource Planning Associates. Mr. Dar holds a
Bachelor of Science degree in Engineering and a Master of Science degree in
Management and Finance from the Massachusetts Institute of Technology.
Mr. Dar serves as a director and chairman of the Compensation Committee of
HarCor Energy, an independent oil and gas company traded on The Nasdaq Stock
MarketSM.
Daniel M. Rouse has been employed as the Company's Chief Financial Officer
and Treasurer since he joined the Company in 1991. From 1987 to 1991, Mr. Rouse
was employed by Strategic Solutions, Inc. as Chief Financial Officer. From
1984 to 1987, Mr. Rouse was a principal at Loeb and Cohen, P.C. From 1979 to
1984, Mr. Rouse was employed by Jarrell Oil Company, Inc. as Vice President,
Finance and Controller. Mr. Rouse holds a Bachelor of Science degree in Finance
and Accounting from York University (Canada). Mr. Rouse is a Certified Public
Accountant.
Alex M. Steinbergh has been employed by the Company in various management
positions since 1992 and currently serves as the Chief Executive Officer of HB
Capital, Inc., a wholly-owned subsidiary of Hagler Bailly, Inc. Mr. Steinbergh
leads the Company's acquisitions activities. Mr. Steinbergh is the co-founder
and currently a general partner of Resource Capital Group, a holding company for
real estate investment management and development companies in Cambridge, MA.
From 1972 to 1980, Mr. Steinbergh was a colleague of Mr. Bailly at Resource
Planning Associates where he held successive positions from Associate to
Managing Director. From 1969 to 1972, Mr. Steinbergh was an Associate of
McKinsey & Company. Mr. Steinbergh holds a Master of Business Administration
degree from Harvard University, a Masters degree in Economics from Case Western
Reserve University and a Bachelor degree in Economics from Cornell University.
Alain M. Streicher has been employed by the Company in various management
positions since it was founded in 1980. Since October 1997, Mr. Streicher has
served as Acting Chief Operating Officer of Hagler Bailly, Inc., and since
January 1997, has served as the Chief Executive Officer of Hagler Bailly
Services, Inc. and leads the Company's energy and infrastructure planning and
development practice. Mr. Streicher has served as a member of the Board of
Directors of the Company since May 1995. From 1976 to 1980, Mr. Streicher was
Chief Energy Analyst at the CEREN in Paris. Mr. Streicher holds a Bachelor of
Science degree in Physics and Chemistry from the University of Orleans (France)
and a Masters degree in Physics from the University of Grenoble (France) and a
Masters degree in Industrial Management from the Ecole des Mines in Paris
(France).
Stephen V.R. Whitman has been Vice President and General Counsel of the
Company since July 1, 1997. Mr. Whitman was in private law practice in his own
firm from May 1993 until July 1997. From 1984 through May 1993 he was associated
with the law firm of Kelley Drye and Warren. From 1979 to 1984, he was a lawyer
in the Office of the General Counsel of the United States Agency for
International Development ("USAID") and served as the USAID Regional Legal
Advisor in Lima, Peru. From 1975 through 1978 Mr. Whitman was associated with
the law firm of White & Case. He earned a Bachelor of Arts degree from Harvard
College and a Juris Doctor degree from the University of Virginia School of Law.
Michael D. Yokell has been employed by the Company in various positions
since 1987, and currently leads the Company's economic analysis and litigation
support practice and is a Senior Vice President of Hagler Bailly Consulting,
Inc. Mr. Yokell served as President of the Company's predecessor, RCG/Hagler
Bailly, Inc., from 1988 to 1995. Mr. Yokell was the President of Energy and
Resource Consultants, a corporation acquired by the Company in 1987. Before
entering management consulting, Mr. Yokell taught Economics at the University
of California, Berkeley and Washington State University and was a Senior
Economist at the United States Department of Energy. Mr. Yokell earned Ph.D.
and Masters degrees in Economics from the University of Colorado and a Bachelor
of Science degree in Physics from the Massachusetts Institute of Technology.
Mr. Yokell serves on the Board of Directors of the Keystone Energy Center.
Robert W. Fri has served as a member of the Board of Directors of the
Company since May 1995. Mr. Fri is currently director of the National Museum
of Natural History at the Smithsonian Institution, and Senior Fellow Emeritus
at Resources for the Future, where he served as President from 1986 to 1995.
Mr. Fri is a director of the American Electric Power Company, a member of
the University of Chicago Board of Governors for the Argonne National
Laboratory, and a trustee of Science Service, Inc., publisher of Science
News and organizer of the Westinghouse Science Talent Search. In 1971, Mr.
Fri became the First Deputy Administrator of the United States Environmental
Protection Agency. In 1975, President Ford appointed Mr. Fri as the Deputy
Administrator of the United States Energy Research and Development
Administration. Mr. Fri served as acting administrator of both agencies for
extended periods. From 1978 to 1986, Mr. Fri operated his own company,
Energy Transition Corporation. Mr. Fri began his career with McKinsey &
Company, where he was elected a Principal. Mr. Fri earned a Bachelor of Arts
degree in Physics from Rice University and a Masters degree in Business
Administration from Harvard University.
Richard H. O'Toole is currently a Director of ABB Europe Limited. Mr.
O'Toole has extensive international experience on trade, investment and
regulatory issues and has also acted as advisor and consultant to a variety of
public and private sector organizations. A former diplomat, Mr. O'Toole has
served in posts in Paris, Geneva and Brussels. From 1976 to 1979, Mr. O'Toole
was Special Assistant in the Office of Executive Director of the OECD's
International Energy Agency. From 1979 to 1982, Mr. O'Toole was European
Correspondent in the Political Division of the Irish Foreign Ministry. He was
Irish Deputy Permanent Representative to the United Nations in Geneva from 1983
to 1984. In 1985, Mr. O'Toole was nominated Chef de Cabinet in the European
Commission with responsibilities in the areas of competition policy,
institutional issues and social policy. In 1989 he joined GPA Group plc and
became Managing Director of its GPA Technologies Division. From 1993 to 1995 he
was appointed Assistant Director General of the General Agreement on Tariffs and
Trade (GATT) where he was a leading member of the Secretariat team supervising
the conclusion of the Uruguay Round of trade negotiations and the creation of
the World Trade Organization (WTO) as a successor to the GATT arrangements. Mr.
O'Toole earned Bachelor and Masters of Science Degrees from University College,
Galway.
Fred M. Schriever retired in April 1996 from RCG. Mr. Schriever was
employed by RCG in various positions since 1971, most recently as its Chairman
and Chief Executive Officer. Prior to joining RCG, Mr. Schriever was a partner
of Booz Allen & Hamilton. Since 1996, Mr. Schriever has been a consultant to
various industry groups. Mr. Schriever is a Fellow of both the Institute of
Directors and the Institute of Management Consultants in the United Kingdom,
and a member of the United States Institute of Management Consultants ant the
American Society of Mechanical Engineers and a Certified Management Consultant.
Mr. Schriever earned Bachelor's and Master's degrees from Polytechnic
University.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). SEC regulations require the Company's executive officers,
directors and greater than ten percent stockholders to furnish the Company with
copies of the reports they are required to file. Based solely on a review of the
copies of such reports furnished to the Company, the Company believes that
during 1997, its executive officers, directors, and greater than ten percent
beneficial owners complied with all applicable Section 16(a) filing
requirements, except that one report with respect to each of Messrs. Bailly,
Fri, O'Toole and Yokell was filed late.
ITEM 11 -- EXECUTIVE COMPENSATION
Executive Compensation Summary Table
The following table sets forth certain information with respect to the
annual and long-term compensation paid to the President and Chief Executive
Officer and the four other most highly paid executive officers during the year
ended December 31, 1997 (the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
<S> <C> <C> <C> <C> <C>
All Other
------- ------------ -------------- -------------- ---------------
Name and Principal Position Bonus Options/ Compensation
Year Salary ($) ($) SARs (#) ($)
- ---------------------------------------------
Henri-Claude Bailly 1997 $375,000 $125,000 172,876 $64,357(1)
President, Chief Executive Officer and 1996 325,000 606,954 51,863 107,126(2)
Chairman of the Board of Hagler Bailly, Inc.
