<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number 000-21629
THE O'GARA COMPANY
(Exact name of registrant as specified in its charter)
Ohio 31-1470817
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
9113 LeSaint Drive
Fairfield, Ohio 45014
(513) 874-2112
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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 No X
----- -----
The number of shares of common stock outstanding on November 30, 1996 was
6,611,846
================================================================================
<PAGE> 2
THE O'GARA COMPANY
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Item 1. Financial Statements
Combined Balance Sheets (unaudited) as of September 30, 1996
and December 31, 1995....................................................................................1
Combined Statements of Operations (unaudited) for the Three and Nine Months
Ended September 30, 1996 and 1995........................................................................3
Combined Statements of Cash Flows (unaudited) for the Nine Months
Ended September 30, 1996 and 1995........................................................................4
Notes to Combined Unaudited Financial Statements.............................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................8
PART II
OTHER INFORMATION
Item 1. Legal Proceedings .........................................................................................14
Item 6. Exhibits and Reports on Form 8-K ..........................................................................15
Signatures................................................................................................................16
Exhibit 11................................................................................................................17
</TABLE>
<PAGE> 3
Item 1. FINANCIAL STATEMENTS
THE O'GARA COMPANY
COMBINED BALANCE SHEETS
ASSETS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 324 $ 532
Trade accounts receivable, net of allowance for
doubtful accounts of $109 and $139 for December 31,
1995 and September 30, 1996, respectively 7,095 10,751
Other receivables
Advances to shareholders 205 402
Affiliates 128 388
Advances to vendors 3,360 2,682
Notes receivable-shareholder 233 245
Note receivable-affiliate -- 310
Costs and estimated earnings in excess of
billings on uncompleted contracts 7,700 16,098
Inventories 4,928 9,531
Prepaid expenses 149 171
-------- --------
Total current assets 24,122 41,110
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land 372 461
Buildings and improvements 2,763 2,813
Furniture and fixtures 1,287 1,510
Machinery and equipment 2,260 2,976
-------- --------
6,682 7,760
Less: accumulated depreciation (3,511) (3,981)
-------- --------
3,171 3,779
-------- --------
OTHER ASSETS 524 1,578
-------- --------
$ 27,817 $ 46,467
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
1
<PAGE> 4
THE O'GARA COMPANY
COMBINED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
CURRENT LIABILTIES:
Revolving lines of credit $ 10,189 $14,009
Current portion of long-term debt 1,649 1,577
Notes payable-shareholders 309 252
Accounts payable-
Trade 10,075 9,468
Affiliates 500 582
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,706 --
Accrued liabilities 1,677 2,119
Customer deposits 1,248 12,416
-------- -------
Total current liabilities 27,353 40,423
LONG-TERM DEBT, net of current portion 225 187
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 100,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 25,000,000
shares authorized, 4,490,383, and 4,611,846 shares
issued and outstanding in 1995 and 1996, respectively 15 15
Additional paid-in-capital 2,731 2,731
Retained earnings (deficit) (2,509) 3,108
Cumulative foreign currency translation adjustment 2 3
-------- -------
Total shareholders' equity 239 5,857
-------- -------
$ 27,817 $46,467
======== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE> 5
THE O'GARA COMPANY
COMBINED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1995 1996 1995 1996
------- ----------- -------- -----------
<S> <C> <C> <C> <C>
NET SALES $ 5,728 $ 18,804 $ 17,889 $ 60,325
COST OF SALES 4,463 13,683 13,771 45,065
------- ----------- -------- -----------
Gross profit 1,265 5,121 4,118 15,260
OPERATING EXPENSES:
Selling and marketing 652 1,201 2,004 3,400
General and administrative 634 1,587 2,714 4,855
------- ----------- -------- -----------
Operating income (loss) (21) 2,333 (600) 7,005
OTHER INCOME (EXPENSE):
Interest expense, net (159) (375) (514) (988)
Other (44) (113) (101) (170)
------- ----------- -------- -----------
(203) (488) (615) (1,158)
Net income (loss) $ (224) $ 1,845 $ (1,215) $ 5,847
======= =========== ======== ===========
UNAUDITED PRO FORMA INFORMATION (Note 6):
Gross profit $ 5,121 $ 15,260
Selling and marketing expenses 1,201 3,400
General and administrative expenses 1,622 4,960
----------- -----------
Operating income 2,298 6,900
Interest expense, net (273) (730)