- --------------------------------------------- -------- ------------- --------------- --------------- ----------------
Daniel M. Rouse 1997 175,945 62,500 20,745 26,025(3)
Vice President, Chief Financial Officer and 1996 134,335 110,683 -- 13,931(4)
Treasurer of Hagler Bailly, Inc.
- --------------------------------------------- -------- ------------- --------------- --------------- ----------------
Vinod K. Dar 1997 352,694 140,000 -- 13,357(4)
Senior Vice President and Managing Director 1996 308,753 -- -- 467,931(5)
of Hagler Bailly Consulting, Inc.
- --------------------------------------------- -------- ------------- --------------- --------------- ----------------
Alain M. Streicher 1997 225,880 115,000 -- 14,357(4)
Acting Chief Operating Officer of Hagler 1996 176,357 270,245 -- 13,931(4)
Bailly, Inc., Chief Executive Officer and
Managing Director of Hagler Bailly
Services, Inc.
- --------------------------------------------- -------- ------------- --------------- --------------- ----------------
Alex M. Steinbergh 1997 210,543 59,474 -- --
Chief Executive Officer of HB Capital, Inc. 1996 -- -- -- --
- --------------------------------------------- -------- ------------- --------------- --------------- ----------------
<FN>
(1) Represents $50,000 paid pursuant to Mr. Bailly's employment agreement and $14,357 in matching payments
and profit sharing under the Company's 401(k) Profit Sharing Plan. See "Employment Arrangements."
(2) Represents $93,195 paid pursuant to Mr. Bailly's employment agreement and $13,931 in matching payments
and profit sharing under the Company's 401(k) Profit Sharing Plan.
(3) Represents $11,668 paid for as compensation deducted from accrued paid leave hours and $14,347 in
matching payments and profit sharing under the Company's 401(k) Profit Sharing Plan.
(4) Represents matching payments and profit sharing under the Company's 401(k) Profit Sharing Plan.
(5) Represents $454,000 paid to the Hagler Bailly, Inc. Deferred Compensation Plan Trust for Vinod K. Dar
and $13,931 in matching payments and profit sharing under the Company's
401(k) Profit Sharing Plan. In September 1996, the Company adopted the
Hagler Bailly, Inc. Deferred Compensation Plan Trust for Vinod K. Dar,
an individual deferred compensation plan for Vinod K. Dar, a Senior
Vice President of Hagler Bailly Consulting, Inc. Pursuant to this plan,
the Company contributed $454,000 of Mr. Dar's compensation payable for
services performed to a trust created for his benefit. The trust used
such deferred compensation to purchase 345,754 shares of Hagler Bailly
Common Stock from the Company at a price of $1.31 per share. Subject to
the terms of the trust, including upon Mr. Dar's termination of
employment or in the event of a change in control, Mr. Dar will receive
a distribution of 345,745 shares of Hagler Bailly Common Stock from the
trust.
</FN>
</TABLE>
Stock Option Grants During 1997
The following table presents information with respect to stock option
grants during the year ended December 31, 1997 to the Named Executive Officers.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value Assumed Annual
Rate of Stock Price
Appreciation for
Option Term (1)
Individual Grants
Number of % of Total
Options/SARs ------------- ----------- ----------- ----------
Securities
Underlying Granted to Exercise
Option/SARs Employees
Name Granted (#) in Fiscal Year or Base Expiration 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Price ($/Sh) Date
- -------------------------
97,509 (2) 14% $6.10 01/17/07 $374,070 $947,966
Henri-Claude A. Bailly 75,367 (3) 11% 6.71 01/17/02 139,719 308,743
- -------------------------
Daniel M. Rouse 20,745 3% 6.10 01/17/07 79,583 201,679
- -------------------------
Vinod K. Dar -- -- -- -- -- --
- -------------------------
Alain M. Streicher -- -- -- -- -- --
- -------------------------
Alex M. Steinbergh -- -- -- -- -- --
- ------------------------
<FN>
(1) The potential realizable value is calculated based on the five-year
term for Mr. Bailly's option to purchase 75,367 shares, and on the
ten-year term for Mr. Bailly's and Mr. Rouse's options to purchase
97,509 and 20,745 shares, respectively. It is calculated by assuming
that the stock price on the date of grant appreciates from the exercise
price at the indicated annual rate, compounded annually for the entire
term of the option.
(2) Non-qualified options granted pursuant to the Company's Stock Option
Plan, with an exercise price based on Fair Market Value as determined
by an independent third party appraisal.
(3) Incentive stock options granted pursuant to the Company's Stock Option
Plan, with an exercise price based on 110% of the Fair Market Value as
determined by an independent third party appraisal.
</FN>
</TABLE>
Stock Option Exercises and Values in 1997
The following table sets forth the number of shares covered by exercisable
and unexercisable options held by the Named Executive Officers on December 31,
1997 and the aggregate gains that would have been realized had these options
been exercised on December 31, 1997, even though the options were not exercised,
and the unexercisable options could not have been exercised on December 31,
1997. A total of 72,213 stock options were exercised by the Named Executive
Officers during the fiscal year ended December 31, 1997.
Aggregate Option Exercises During 1997
and Values on December 31, 1997
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
--------------------------------- -------------------------------
Underlying Unexercised In-the-Money Options/SARs at
Options/SARs at FY-End FY-End
(#) ($)(1)
- ----------------------- ------------ -------------- --------------- ----------------- -------------- ----------------
Shares
Acquired on
Exercise (#) --------------
Name Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------
<S> <C> <C> <C> <C> <C> <C>
17,000 $ 356,065(2) 234,542 -- $5,234,977 --
Henri-Claude A. Bailly 34,575 174,258(3) -- -- -- --
17,288 85,403(4) -- -- -- --
9,795 65,572 154,663 $1,035,382
24,780 72,729 406,392 1,192,756
Daniel M. Rouse ...... -- -- 12,087 20,745 270,024 340,218
Vinod K. Dar
Alain M. Streicher ... 3,350 74,839(5) 117,580 -- 2,626,737 --
Alex M. Steinbergh ... -- -- -- -- -- --
<FN>
(1) Options are in-the-money if the market value of the shares covered
thereby is greater than the option exercise price. Value is calculated
based on the fair market value of the Common Stock at December 31, 1997
of $22.50 (as reported on The Nasdaq Stock MarketSM), less the exercise
price.
(2) Value is calculated based on the fair market value of the Common Stock at December 22, 1997 (date of
exercise) of $21.125 (as reported on The Nasdaq Stock MarketSM), less the exercise price.
(3) (4) Value is calculated based on fair market value of Common Stock at
January 23, 1997 (date of exercise), of $6.10 (as determined by an
independent third party appraisal), less the exercise price.
(5) Value is calculated based on the fair market value of the Common Stock at December 31, 1997 (date of
exercise) of $22.50 (as reported on The Nasdaq Stock MarketSM), less the exercise price.
</FN>
</TABLE>
Employment Arrangements
The Company entered into an employment agreement with Mr. Bailly on May
25, 1995 in connection with the management repurchase of the Company from RCG
and such agreement was amended and restated effective upon consummation of
Hagler Bailly's initial public offering (the "Agreement"). Mr. Bailly will serve
as Chairman of the Board and Chief Executive Officer of the Company and Hagler
Bailly Consulting, Inc. (or such other position mutually agreed upon) for a term
of three (3) years (ending July 9, 2000) and will receive for his services an
initial base salary of $375,000 per year, subject to increase each January 1 by
an amount that is no less than greater of 5.0% over the annual rate of base
salary in effect the preceding year, and the increase in the Consumer Price
Index for the year. Mr. Bailly is entitled to a bonus for each calendar year
equal to an amount determined by the Executive Compensation Committee of the
Board. Mr. Bailly is also entitled to receive, from time to time, options to
purchase Hagler Bailly Common Stock pursuant to the Stock Option Plan as
determined by the Stock Option Committee of the Board. Mr. Bailly is entitled to
participate in all of the benefit programs which are presently or may in the
future be provided by the Company. In addition, Mr. Bailly is also entitled to a
bonus equal to the average bonus percentage received during the term of the
Agreement multiplied by his then current base salary if his employment is
terminated without cause or upon change in control (as defined in the
Agreement).