Other expenses (113) (170)
----------- -----------
Income before provision for
income taxes 1,912 6,000
Provision for income taxes 765 2,400
----------- -----------
Net income $ 1,147 $ 3,600
=========== ===========
Earnings per share $ 0.18 $ 0.57
=========== ===========
Weighted average shares outstanding 6,342,817 6,342,817
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
THE O'GARA COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1995 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,215) $ 5,847
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 518 512
Decrease (increase) in receivables 3,685 (4,128)
Decrease in advances to vendors -- 678
Decrease (increase) in costs and estimated earnings in excess
of billings on uncompleted contracts 2,872 (8,398)
Increase in inventories (5,245) (4,604)
Increase in prepaid expenses (397) (22)
Increase in other assets (828) (981)
Increase (decrease) in accounts payable 2,011 (525)
Decrease in billings in excess of costs and
estimated earnings on uncompleted contracts (1,749) (1,706)
Increase (decrease) in accrued liabilties (746) 442
Increase in customer deposits 329 11,168
--------- ---------
Net cash used in operating activities (765) (1,717)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (222) (1,076)
Investment in shareholder and affiliate notes -- (322)
--------- ---------
Net cash used in investing activities (222) (1,398)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving lines of credit 712 3,620
Proceeds from long-term debt -- --
Payments of long-term debt (101) (10)
Repayment of shareholder notes -- (57)
Proceeds from shareholder notes 9 --
Proceeds from issuance of common stock 250 --
Distribution to shareholders (163) (230)
--------- ---------
Net cash provided by financing activities 707 3,323
--------- ---------
NET INCREASE (DECREASE) IN CASH (280) 208
--------- ---------
CASH, beginning of period 634 324
--------- ---------
CASH, end of period $ 354 $ 532
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 497,000 $ 902,000
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Note payable obligation incurred and receivable forgiven in
connection with non-compete agreement $ -- $ 115,000
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 7
THE O'GARA COMPANY
NOTES TO COMBINED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The O'Gara Company (the "Company") is a leading provider of fully
integrated ballistic and blast protected vehicle armoring systems for military,
commercial and governmental clients worldwide. These products are provided
through the Company's principal subsidiary O'Gara-Hess & Eisenhardt Armoring
Company ("OHE") and the Company's Security Hardware Products Group. Through its
subsidiary O'Gara Satellite Networks Limited ("OSN") and its Security Systems
Integration Group, the Company provides integrated satellite communications
systems to commercial and governmental clients and integrated site protection
security systems. The Company recently has begun to offer security-related
services, such as background clearances, business intelligence, country risk
assessments and private security agent and driver training, through its Security
Services Group.
On November 12, 1996, the Company completed an initial public offering
of 2,000,000 shares of common stock at $9 per share. The net proceeds from the
offering (approximately $15.2 million) after deducting underwriting discounts
and expenses payable by the Company were used to finance certain distributions
to existing shareholders (approximately $9.0 million), to acquire the Company's
leased Mexico City manufacturing facility (approximately $1.3 million), and to
pay initial installments for the acquisition of Palmer Associates, S.C.
(approximately $0.8 million). The balance of the proceeds (approximately $4.2
million) was used to repay a portion of the indebtedness of the Company
(including approximately $.3 million to certain directors & officers).
The accompanying unaudited combined financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the Combined Financial Statements and Notes thereto included in the Company's
Registration Statement on Form S-1, File No. 333-11093.
The accompanying combined financial statements consist of several
entities, all of which, until October 28, 1996, were owned or controlled by
substantially the same shareholders.
In contemplation of the Company's initial public offering, these
entities and their respective shareholders entered into a reorganization plan
that was executed on October 28, 1996 (the "Reorganization"). Accordingly, the
accompanying combined financial statements present, as a combination of entities
under common control as if using the pooling method of accounting, the financial
position and related results of operations of the Company on a combined basis
for all periods presented. All significant balances and transactions between the
combined entities have been eliminated in these combined statements.
(2) REVENUE RECOGNITION
Revenue related to government contracts and most commercial contracts
results principally from long-term fixed price contracts and is recognized on
the percentage of completion method calculated utilizing the cost-to-cost
approach. The percent deemed to be complete is calculated by comparing the costs
incurred to date to estimated total costs for each contract. This method is used
because management considers costs incurred to be the best available measure of
progress on these contracts. However, adjustments to this measurement are made
when management believes that costs incurred materially
5
<PAGE> 8
exceed effort expended. Contract costs include all direct material and labor
costs, along with certain direct overhead costs related to contract production.
Provisions for any estimated total contract losses on uncompleted
contracts are recorded in the period in which it becomes known that such losses
will occur. Changes in estimated total contract costs will result in revisions
to contract revenue. These revisions are recognized when determined.
Revenue related to telecommunications equipment and services is
recognized as equipment is shipped or as services are provided. Revenue and
related direct costs of brokered satellite time are recorded when payments are
received from customers.
(3) S CORPORATION DISTRIBUTION
From 1988 when OHE elected S Corporation status until October 28, 1996,
when that status terminated, OHE had made distributions from time to time to its
shareholders for the purpose of funding their income tax payments on the income
generated by OHE, which income was taxable to the shareholders whether or not
distributed. In connection with the Reorganization, OHE distributed to its
shareholders a dividend of $9.0 million in AAA Notes, which approximates the
value of OHE's AAA account at the time of the Reorganization.
(4) TAXES ON INCOME
During the time OHE was treated as an S Corporation under Subchapter S
of the Code and comparable provisions of certain state tax laws, it paid no
federal income tax. On October 28, 1996, OHE terminated its S Corporation
status, with the result that the Company is responsible for federal and state
income taxes from that date forward.
(5) INVENTORIES
Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method and including the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ ------------
(unaudited)
<S> <C> <C>
Raw materials ................................................ $2,306 $4,782
Vehicle costs and work-in-process ............................ 2,621 4,749
------ ------
$4,927 $9,531
====== ======
</TABLE>
6
<PAGE> 9
(6) PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS (UNAUDITED)
The pro forma combined statements of operations information presents
the pro forma effects on the historical combined financial information
reflecting certain transactions as if they occurred on January 1, 1996. The
following adjustments have been reflected in the pro forma combined statements
of operations information (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED SEPTEMBER
SEPTEMBER 30, 30,
1996 1996
---------------- --------------
<S> <C> <C>
Amortization on intangible assets resulting from
the purchase of Palmer Associates, SC ......................................... $ (35) $ (105)
The elimination of interest expense relating to the
debt intended to be repaid .................................................... 102 258
The provision for income taxes at an effective rate of 40% as if OHE had been a
C Corporation and as if the Company had filed a consolidated US
Federal tax return ............................................................ (765) (2,400)
----- -------
Total ......................................................................... $(698) $(2,247)
===== =======
</TABLE>
7
<PAGE> 10
ITEM 2.
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of results of operations and financial condition is
based upon and should be read in conjunction with the Company's Combined
Financial Statements and Notes thereto.
GENERAL
The O'Gara Company (the "Company") is a leading provider of fully
integrated ballistic and blast protected vehicle armoring systems for military,
commercial and governmental clients worldwide. These products are provided
through the Company's principal subsidiary O'Gara-Hess & Eisenhardt Armoring
Company ("OHE") and the Company's Security Hardware Products Group. Through its
subsidiary O'Gara Satellite Networks Limited ("OSN") and its Security Systems
Integration Group, the Company provides integrated satellite communications
systems to commercial and governmental clients and integrated site protection
security systems. The Company recently has begun to offer security-related
services, such as background clearances, business intelligence, country risk
assessments and private security agent and driver training, through its Security
Services Group.
For the nine months ended September 30, 1996, net sales increased to
$60.3 million, compared to $17.9 million for the nine months ended September 30,
1995. The primary reasons for this growth were i) a U.S. Military request to
accelerate the production of Up-Armored High Mobility Multi-purpose Wheeled
Vehicles ("HMMWV") in 1996, and ii) during 1995, an unanticipated six month
delay in the delivery of HMMWV chassis from a supplier that led to the
production of significantly fewer Up-Armored HMMWV's than expected, thereby
reducing net sales and net income.