Director Compensation
Directors who are not executive officers of the Company are paid a fee of
$1,000 for each Board meeting attended in person and all directors are
reimbursed for travel expenses incurred in connection with attending board and
committee meetings. Directors are not entitled to additional fees for serving on
committees of the Board of Directors. Messrs. Schriever, Fri and O'Toole, each
non-employee directors of the Company, were granted options to purchase 8,186,
8,186, and 3,000 shares of Common Stock, respectively, in 1997. Pursuant to the
terms of the Stock Option Plan, subsequent to the Company's initial public
offering, each director of Hagler Bailly who is not otherwise employed by the
Company is granted an option at the time of each annual election of directors to
purchase 3,000 shares of Common Stock.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
Set forth below is the name, address, stock ownership and voting power of
each person or group of persons known by the Company to own beneficially more
than 5% of the outstanding shares of the Company's Common Stock.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
- ----------------- ----------------------------------------------- Beneficial Ownership -------------------
Title of Class of Beneficial Owner Percent of Class
<S> <C> <C> <C>
Common Stock FMR Corp. (1) 787,500 8.88
82 Devonshire Street, Boston, MA 02109
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Henri-Claude Bailly (2) 824,336 9.33
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Vinod K. Dar (3) 468,631 5.3
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Alain M. Streicher (4) 490,677 5.55
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Michael D. Yokell (5) 615,389 6.96
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
<FN>
(1) On February 10, 1998, FMR Corp. filed a Schedule 13G with the
Securities and Exchange Commission reporting beneficial ownership of
787,500 shares of the Company's Common Stock.
(2) Includes 72,500 shares of Common Stock held jointly in trust by Mr.
Bailly and Mr. Streicher on the behalf of Mr. Streicher's children, and
options to purchase 303,692 shares of the Company's Common Stock which
are currently exercisable or exercisable within 60 days of March 2,
1998.
(3) Includes 345,754 shares of Common Stock held in the Hagler Bailly, Inc.
Deferred Compensation Plan Trust for Mr. Dar's benefit.
(4) Includes 72,500 shares of Common Stock held jointly in trust on behalf
of Mr. Streicher's children. Inc, and options to purchase 117,580
shares of the Company's Common Stock which are currently or exercisable
within 60 days of March 2, 1998.
(5) Includes 29,389 shares of Common Stock held by Mr. Yokell in trust on behalf of his Children.
</FN>
</TABLE>
The following table sets forth certain information regarding the
beneficial ownership of Hagler Bailly Common Stock at March 2, 1998, by (i) each
director and the Named Executive Officers and (ii) all executive officers and
directors as a group.
<TABLE>
<CAPTION> Name and Address Amount and Nature of
- ----------------- ----------------------------------------------- Beneficial Ownership -------------------
Title of Class of Beneficial Owner Percent of Class
<S> <C> <C> <C>
Common Stock Henri-Claude Bailly (1) 824,336 9.29
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Vinod K. Dar (2) 468,631 5.28
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Robert W. Fri (3) 11,642 0.13
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Richard H. O'Toole (4) 3,000 0.03
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Daniel M. Rouse (5) 12,087 0.14
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Fred M. Schriever (6) 24,398 0.28
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Alex M. Steinbergh 7,206 0.08
c/o HB Capital, Inc.
77 Franklin Street, Boston, MA 02110
- ------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock Alain M. Streicher (7) 490,677 5.53
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
================== ================================================ ============================ ====================
Common Stock Michael D. Yokell (8) 615,389 6.96
c/o Hagler Bailly, Inc.
1530 Wilson Blvd., Arlington, VA 22209
================== ================================================ ============================ ====================
All Directors and Executive Officers as a Group 2,552,293 28.78
<FN>
(1) Includes 72,500 shares of Common Stock held in trust by Mr. Bailly and
Mr. Streicher on the behalf of Mr. Streicher's children, and options to
purchase 303,692 shares of the Company's Common Stock which are
currently exercisable or exercisable within 60 days of March 2, 1998.
(2) Includes 345,754 shares of Common Stock held in the Hagler Bailly, Inc.
Deferred Compensation Plan Trust for Mr. Dar's benefit.
(3) Consists of options to purchase 11,642 shares of the Company's Common
Stock which are currently exercisable or exercisable within 60 days of
March 2, 1998.
(4) Consists of options to purchase 3,000 shares of the Company's Common
Stock which are currently exercisable or exercisable within 60 days of
March 2, 1998.
(5) Consists of options to purchase 12,087 shares of the Company's Common
Stock which are currently exercisable or exercisable within 60 days of
March 2, 1998.
(6) Excludes 50,000 shares of Common Stock held by Mr. Schriever's spouse,
as to which Mr. Schriever disclaims beneficial ownership. Includes
options to purchase 8,186 shares of the Company's Common Stock which
are currently exercisable or exercisable within 60 days of March 2,
1998.
(7) Includes 72,500 shares of Common Stock held jointly in trust on behalf of Mr. Streicher's children.
(8) Includes 29,389 shares of Common Stock held by Mr. Yokell in trust on behalf of his Children.
</FN>
</TABLE>
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Daniel M. Rouse, Vice President and Chief Financial Officer of the
Company, was indebted to the Company in the amount of $287,427.14 at December
31, 1997. This amount consisted of $74,496.63 constituting the outstanding
balance on a personal loan incurred prior to 1997. Interest was payable on this
loan at the rate of 8.5 percent. The remainder consisted of $5,315.14 in accrued
interest and $206,930.51 of bonus advances and charges to Mr. Rouse's personal
account made in the course of 1997, on which no interest was paid during 1997.
The largest aggregate amount of Mr. Rouse's debt outstanding to the Company
during 1997 was $287,427.14. All of Mr. Rouse's indebtedness was combined into
one loan on February 2, 1998 with an interest rate of eight percent (8%) per
annum and a five (5) year term. Mr. Rouse repaid this loan in full on March 25,
1998.
Alain M. Streicher, a director and Senior Vice President of the Company,
was indebted to the Company in the amount of $103,422.26 on December 31, 1997.
This amount consisted of an outstanding balance of $21,295.26 on a loan
established in 1995 with an interest rate of 9 percent per year and accrued
interest of $7,109. The remainder of $75,000 constituted an advance on a bonus,
bore no interest and was for an indeterminate term. The largest aggregate amount
of Mr. Streicher's debt to the Company during 1997 was $181,809. The outstanding
amount of Mr. Streicher's indebtedness is currently $100,571.54.
Michael D. Yokell, a director and Senior Vice President of the Company's
wholly-owned subsidiary, Hagler Bailly Consulting, Inc., obtained a loan of
$500,000 from the Company in April 1997. The loan had an interest rate of 8.45
percent and was repaid in full in June 1997. The largest aggregate amount of Mr.
Yokell's debt to the Company during 1997 was $500,000.
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) The consolidated financial statements filed as part of this report are
listed in the accompanying index to Consolidated Financial Statements. The
exhibits filed as part of this report are listed, in the accompanying
Exhibit Index, which follows the signature pages to this report.
<PAGE>
HAGLER BAILLY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants.......................................FS-1
Consolidated Balance Sheets at December 31, 1997
and 1996................................................................FS-2
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995..................................FS-3
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995....................FS-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995..................................FS-5
Notes to Consolidated Financial Statements..............................FS-6
(b) During the fourth quarter ended December 31, 1997, the Registrant filed
the following Current Reports on Form 8-K: Current Report on Form 8-K
dated December 16, 1997 concerning the acquisition of Apogee Research,
Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
HAGLER BAILLY, INC.