U.S. Military net sales for the nine months ended September 30, 1996 were
$41.6 million, armored commercial vehicle net sales were $11.5 million, and net
sales of the Security Systems Integration Group were $7.2 million, compared to
$4.7 million, $11.3 million, and $1.9 million, respectively, for the
corresponding 1995 period. Income before taxes for the nine months ended
September 30, 1996 increased to $5.8 million compared to a $1.2 million loss for
the nine months ended September 30, 1995. While net sales in the third quarter
of 1996 continue to reflect the effect of the request to accelerate HMMWV
production, the Company expects that production levels, and net sales figures,
will return to a non- accelerated level in the fourth quarter, and for future
quarters. The Company believes its commercial vehicle armoring and security
integration businesses will generate a greater percentage of the Company's
future net sales. Increased net sales are also expected from the Security
Services Group.
8
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
1995 1996 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Security hardware products:
Military 19.9% 61.4% 25.9% 69.0%
Commercial 56.7 20.8 63.3 19.1
Security systems integration 23.4 17.8 10.8 11.9
Security services -- -- -- --
------ ------ ------ ------
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 77.9 72.8 77.0 74.7
------ ------ ------ ------
Gross profit 22.1 27.2 23.0 25.3
Operating expenses:
Selling and marketing 11.4 6.4 11.2 5.6
General and administrative 11.1 8.4 15.2 8.0
Operating income (loss) (.4) 12.4 (3.4) 11.6
Other expense:
Interest expense 2.8 2.0 2.9 1.6
Other, net .8 .6 .6 .3
------ ------ ------ ------
Net income (loss) (6.8%) 9.8% (6.8%) 9.7%
====== ====== ====== ======
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995
Net Sales. Net Sales for the nine months ended September 30, 1996 were
$60.3 million, an increase of $42.4 million or 237% compared to $17.9 million
for the nine months ended September 30, 1995. The increase in net sales was
primarily due to an increase in the production of vehicles under the Up-Armored
HMMWV program. Net sales of military armoring products for the nine months ended
September 30, 1996 were $41.6 million, an increase of $36.9 million or 796%,
compared to $4.7 million for the nine months ended September 30, 1995. Net sales
of commercial armoring products for the nine months ended September 30, 1996
were $11.5 million, an increase of $0.2 million or 2%, compared to $11.3 for the
nine months ended September 30, 1995.
Cost of Sales. Cost of sales for the nine months ended September 30, 1996
was $45.1 million, an increase of $31.3 million or 227%, compared to $13.8
million for the nine months ended September 30, 1995. The increase in cost of
sales was due to the increase in production levels. Gross profit as a percentage
of net sales was 25.3% for the nine months ended September 30, 1996 as compared
to 23.0% for the nine months ended September 30, 1995. In the third quarter,
revenue recognized on new military contracts, both U.S. and foreign, with a
higher gross margin percent than previously experienced, contributed to the
increase in gross margin percent.
As contracts are completed under percentage of completion accounting,
actual cost and gross profit may be revised from previously estimated amounts as
result of the Company's performance in completing the requirements of each
contract. In the three and nine months ended September 30, 1996, gross profit
was favorably effected by adjustments resulting from contracts completed.
Gross margin percent was also favorably affected by an increase in net
sales from foreign subsidiaries, both in Security Hardware and Security Systems
Integration, where the margin percentages are higher than the Company has
experienced in other markets.
9
<PAGE> 12
Selling and marketing. Selling and marketing expenses for the nine months
ended September 30, 1996 were $3.4 million, an increase of $1.4 million or 70%,
compared to $2.0 million for the nine months ended September 30, 1995. This
increase was primarily attributable to expenses associated with increases in
personnel and advertising to implement the Company's business strategy.
General and administrative. General and administrative expenses for the
nine months ended September 30, 1996 were $4.9 million, an increase of $2.1
million or 79%, compared to $2.7 million for the nine months ended September 30,
1995. This increase in administrative expenses was due to the addition of
professional employees to support the increased level of business activity.