Dated: March 30, 1998 By: /s/ Henri-Claude Bailly
Henri-Claude Bailly,
Chief Executive Officer, President and
Chairman of the Board
Dated: March 30, 1998 By: /s/ Daniel M. Rouse
Daniel M. Rouse,
Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)
Date: March 30, 1998 By: /s/ Vinod K. Dar
Vinod K. Dar,
Director
Dated: March 30, 1998 By: /s/ Robert W. Fri
Robert W. Fri,
Director
Dated: March 30, 1998 By: /s/ Richard H. O'Toole
Richard H. O'Toole,
Director
Dated: March 30, 1998 By: /s/ Fred M. Schriever
Fred M. Schriever,
Director
Dated: March 30, 1998 By: /s/ Alain M. Streicher
Alain M. Streicher,
Director
Dated: March 30, 1998 By: /s/ Michael D. Yokell
Michael D. Yokell,
Director
<PAGE>
<TABLE>
<CAPTION> EXHIBIT INDEX
Exhibit
No. Description
<S> <C>
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., Hagler Bailly Acquisition
Corp. 1997-1 and Apogee Research, Inc., dated as of November 18, 1997. (5)
3.1 Amended and Restated Certificate of Incorporation of the Company (1)
3.2 By-Laws of the Company (1)
4 Specimen Stock Certificates (2)
4.1 Escrow Agreement dated December 1, 1997 by and among Hagler Bailly, Inc., Hagler Bailly
Acquisition Corp. 1997-1, Richard R. Mudge as Stockholders' Representative and State Street
Bank and Trust Company, as Escrow Agent. (5)
4.2 Registration Rights Agreement dated November 18, 1997 by and between Hagler Bailly, Inc. and
Richard R. Mudge, acting as Stockholders' Representation. (5)
10.1 Hagler Bailly, Inc. Amended and Restated 1996 Employee Incentive and Non-Qualified Stock
Option and Restricted Stock Plan (including forms of option agreements) (1)
10.2 Form of Non-Compete, Confidentiality and Registration Rights Agreement between the Company
and each stockholder (1)
10.3 Form of Amended and Restated Employment Agreement between the Company and Henri-Claude A.
Bailly (2)
10.4 Lease by and between Wilson Boulevard Venture and RCG/Hagler Bailly, Inc. dated October 25,
1991 (1)
10.5 First Amendment to Lease by and between Wilson Boulevard
Venture and RCG/Hagler Bailly, Inc., dated February 26,
1993 (1)
10.6 Second Amendment to Lease by and between Wilson Boulevard
Venture and RCG/Hagler Bailly, Inc., dated December 12,
1994 (1)
10.7 Lease by and between Bresta Futura V.B.V. and Hagler Bailly Consulting, Inc. dated May 8,
1996 (1)
10.8 Lease by and between L.C. Fulenwider, Inc., and RCG/Hagler Bailly, Inc. dated December 14,
1994 (1)
10.9 Lease by and between University of Research Park Facilities Corp. and RCG/Hagler Bailly,
Inc., dated April 1, 1995 (2)
10.10 Credit Agreement by and between Hagler Bailly Consulting, Inc. and State Street Bank and
Trust Company, dated May 17, 1995 (1)
10.11 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)
10.12 Extension Agreement by and between Hagler Bailly Consulting, Inc. and State Street Bank and
Trust Company, dated as of August 1, 1996 (1)
10.13 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)
10.14 Term Note by and between Hagler Bailly Consulting, Inc., and State Street Bank and Trust
Company, dated May 26, 1995 (1)
10.15 Revolving Credit Note by and between Hagler Bailly Consulting, Inc. and State Street Bank
and Trust Company, dated May 26, 1995 (3)
10.16 Amendment to Credit Agreement by and between Hagler Bailly
Consulting, Inc., and State Street Bank and Trust Company,
dated as of June 12, 1997 (3)
10.17 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. (4)
10.18 Promissory Note by Hagler Bailly Consulting, Inc. and Hagler Bailly Services, Inc. to State
Street Bank and Trust Company, dated September 30, 1997. (4)
10.19 Security Agreement by and between Hagler Bailly Consulting, Inc. and State Street Bank and
Trust Company, dated as of September 30, 1997. (4)
10.20 Security Agreement by and between Hagler Bailly Services, Inc. and State Street Bank and
Trust Company, dated as of September 30, 1997. (4)
10.21 Guaranties by Hagler Bailly, Inc. to State Street Bank and Trust Company, dated September
30, 1997. (4)
10.22 Guaranties by HB Capital, Inc. to State Street Bank and Trust Company, dated September 30,
1997. (4)
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 Consulting, Inc., dated
September 30, 1997. (4)
10.24 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. (4)
10.25 Guaranty of Monetary Obligations to Bresta Futura V.B.V. by Hagler Bailly, Inc., dated July
23, 1997. (4)
21 Subsidiaries
24 Powers of Attorney (included on Signature Pages) (1)
27 Financial Data Schedule
<FN>
- -------------------------------------------------------------------------------------------------------------------
(1) Included in Amendment No.1 to the Company's Registration
Statement as Form S-1 (No. 333-22207) filed with Securities
and Exchange Commission on May 21, 1997.
(2) Included in Amendment No.2 to the Company's Registration
Statement Form S-1 (No. 333-22207) filed with the
Securities and Exchange Commission on June 12, 1997.
(3) Included in Amendment No. 3 to the Company's Registration
Statement on Form S-1 (No. 333-22207) filed with the
Securities and Exchange Commission on July 1, 1997.
(4) Included in the Company's Quarterly Report on Form 10-Q
filed with the Securities and Exchange Commission for the
quarter ended September 30, 1997, on November 14, 1997.
(5) Included in the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 16,
1998.
</FN>
</TABLE>
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Hagler Bailly, Inc.
We have audited the accompanying consolidated balance sheets of Hagler Bailly,
Inc. ("the Company") and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Hagler
Bailly, Inc. and its subsidiaries December 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
We previously audited and reported on the December 31, 1996 consolidated balance
sheet and the related consolidated statements of operations, stockholders'
equity, and cash flows of Hagler Bailly, Inc. and its subsidiaries for the
period from May 26, 1995 to December 31, 1995 and the year ended December 31,
1996, prior to their restatement for the 1997 pooling of interests as described
in Note 16. The contribution of the Hagler Bailly, Inc. to total assets,
revenues, and net (loss)income represented 88%, 82%, 81%, and 90%, 91%, 93% of
the respective restated totals as of and for the years ended December 31, 1995
and 1996, respectively. Financial statements of the other pooled Company
included in the 1995 and 1996 restated consolidated financial statements were
audited and reported on separately by other auditors. We also have audited, as
to combination only, the accompanying consolidated balance sheet as of December
31, 1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1995 and 1996, after
restatement for the 1997 pooling of interests; in our opinion, such consolidated
financial statements have been properly combined on the basis described in Note
16 to the consolidated financial statements.
March 5, 1998
Vienna, Virginia /s/ Ernst & Young LLP
<PAGE>
Hagler Bailly, Inc.
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31,
--------------------------------------
1996 1997
<S> <C> <C>
--------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,685,962 $ 3,035,179
Investments - 6,551,446
Accounts receivable, net 17,479,485 30,429,516
Note receivable - 1,000,000
Prepaid expenses 391,053 719,914
Other current assets 234,490 1,867,444
--------------------------------------
Total current assets 19,790,990 43,603,499
Property and equipment, net 2,631,046 2,650,475
Software development costs, net - 2,463,174
Intangible assets, net 7,661,092 6,925,960
Other assets 620,973 1,192,620
Deferred income taxes - 601,002
--------------------------------------
Total assets $30,704,101 $57,436,730
======================================
Liabilities and stockholders' equity Current liabilities:
Bank line of credit $ 2,600,000 $
-
Accounts payable and accrued expenses 3,193,538 3,809,475
Accrued compensation and benefits 4,262,524 4,638,433
Billings in excess of cost 2,173,427 1,757,208
Current portion of long-term debt 1,337,466 -
Deferred income taxes 1,554,600 1,318,792
Income taxes payable 44,305 1,407,794
--------------------------------------
Total current liabilities 15,165,860 12,931,702
Long-term debt, net of current portion 7,329,280 -
--------------------------------------
Total liabilities 22,495,140 12,931,702
Stockholders' equity :
Common stock:
Class A par value $.01, 20,000,000 shares authorized, 5,357,073 and
8,412,851 issued and outstanding, at 1996 and 1997 53,571 84,128
Additional capital 10,221,674 41,059,053
Retained (deficit) earnings (2,066,284) 3,361,847
--------------------------------------
Total stockholders' equity 8,208,961 44,505,028
--------------------------------------
Total liabilities and stockholders' equity $30,704,101 $57,436,730
======================================
See accompanying notes.