Interest expense, net. Interest expense for the nine months ended September
30, 1996 was $1.0 million, an increase of $0.5 million or 92%, compared to $0.5
million for the nine months ended September 30, 1995. This increase in interest
expense was due to increased borrowings necessary to finance increased
production levels.
Net income (loss). Net income for the nine months ended September 30, 1996
was $5.8 million, an increase of $7.1 million, compared to a net loss of $1.2
million for the nine months ended September 30, 1995. The primary reasons for
this increase were i) a U.S. Military request to accelerate the production of
Up-Armored HMMWV's in 1996, and ii) during 1995, an unanticipated six month
delay in the delivery of HMMWV chassis from a supplier that led to the
production of significantly fewer Up-Armored HMMWV's than expected.
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Net Sales. Net sales for the three months ended September 30, 1996 were
$18.8 million, an increase of $13.1 million or 228% compared to $5.7 million for
the three months ended September 30, 1995. The increase in net sales was
primarily due to an increase in the production of vehicles under the Up-Armored
HMMWV program. Net sales of military armoring products for the three months
ended September 30, 1996 were $11.6 million, an increase of $10.5 million or
915%, compared to $1.1 million for the three months ended September 30, 1995.
Net sales of commercial armoring products for the three months ended September
30, 1996 were $3.9 million an increase of $.7 million or 21%, compared to $3.2
million for the three months ended September 30, 1995.
Cost of Sales. Cost of sales for the three months ended September 30, 1996
was $13.7 million, an increase of $9.2 million or 207%, compared to $4.5 million
for the three months ended September 30, 1995. The increase in cost of sales was
due to the increase in production levels. Gross profit as a percentage of net
sales was 27.2% for the three months ended September 30, 1996 as compared to
22.1% for the three months ended September 30, 1995. In the third quarter,
revenue recognized on new military contracts, both U.S. and foreign, with a
higher gross margin percent than previously experienced, contributed to the
increase in gross margin percent.
As contracts are completed under percentage of completion accounting,
actual cost and gross profit may be revised from previously estimated amounts as
result of the Company's performance in completing the requirements of each
contract. In the three and nine months and ended September 30, 1996, gross
profit was favorably effected by adjustments resulting from contracts completed.
Gross margin percent was also favorably affected by an increase in net
sales from foreign subsidiaries, both in Security Hardware and Security Systems
Integration, where the margin percentages are higher than the Company has
experienced in other markets.
Selling and marketing. Selling and marketing expenses for the three months
ended September 30, 1996 were $1.2 million, an increase of $0.5 million or 84%,
compared to $0.6 million for the three months
10
<PAGE> 13
ended September 30, 1995. This increase was primarily attributable to expenses
associated with increases in personnel and advertising to implement the
Company's business strategy.
General and administrative. General and administrative expenses for the
three months ended September 30, 1996 were $1.6 million, an increase of $1.0
million or 150%, compared to $0.6 million for the three months ended September
30, 1995. This increase in administrative expenses was due to the addition of
professional employees to support the increased level of business activity.
Interest expense, net. Interest expense for the three months ended
September 30, 1996 was $0.4 million, an increase of $0.2 million or 136%,
compared to $0.2 million for the three months ended September 30, 1995. This
increase in interest expense was due to increased borrowings necessary to
finance increased production levels.
Net income (loss). Net income for the three months ended September 30,
1996 was $1.8 million, an increase of $2.1 million, compared to a net loss of
$0.2 million for the three months ended September 30, 1995. The primary reasons
for this increase were i) a U.S. Military request to accelerate the production
of Up-Armored HMMWV's in 1996, and ii) during 1995, an unanticipated six month
delay in the delivery of HMMWV chassis from a supplier that led to the
production of significantly fewer Up-Armored HMMWV's than expected.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
General. The Company historically has met its operating cash needs by
utilizing borrowings under its credit arrangements to supplement cash provided
by cumulative net income and depreciation and amortization.
Existing credit agreements. The Company is party to various credit
arrangements aggregating $16.5 million, principally with The Fifth Third Bank.
The Company currently has a $12.0 million revolving credit loan that matures
March 1, 1997 and a $4.0 million facility that matures on February 14, 1997.