</TABLE>
<PAGE>
Hagler Bailly, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
-----------------------------------------------------------
1995 1996 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Consulting revenues $24,754,824 $45,123,323 $51,411,905
Subcontractor and other revenues 11,119,479 22,820,829 33,644,667
-----------------------------------------------------------
Total revenues 35,874,303 67,944,152 85,056,572
Cost of revenues 29,295,114 54,090,617 64,096,544
-----------------------------------------------------------
Gross profit 6,579,189 13,853,535 20,960,028
Selling, general and administrative expenses 3,991,070 9,138,606 12,318,954
Stock and stock option compensation - 6,172,000 79,869
-----------------------------------------------------------
Income (loss) from operations 2,588,119 (1,457,071) 8,561,205
-----------------------------------------------------------
Other income (expense):
Interest income 25,374 122,597 903,923
Interest expense (759,384) (1,135,192) (684,572)
-----------------------------------------------------------
Income (loss) before income tax expense 1,854,109 (2,469,666) 8,780,556
Income tax expense 869,900 961,319 3,352,425
-----------------------------------------------------------
Net income (loss) $ 984,209 $ (3,430,985) $ 5,428,131
===========================================================
Net income (loss) per share:
Basic $ 0.33 $ (0.67) $ 0.78
===========================================================
Diluted $ 0.28 $ (0.67) $ 0.70
===========================================================
Weighted average shares outstanding:
Basic 2,971,223 5,119,054 6,976,387
===========================================================
Diluted 3,498,149 5,119,054 7,809,867
===========================================================
See accompanying notes.
</TABLE>
<PAGE>
Hagler Bailly, Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Retained Total
-------------------------------------------
Shares Additional Earnings Shareholders'
------------------------------
Class A Class B Amount ------- (Deficit) Equity
Capital
<S> ......................................<C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ............ 358,774 -- $ 3,588 $ 218,536 $ 499,640 $ 721,764
Issuance of Common at MBO ............. 4,149,040 -- 41,490 2,958,510 -- 3,000,000
Less: Notes receivable for Common Stock -- -- -- (97,447) -- (97,447)
Issuance of Common Stock .............. 208,803 103,726 3,125 274,042 -- 277,167
Repurchase of Common Stock ............ (29,344) -- (293) (59,165) (119,148 (178,606)
Net income ............................ -- -- -- -- 984,209 984,209
--------
Balance, December 31, 1995 ............ 4,687,273 103,726 47,910 3,294,476 1,364,701 4,707,087
Repayment of notes receivable for
Common Stock ....................... -- -- -- 97,447 -- 97,447
Issuance of Common Stock .............. 761,992 -- 7,620 869,446 -- 877,066
Repurchase of Common Stock ............ (185,545) -- (1,855) (212,070) -- (213,925)
Substitution and issuance of
compensatory stock and options ..... 93,353 (103,726) (104) 6,172,375 -- 6,172,271
(Note10)
Net loss .............................. -- -- -- -- (3,430,985) (3,430,985)
-------
Balance, December 31, 1996 ............ 5,357,073 -- 53,571 10,221,674 (2,066,284) 8,208,961
Issuance of Common Stock (IPO) ........ 2,500,000 -- 25,000 30,240,031 -- 30,265,031
Compensatory stock and options ........ -- -- -- 79,869 -- 79,869
Issuance of Common Stock (options) .... 484,701 -- 4,847 132,879 -- 137,726
Net income ............................ -- -- -- -- 5,428,131 5,428,131
Issuance of Common Stock .............. 71,077 -- 710 384,600 -- 385,310
--------
============ ============ ============ ============ ============ ===========
Balance, December 31, 1997 ............ 8,412,851 -- $ 84,128 $ 41,059,053 $ 3,361,847 $ 44,505,028
===========
See accompanying notes
</TABLE>
<PAGE>
Hagler Bailly, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1995 1996 1997
-----------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 984,209 $(3,430,985) $5,428,131
Adjustments to reconcile net income (loss) to net cash
rovideerating activities:
provided by (used in) operating activities
Depreciation and amortization 816,378 1,354,545 1,892,132
Provision for possible losses 129,484 1,092,713 503,460
Provision for deferred income taxes 723,300 816,100 (836,810)
Stock and stock option compensation - 6,172,000 79,869
Changes in operating assets and liabilities:
Accounts receivable (2,280,925) (3,049,437) (13,453,491)
Prepaid expenses 4,828 (126,588) (328,861)
Other current assets (138,634) 200,630 (1,632,954)
Other assets (220,197) (341,815) (571,647)
Accounts payable and accrued expenses (1,544,047) (704,868) 615,937
Accrued compensation and benefits 2,499,276 765,724 375,909
Income taxes payable (102,641) 15,934 1,363,489
Billing in excess of cost 1,228,756 775,451 (416,219)
-----------------------------------------------------------
-----------------------------------------------------------
Net cash provided by (used in) operating activities 2,099,787 3,539,404 (6,981,055)
-----------------------------------------------------------
Investing activities
Note receivable - - (1,000,000)
Purchase of investments - - (161,850,846)
Sale of investments - - 155,299,400
Purchase of RCG/Hagler Bailly, Inc.
rereceived)
(net of $1,126,873 cash received) (11,802,250) - -
Expenditures for software development - - (2,512,174)
Acquisition of property and equipment (637,042) (1,131,251) (1,127,429)
-----------------------------------------------------------
Net cash used by investing activities (12,439,292) (1,131,251) (11,191,049)
-----------------------------------------------------------
Financing activities
Issuance of Common Stock, net 3,190,171 877,066 30,788,067
Retirement of Common Stock (178,606) - -
Repurchase of Common Stock - (213,925) -
Repayment of notes receivable for Common Stock - 97,447 -
Net borrowing (payments) on bank line of credit 1,420,328 433,701 (2,600,000)
Proceeds from long-term debt financing 7,100,000 - -
Principal payments on long-term debt (540,619) (2,622,298) (8,666,746)
-----------------------------------------------------------
Net cash provided by (used in) financing activities 10,991,274 (1,428,009) 19,521,321
-----------------------------------------------------------
Net increase in cash and cash equivalents 651,769 980,144 1,349,217
Cash and cash equivalents, beginning of year 54,049 705,818 1,685,962
===========================================================
Cash and cash equivalents, end of year $ 705,818 $1,685,962 $3,035,179
===========================================================
See accompanying notes.
</TABLE>
<PAGE>
Hagler Bailly, Inc.
Notes to Consolidated Financial Statements
December 31, 1996 and 1997
1. Organization
Hagler Bailly, Inc. ("Hagler Bailly" or the "Company") is a worldwide
provider of management consulting and other advisory services to the private
and public sectors. The Company operates in principally one business segment.
The firm is headquartered in the Washington, D.C. metropolitan area and has
offices in the United States, Asia, Europe, and Latin America.
Hagler Bailly was organized under the laws of the state of Delaware and formed
for the primary purpose of facilitating the acquisition of RCG/Hagler Bailly,
Inc. ("Predecessor") by its management. The Predecessor was a wholly-owned
subsidiary of RCG International, Inc. ("RCG"). The date of inception of the
Company was May 5, 1995. The Company had no operations from May 5, 1995 to May
25, 1995. Effective on the close of business on May 25, 1995, the Company,
through a wholly-owned subsidiary, acquired all of the voting stock of the
Predecessor and the Company began operations on May 26, 1995.
On July 3, 1997 the Company consummated an initial public offering of 2,500,000
shares at an offering price of $14 per share. The offering netted the Company
$30.3 million to be used to pay off all debt then outstanding, fund
acquisitions, and provide ongoing working capital needs.
On December 1, 1997, the Company acquired all of the outstanding common stock of
Apogee Research, Inc. ("Apogee") (see Note 16). The business combination was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements include the accounts of the Company, its subsidiaries and Apogee for
all periods presented.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes, in particular, estimates of revenues and
contract cost used in the earnings recognition process. Actual results could
differ from those estimates.
Cash and Cash Equivalents
Cash equivalents are short-term, highly liquid investments which have an
original maturity when acquired of three months or less.
Marketable Securities
Marketable securities are classified as available-for-sale and are recorded at
fair market value with unrealized gains and losses, net of taxes, reported as a
separate component of shareholders' equity, if material.
Realized gains and losses and declines in market value judged to be other than
temporary are included in investment income. Interest and dividends are included
in investment income (see Note 3).
Property and Equipment
Property and equipment are recorded at original cost and depreciated using
primarily the straight line method over their estimated useful lives of three to
seven years. Leasehold improvements are recorded at cost and amortized over the
shorter of their useful lives or the term of the related leases by use of the
straight-line method.
Revenue Recognition
Consulting revenue represents revenue generated by professional staff of the
Company. Subcontractor and other revenue represents revenue principally
generated through the use of subcontractors and independent consultants.
Revenue from cost-plus fixed-fee contracts is recognized as costs are incurred
on the basis of direct costs plus allowable indirect costs and a pro rata
portion of estimated fee.
Revenue from fixed-bid type contracts is recognized on the
percentage-of-completion method of accounting with costs and estimated profits
included in revenue based on the relationship that contract costs incurred bear
to management's estimate of total contract costs. Losses, if any, are accrued
when they become known and the amount of the loss is reasonably determinable.
Revenue from standard daily rate contracts is recognized at amounts represented
by the agreed-upon billing amounts and costs are recognized as incurred.
Amounts billed or received in excess of revenue recognized in accordance with
the Company's revenue recognition policy are classified as billings in excess
of cost in the accompanying balance sheets.
Income Taxes
The Company provides for income taxes in accordance with the liability method.
Under this method, deferred tax assets and liabilities are determined based on
temporary differences between financial and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share". Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1995 1996 1997
---------------- -- ---------------- --- ----------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $984,209 $(3,430,985) $5,428,131
================ == ================ === ================
Denominator:
Denominator for basic earnings per share -
weighted average shares 2,971,223 5,119,054 6,976,387
Effect of dilutive securities:
Stock options 526,926 - 833,480
================ == ================ === ================
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 3,498,149 5,119,054 7,809,867
================ == ================ === ================
</TABLE>
Recent Pronouncements
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" which established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in-capital in the
equity section of the balance sheet. This statement is effective for fiscal
years beginning after December 15, 1997. The Company believes that the adoption
of this statement will not have a material impact on its financial position or
results of operations.
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments of
an Enterprise and Related Information" which established standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes the standards for related disclosures about
products and services, geographic areas and major customers. This Statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. The financial information
is required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. This statement is effective for financial statements for
periods beginning after December 15, 1997. The Company believes that the
adoption of this statement will not have a material impact on its financial
position or results of operations.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition,"
which changes the requirements for revenue recognition effective for
transactions that the Company will enter into beginning January 1, 1998. The
Company believes that the impact of the adoption of the SOP will not be material
to the 1998 financial statements.
3. Investments
The composition of investments are as follows:
December 31, 1997
Municipal debt security $1,000,569
Mortgage backed debt security 5,406,522
Equity securities 51,116
Cash equivalents 93,239
--------------------------
Total $6,551,446
==========================
All investment securities have maturities of twelve months or less. Interest
income for the year ended December 31, 1997 was approximately $347,000.
4. Accounts Receivable
At December 31, 1996 and 1997, the components of accounts receivable are:
1996 1997
-----------------------------------------
Billed amounts $13,052,053 $19,724,886
Unbilled amounts currently billable 5,055,916 11,520,799
Retention not currently billable 256,306 287,377
Allowance for possible losses (884,790) (1,103,546)
-----------------------------------------
Total $17,479,485 $30,429,516
=========================================
The activity in the allowance for possible losses for years ended December 31 is
as follows:
1996 1997
----------------------------------------
Balance at beginning of year $ 358,784 $884,790
Provision for losses charged to expense 1,092,713 503,460
Charge-offs, net of recoveries (566,707) (284,704)
-----------------------------------------
Balance at end of year $ 884,790 $1,103,546
=========================================
All billed and unbilled receivable amounts are expected to be collected during
the next fiscal year. Management has provided an allowance for amounts which it
believes are doubtful as to their ultimate realization. Substantially all the
retention relates to contracts for which a final invoice is submitted upon
completion of indirect cost audits and contract close-outs; therefore it is
anticipated that the retention amounts will not all be collected within the next
fiscal year.
5. Property and Equipment
Components of property and equipment at December 31, 1996 and 1997 are as
follows:
1996 1997
--------------------------------------
Office equipment and furniture $3,864,956 $5,069,237
Leasehold improvements 304,397 285,240
--------------------------------------
4,169,353 5,354,477
Accumulated depreciated
and amortization (1,538,307) (2,704,002)
======================================
$2,631,046 $2,650,475
======================================
Depreciation expense for the years ended December 31, 1995, 1996 and 1997 was
$457,000, $838,000 and $1,157,000, respectively. Costs of repairs and
maintenance of property and equipment are charged to expense as incurred.
6. Software Development Costs
At December 31, 1997, the Company had recorded $2,463,174 of capitalized
software development costs net of $49,000 of accumulated amortization. The
Company accounts for these development costs in accordance with FASB 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed".
Capitalized development costs are amortized on a product by product basis
starting when the product is available for general release to customers.
Amortization is calculated using the straight-line method over the remaining
estimated economic life of the product. The Company periodically evaluates the
net realizable value of all unamortized capitalized costs. At December 31, 1997
the Company believes there has been no impairment of net realizable value of
these recorded amounts.
7. Management Buy-Out
Effective at the close of business on May 25, 1995, the Company purchased all of
the outstanding shares of RCG/Hagler Bailly, Inc. from RCG in an acquisition
accounted for as a purchase. The consolidated financial statements include the
results of operations from the date of acquisition. Under the terms of the
Management Buy-Out, the Company agreed to pay approximately $15,587,000 and
assume certain tax obligations of the seller. Acquisition related costs of
approximately $491,000 were incurred. The purchase was funded by capital
contributions, bank debt, and subordinated debt from RCG.
The purchase price was allocated to the assets acquired and the liabilities
assumed based upon their fair values as of the acquisition date. The excess of
the purchase price over the fair value of assets acquired in the purchase was
recorded as intangible assets, including goodwill, and are being amortized over
5 to 20 years on a straight-line basis. Intangible assets at December 31, 1996
and 1997 are net of accumulated amortization of $1,017,000 and $1,753,000,
respectively. Amortization expense for the years ended December 31, 1995, 1996
and 1997 was $334,000, $683,000 and $736,000, respectively.
The Company periodically reviews the value of its net intangible assets to
determine if an impairment has occurred. Based on its review, the Company does
not believe that an impairment of net intangible assets has occurred at December
31, 1997.
Pro forma unaudited consolidated operating results of the Company for the year
ended December 31, 1995 assuming the acquisition had been made as of January 1,
1995 are summarized below:
Pro forma revenue $55,749,661
Pro forma net income $1,089,981
Pro forma earnings per share:
Basic $0.37
Diluted $0.31
These pro forma results have been prepared for comparative purposes only and
include adjustments such as additional amortization expenses as a result of
goodwill and other intangible assets and increased interest expense related to
debt used to finance the Management Buy-Out. They do not purport to be
indicative of the results of operations which actually would have resulted had
the combination occurred on January 1, 1995, or of the future results of
operations of the consolidated entities.
8. Note Receivable
During 1997 the Company entered into a bridge loan agreement for $1,000,000 with
another company. The loan is due in six equal installments beginning June 1,
1998. The loan pays interest at 15% and is secured by all of the assets of the
borrower. The loan agreement allows the Company to purchase an ownership
interest of this company as defined in the loan agreement.
9. Bank Line of Credit
At December 31, 1996 and 1997, the Company had a line of credit arrangement with
a bank which provides funds up to $5,750,000 and $15,000,000, respectively,
subject to sufficient collateral. The line is secured primarily by the Company's
accounts receivable and contract rights. Under the terms of the line of credit,
interest is payable monthly at the bank's prime rate. There is an annual fee
equal to 1/4 of 1% of the unused portion of the available line of credit. The
line of credit agreement contains certain covenants which among other things
restrict future borrowings and require the Company to maintain certain financial
ratios. At December 31, 1996 and 1997 the Company had available borrowing
capacity of $3,150,000 and $15,000,000, respectively, under the line of credit.