Outstanding borrowings under these credit arrangements were approximately $14.0
million as of September 30, 1996. These credit arrangements bear interest at the
prime rate, which was 8.25% at September 30, 1996, on the first $12.5 million in
borrowings and 1% in excess of the prime rate on borrowings in excess of $12.5
million. The remaining $0.5 million credit arrangement is with a Brazilian bank
to support the Company's Brazilian subsidiary. As of December 5, 1996 the
outstanding balance under these credit agreements was $6.7 million.
New credit agreement. The Company expects to enter into a new credit
agreement to replace the existing credit arrangements with The Fifth Third Bank.
It is anticipated that the new credit agreement with The Fifth Third Bank and
one other bank will consist of a one year, revolving credit facility together
with a letter of credit facility that will provide the Company with increased
borrowing levels and more favorable terms and conditions than the existing
credit arrangements. The new credit agreement is expected to bear interest at
either the prime rate or a floating rate based upon LIBOR plus 275 basis points,
with a 1% per year charge for outstanding letters of credit. The facility will
be secured by a lien on the Company's assets and will include various financial
covenants including minimum tangible net worth, total debt to tangible net
worth, current ratio, and debt service coverage. The facility is expected to
contain provisions requiring lender approval for investments in foreign
operations and acquisitions in excess of certain amounts yet to be determined.
The new credit agreement will not be guaranteed by any of the Company's
shareholders. The Company expects that borrowings under the new credit agreement
and income from operations will be sufficient to fund the Company's operations
(without giving effect to additional acquisitions) for at least the next 12
months.
Cash flows from operating activities. Net cash used in operating activities
was $0.8 million and $1.7 million for the nine months ended September 30, 1995
and 1996, respectively. During the first nine months of 1996, the Company
experienced a significant aggregate net increase in receivables, costs in excess
of billings, and inventories as result of increased production and sales related
to the Up-armored HMMWV program.
Capital expenditures. Historically, the Company has limited its capital
expenditure requirements by leasing facilities and equipment from affiliated
entities. Capital expenditures totaled $1.1 million in the nine months ended
September 30, 1996, and $0.2 million for the same period in 1995. The Company
anticipates that aggregate capital expenditures for 1996 will total
approximately $2.7 million, including the $1.3 million utilized to purchase its
previously leased Mexico City manufacturing facility.
Cash flows from financing activities. Net cash provided by financing
activities of $0.7 million and $3.3 million for the nine months ended September
30, 1995 and 1996, respectively, was primarily from net increases in borrowings
under the Company's revolving lines of credit.
S Corporation distributions. OHE elected S Corporation status in 1988 and
historically made distributions to its shareholders for the purpose of paying
taxes on income generated by OHE which was taxable to the shareholders. On
October 28, 1996, OHE terminated its S Corporation status and distributed to its
shareholders a dividend of $9.0 million in AAA Notes, which approximated the
balance of OHE's AAA account. These AAA Notes were paid with a portion of the
proceeds of the Company's initial public offering discussed previously.
12
<PAGE> 15
Foreign operations. The Company attempts to mitigate the risks of doing business
in developing countries by separately incorporating its operations in certain
such countries; having local partners in certain countries; entering into
contracts providing for payment in U.S. dollars instead of the local currency
where possible; maintaining reserves for credit losses; and maintaining
insurance on equipment to protect against losses related to political risks and
terrorism.
Quarterly fluctuations. The Company's operations are not seasonal, but may
fluctuate on a quarterly basis as a result of the timing of contract costs. The
incurrence of contract costs and related production scheduling must be
responsive to specific customer delivery requirements which may involve the
acceleration of deliveries under a contract at a customer's request due to the
customer's urgent needs, such as occurred with the HMMWV contract in 1996. The
Company's liquidity may be affected by the payment terms of its U.S. Military
and certain foreign government contracts.