<PAGE>
10. Long-term Debt
<TABLE>
<CAPTION>
Long-term debt consisted of the following at December 31, 1996:
<S> <C>
Senior term loan from a bank, in the original amount of $7,000,000, interest
payable at the bank's prime rate plus 7/8%. Subject to certain limitations,
the Company may fix the interest rate on portions or all of the note at
LIBOR plus 2% for periods ranging from 30-360 days. The interest rate was
7.6% at December 31, 1996. Principal is due in quarterly installments
ranging from $250,000 to $384,500, plus interest over the term of the note
secured by the assets of the Company.
$3,913,000
Subordinated note payable to RCG in the amount of $4,650,000; interest at 9.5%
payable semiannually; balloon payment
due May 2001. 4,650,000
Other notes and equipment loans; interest at rates approximating prime;
maturities through June 30, 1999.
104,000
----------------
Total long-term debt 8,667,000
Less: current portion 1,337,000
================
Long-term debt, net of current portion $7,330,000
================
</TABLE>
Cash paid for interest for the years ended December 31, 1995, 1996 and 1997 was
approximately $569,000, $1,134,000 and $850,000, respectively.
The Company used a portion of the proceeds from the Initial Public Offering to
pay off all outstanding long term debt of the Company in July 1997.
<PAGE>
11. Income Taxes
The Company has historically filed its consolidated federal income tax return on
the cash basis, whereby for tax purposes, revenue was recognized when received
and expenses were recognized when paid. The timing of certain transactions,
primarily the collections of accounts receivable and the payments of accounts
payable and accrued expenses were applied to different periods for financial
statement and income tax reporting purposes. Deferred federal and state income
taxes were provided for these temporary differences. Upon consummation of the
IPO of the Company's Common Stock during 1997, the Company was required to
change to the accrual method for income tax reporting.
Components of income tax expense consisted of the following:
For the Year Ended
December 31,
------------------------------------------------------
1995 1996 1997
---------------- -- ------------- -- -----------------
Current
Federal $118,000 $115,000 $3,363,000
State 29,000 30,000 826,000
---------------- -- ------------- -- -----------------
147,000 145,000 4,189,000
Deferred:
Federal 578,000 654,000 (671,000)
State 145,000 162,000 (166,000)
---------------- -- ------------- -- -----------------
723,000 816,000 (837,000)
================ == ============= == =================
Income tax expense $870,000 $961,000 $3,352,000
================ == ============= == =================
The Company paid income taxes of $249,000, $40,000, and $2,911,000 during 1995,
1996 and 1997, respectively.
Income tax expense for the years ended December 31, 1995, 1996 and 1997, varies
from the amount computed using statutory rates as follows:
<TABLE>
<CAPTION> For the Year Ended
December 31,
--------------------------------------------------------
1995 1996 1997
----------------- - ----------------- -- ----------------
<S> <C> <C> <C>
Tax computed at the Federal statutory rate $699,000 $(862,000) $2,749,000
State income taxes, net of Federal income tax benefit
104,000 142,000 695,000
Non-deductible charge for stock option compensation
- 1,661,000 31,000
Other 67,000 20,000 (123,000)
================= = ================= == ================
Income tax expense $870,000 $961,000 $3,352,000
================= = ================= == ================
</TABLE>
The components of temporary differences are as follows:
<TABLE>
<CAPTION> December 31,
-----------------------------------
1996 1997
--------------- -- ----------------
<S> <C> <C>
Deferred tax liabilities:
Accounts receivable $6,015,000 $1,421,000
Cash to accrual adjustment - 756,000
Other 179,000 126,000
--------------- -- ----------------
Total deferred tax liabilities 6,194,000 2,303,000
Deferred tax assets:
Accounts payable and accrued expenses 967,000 -
Accrued compensation and benefits 1,617,000 1,226,000
Billings in excess of cost 811,000 -
Deferred compensation 762,000 -
Provisions for possible accounts receivable losses
- 359,000
Net operating loss carryforwards 482,000 -
--------------- -- ----------------
Total deferred tax assets 4,639,000 1,585,000
=============== == ================
Net deferred tax liability $1,555,000 $ 718,000
=============== == ================
</TABLE>
<PAGE>
12. Stockholders' Equity
The Company was authorized at inception to issue 6,915,067 shares of $.01 par
value Class A common stock and 2,074,521 shares of $.01 par value Class B common
stock. Pursuant to a stockholders' agreement, all of the Company's common stock
and options had certain restrictions on ownership and are subject to a
repurchase provision. Class B shares were not eligible for dividends and had no
voting privileges.
The Company may grant qualified and non-qualified stock options to employees to
purchase common stock under the Employee Incentive and Non-Qualified Stock
Option and Restricted Stock Plan (the "Stock Plan"). Prior to December 31, 1996,
the Company's Stock Plan was a formula based plan and was authorized to grant
options to purchase Class A and B shares. The exercise price of options granted
were based upon the book value per share at May 26, 1995, adjusted for accretion
of formula value during any interim period up to the grant date. Under the Stock
Plan, options to purchase Class B shares granted did not accrue value to the
option holder until date of exercise. Options to purchase Class A shares accrued
value to the option holder from the date of grant.
Effective at December 31, 1996, the Company (a) adopted an amendment to its
Stock Plan which changed the exercise price of future options to be granted
thereunder to the fair value of the underlying Common Stock; and (b) in
connection with a reclassification of its Common Stock amended all outstanding
options to purchase 971,963 Class B shares vesting on January 1, 1997 to
substitute 0.9 of a Class A share for each Class B share underlying such
options. In addition, a remaining total of 971,963 options to purchase Class B
shares vesting on January 1, 1998 were canceled. As a result, the Company
recorded a non-recurring, non-cash charge to operations of $6,172,000 of which
$4,618,000 was for options to purchase Common Stock and $1,554,000 was for
394,160 shares of Common Stock sold to employees during 1996. These charges
represent the aggregate difference between the exercise price of such
outstanding options or the issuance price of Common Stock sold to employees
during 1996, as the case may be, and the appraised market value of the
underlying Common Stock at December 31, 1996.
Options granted after 1996 vest over periods ranging from immediately to three
years and are exercisable for five years. Options issued prior to 1996 generally
vest 50% after eighteen months and fully after an additional year. Once vested,
the options are exercisable for ten years.
Pro forma information regarding net income (loss) and per share data, is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock options under the fair value method therein. The fair
value for options granted from May 25, 1997 to July 9, 1997 was estimated at the
date of grant using a minimal valuation method with the following
weighted-average assumptions, risk free interest rate of 5.25%, no expected
dividends and an average expected life of the options of 5 years. For all
options issued subsequent to July 9, 1997, in accordance with SFAS 123, the fair
value of options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997:
Risk-free interest rate of 5.25%; no dividends; a volatility factor of the
expected market price of the Company's common stock of .40 and a
weighted-average expected life of the options of approximately 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of the pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period.
The Company's pro forma information follows:
<TABLE>
<CAPTION> Year ended December Year ended December Year ended December
31, 1995 31, 1996 31, 1997
--------------------- -- --------------------- -- ---------------------
<S> <C> <C> <C>
Net income (loss) $984,209 $(3,467,641) $5,211,151
Earnings (loss) per share:
Basic $ 0.33 $ (0.68) $ 0.75
Diluted $ 0.28 $ (0.68) $ 0.67
</TABLE>
<PAGE>
The following summarizes option activity:
<TABLE>
<CAPTION>
Weighted Average
Class A Class B Exercise Price
Options Options
---------------- -- --------------- --------------------
<S> <C> <C> <C>
1995
Granted - 2,074,524 $0.16
Exercised - (103,726) $0.16
---------------- -- ---------------
Outstanding at December 31, 1995 - 1,970,798 $0.16
1996
Granted 62,236 - 1.06
Canceled - (971,963) 0.16
Forfeited - (26,872) 0.16
Substituted 874,707 (971,963) 0.16
---------------- -- ---------------
Outstanding at December 31, 1996 936,943 - 0.22
===============
1997
Granted 677,135 8.34
Exercised (484,701) 0.20
Canceled (15,000) 10.00
================
Outstanding at December 31, 1997 1,114,377 5.21
================
Exercisable at December 31, 1997 470,909 $1.05
================
</TABLE>
The grant date weighted average fair value of options granted in 1995, 1996, and
1997 were $2.12, $0.74, and $1.98, respectively.
At December 31, 1997 the price range of options outstanding are as follows:
<TABLE>
<CAPTION>
Weighted Average Remaining
Average Contractual Life
Options Exercise Per
Outstanding Share
------------------ -- --------------- -- ---------------------
<S> <C <C> <C>
Less than $1.00 420,420 $0.18 7.4
$1.00-$10.00 562,938 6.29 9.0
Over $10.00 131,019 16.73 9.7
==================
Total 1,114,377 $5.21 8.5
==================
</TABLE>
13. Operating Leases
The Company leases office space and equipment located throughout the United
States and worldwide, all of which are under operating leases which expire over
the next seven years. Substantially all office space leases provide for the
Company to pay a pro rate share of annual increases above a stated base amount
of the landlords' related real estate taxes and operating expenses. Management
expects that in the normal course of business, operating leases will be renewed
or replaced by other operating leases.
The following is a schedule by years of the future minimum rental payments
required under the operating leases that have an initial or remaining
noncancellable lease term in excess of one year as of December 31, 1997:
Year ended December 31
1998 $2,929,000
1999 3,294,000
2000 3,156,000
2001 3,092,000
2002 504,000
Total minimum rental payments $12,975,000
Total rental expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $1,346,000, $2,214,000 and $2,337,000, respectively
<PAGE>
14. Retirement Plan
The Company maintains tax-deferred savings plans under Section 401(k) of the
Internal Revenue Code to provide retirement benefits for all eligible employees
(the "Plan"). Employees may voluntarily contribute a percentage of their annual
compensation to the Plan, subject to Internal Revenue Service limitations. The
Company may, but has no obligation to, make matching contributions. In addition,
the Company may, but has no obligation to, make a discretionary contribution to
the Plan. Discretionary contributions are allocated to participants' accounts in
proportion to their compensation. The company's discretionary matching and other
contributions for 1996 and 1997 were $1,384,000 and $1,528,000, respectively.
Rights to benefits provided by the Company's discretionary contributions vest as
follows: 40% after two years, 70% after three years and 100% after four years of
service. Participants are fully vested in their voluntary contributions.
15. Commitments and Contingencies
Cost subject to audit
Under its United States government contracts, the Company is subject to audit by
the Defense Contract Audit Agency, which could result in adjustments of amounts
previously billed. Management believes that the results of such audits will not
have a material adverse effect on the Company's financial position or results of
operations.
Financial Instruments and Risk Management
The Company operates around the world principally in United States currency. The
Company may reduce any periodic exposures to fluctuations in foreign exchange
rates by creating offsetting ("hedge") positions through the use of derivative
financial instruments. The Company currently does not use derivative financial
instruments for trading or speculative purposes, nor is the Company a party to
leverage derivatives. The Company regularly monitors any foreign currency
exposures and ensures that hedge contract amounts do not exceed the amounts of
the underlying exposures.
<PAGE>
The Company had no open hedge positions at December 31, 1996 and 1997.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable.
The Company maintains cash and cash equivalents with various financial
institutions. These financial institutions are located in many different
countries throughout the world, and the Company's policy is designed to limit
exposure with any one institution. As part of its cash management process, the
company performs periodic evaluations of the relative credit standing of these
financial institutions.
At December 31, 1996 and 1997, respectively, cash of approximately $1,004,000
and $1,425,000 was located in foreign bank accounts.
Major Customers
At December 31, 1996 and 1997, included in accounts receivable was $6,824,000
and $9,143,000, respectively, due from agencies of the United States government.
Credit risk with respect to the remaining trade accounts receivable is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion across different industries and countries.
The Company performs ongoing credit evaluations of its customers' financial
condition.
The Company generates revenues from contracts with governmental agencies and
private companies within the United States and worldwide. During 1995, 1996 and
1997, the Company recognized approximately, $12,313,000, $25,997,000 and
$31,792,000, respectively, of its revenue from the United States Agency for
International Development ("USAID"), a U.S. government agency, and a major
public utility. Revenues earned from foreign customers, both commercial and
governmental, were approximately $713,000, $1,314,000 and $6,831,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
<PAGE>
16. Pooling of Interests
In November of 1997, the shareholders of the Company and Apogee approved the
merger of the companies. Under the terms of the agreement, Apogee shareholders
received 1.2689 shares of the Company's stock for each Apogee share. The Company
issued 409,985 shares of its stock of all of outstanding shares and stock
options of Apogee. Apogee was founded in 1986, and provides consulting services
to the transportation and the environmental sectors. The merger qualified as a
tax-free reorganization and was accounted for as a pooling of interests.
Accordingly, the Company's financial statements have been restated to include
the results of Apogee for all periods presented. As Hagler Bailly began
operations on May 26, 1995, the financial statements for all periods prior to
May 26, 1995 will be those of Apogee.
Combined and separate results of Hagler Bailly and Apogee during the periods
preceding the merger were as follows (in millions):
Hagler Bailly Apogee Combined
-------------------- ---------------- -- ---------------
Year ended December 31, 1995
Revenues 29.3 6.6 35.9
Net income .9 .1 1.0
Year ended December 31, 1996
Revenues 61.6 6.3 67.9
Net income (loss) (3.6) .2 (3.4)
The combined financial results presented above include adjustments made to
conform accounting policies of the two companies.
17. Subsequent Events
On February 23, 1998 the Company completed the acquisition of TB&A Group, Inc.
and its wholly-owned subsidiary, Theodore Barry & Associates ("TB&A"). The
Company issued 454,994 shares of common stock in connection with the business
combination. The business combination will be accounted for as a pooling of
interests.
Pro forma combined operating results of the Company and TB&A as if the merger
was consummated at the date of the financial statements is as follows (in
millions, except per share data):
1995 1996 1997
------------- ----- ------------ --- -------------
Revenues 64.6 74.5 94.9
Net income (1) 2.0 (3.3) 8.7
Net income per share (1):
Basic $.57 $(.58) $1.15
Diluted $.49 $(.58) $1.04
(1) Includes extraordinary income, resulting from the Company's beneficial
extinguishments of debt net of income taxes of 1.0 million, .1 million and
2.0 million in 1995, 1996 and 1997, respectively.
The pro forma combined financial results presented above include adjustments
made to conform accounting policies of the two companies.
EXHIBIT 21
The following corporations are subsidiaries of Hagler Bailly, Inc.:
Name Jurisdiction of Incorporation
Hagler Bailly Services, Inc. Delaware
Hagler Bailly Consulting, Inc. Delaware
HB Capital, Inc. Delaware
Hagler Bailly Texas, Inc. Texas
(a subsidiary of Hagler Bailly Consulting, Inc.)
Apogee Research, Inc. Maryland
(a subsidiary of Hagler Bailly, Inc.)
Apogee Research International, Ltd. Canada
(a subsidiary of Apogee Research, Inc.)
TB&A, Group, Inc. Delaware
(a subsidiary of Hagler Bailly, Inc.)
Theodore Barry & Associates California
(a subsidiary of TB&A Group, Inc.)
HBQ S.A. Argentina
(Hagler Bailly Services, Inc. has a majority interest)
Hagler Bailly Indonesia, Inc. Delaware
(a subsidiary of Hagler Bailly Services, Inc.)
PT Hagler Bailly Indonesia Indonesia
(a subsidiary of Hagler Bailly Indonesia, Inc.)
Hagler Bailly Armenia Armenia
(a subsidiary of Hagler Bailly Services, Inc.)
Hagler Bailly Services (India) Private Ltd. India
(a subsidiary of Hagler Bailly Services, Inc.)
Hagler Bailly Consulting, S.A. (Paris) France
(a subsidiary of Hagler Bailly Consulting, Inc.)
Hagler Bailly Consulting Ltd. Ireland
(a subsidiary of Hagler Bailly Services, Inc.)
Hagler Bailly Pakistan (Private) Ltd. Pakistan
(Hagler Bailly Services, Inc. has a minority interest)
Hagler Bailly International S.A. Belgium
(a subsidiary of Hagler Bailly Services, Inc.)
Private Label Utility Services, Inc. Delaware
(a subsidiary of HB Capital, Inc.)
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