13
<PAGE> 16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Certain of the services offered by the Company's Security Services Group
are similar to activities provided by O'Gara Protective Services ("OPS"), in
which certain shareholders of the Company have approximately a 47% interest, but
which is controlled by Mr. Edward F. O'Gara, the brother of Thomas M. O'Gara,
Chairman of the Company, and Wilfred T. O'Gara, Chief Executive Officer of the
Company. On October 9, 1996, OPS and Edward F. O'Gara filed a complaint against
the Company, OHE, and Thomas M. O'Gara in the Federal District Court for the
Southern District of Ohio (O'Gara Protective Service, Inc., et al. v. The O'Gara
Company, et al., No. C-1-96-979). The complaint alleges: that Thomas M. O'Gara
and OHE agreed not to compete with OPS and that the Company's plan to enter the
security services market constitutes a breach of that agreement; that Thomas M.
O'Gara breached unspecified fiduciary duties which he owed to OPS by virtue of
his status as a director and significant shareholder of OPS; and that the
Company's plan to enter the security services market constitutes a violation of
the Lanham Act, which prohibits false advertising and use of an established
corporate name in such a manner as to confuse consumers, as well as unfair
competition in violation of the Ohio Deceptive Trade Practices Act and common
law. The plaintiffs are seeking a preliminary and permanent injunction
prohibiting OHE and Thomas M. O'Gara from using the name O'Gara "in connection
with the provision of security services or from otherwise competing with OPS in
the market for security services" and an award to OPS of any profits earned by
OHE in connection with the provision of such services, as well as costs,
punitive damages and attorney's fees. The Company denies the assertions made by
OPS in the complaint. The Company believes it has strong defenses to this action
and will contest the matter vigorously.
Other than set forth above, the Company is not involved in any litigation
or legal proceedings and is not aware of any material litigation or proceeding
threatened against it.
14
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Pro Forma Earnings Per Common Share
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
ended September 30, 1996.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused is report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 9th day of December, 1996.
THE O'GARA COMPANY
By /s/ Nicholas P. Carpinello .
--------------------------------
Nicholas P. Carpinello
Executive Vice President, and Chief
Financial Officer
16
<PAGE> 1
EXHIBIT 11
THE O'GARA COMPANY
COMPUTATION OF PRO FORMA EARNINGS PER COMMON SHARE
For the Three and Nine Months Ended September 30, 1996
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Weighted Average Pro Forma
Number of Common Pro Forma Earnings per
Shares Outstanding Net Income Common Share
------------------ ---------- ------------
<S> <C> <C> <C>
Three Months Ended September 30, 1996
Shares outstanding June 30, 1996 4,490,383 $ -- $--
Dilutive stock options outstanding prior
to exercise 84,496 -- --
Issuance of common stock upon exercise
of options 36,967 -- --
Newly issued shares necessary to fund payment
of certain indebtedness and AAA distributions
(1,730,971 shares at $7.62 per share estimated
net proceeds to fund $13,190,000) 1,730,971 -- --
Pro forma net income -- 1,147 --
---------- ------ -----
6,342,817 $1,147 $0.18
========== ====== =====
Nine Months Ended September 30, 1996
Shares oustanding December 31, 1995 4,490,383 $ -- $--
Dilutive stock options outstanding prior
to exercise 109,051 -- --
Issuance of common stock upon exercise
of options 12,412 -- --
Newly issued shares necessary to fund payment
of certain indebtedness and AAA distributions
(1,730,971 shares at $7.62 per share estimated
net proceeds to fund $13,190,000) 1,730,971 -- --
Pro forma net income -- 3,600 --
---------- ------ -----
6,342,817 $3,600 $0.57
========== ====== =====
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
(IDENTIFY SPECIFIC FINANCIAL STATEMENTS)
COMBINED BALANCE SHEETS
COMBINED STATEMENTS OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 532
<SECURITIES> 0
<RECEIVABLES> 31,015
<ALLOWANCES> 139
<INVENTORY> 9,531
<CURRENT-ASSETS> 41,110
<PP&E> 7,760
<DEPRECIATION> 3,981
<TOTAL-ASSETS> 46,467
<CURRENT-LIABILITIES> 40,423
<BONDS> 187
0
0
<COMMON> 15
<OTHER-SE> 5,842
<TOTAL-LIABILITY-AND-EQUITY> 46,467
<SALES> 60,325
<TOTAL-REVENUES> 60,325
<CGS> 45,065
<TOTAL-COSTS> 45,065
<OTHER-EXPENSES> 8,255
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 988
<INCOME-PRETAX> 5,847
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,847
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
