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Filed pursuant to Rule 424(b)(3)
Registration File No.: 333-35845
PROXY STATEMENT
For Special Meeting of
Shareholders of The O'Gara Company
to be held November 21, 1997
THE O'GARA COMPANY
PROSPECTUS
This Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $0.01 per share ("O'Gara Common Stock"), of The O'Gara Company,
an Ohio corporation ("O'Gara"), in connection with the solicitation of proxies
by the Board of Directors of O'Gara (the "O'Gara Board") for use at the special
meeting of shareholders of O'Gara to be held on November 21, 1997, or any
adjournment or postponement thereof (the "O'Gara Meeting").
The O'Gara Meeting has been called to consider and vote upon a proposal
(the "O'Gara Proposal") (a)(i) to approve and adopt a Plan and Agreement to
Merge (the "Merger Agreement"), dated as of August 8, 1997, among O'Gara, VDE,
Inc., a Delaware corporation and a wholly owned subsidiary of O'Gara ("Newco"),
Kroll Holdings, Inc., a Delaware corporation ("Kroll"), and Jules B. Kroll,
which provides for the merger of Newco into Kroll (the "Merger") and (ii) to
amend and restate the Amended and Restated Articles of Incorporation of O'Gara
(the "O'Gara Articles") to change the name of O'Gara to "The Kroll-O'Gara
Company" and (b) to increase the number of directors of O'Gara to eleven and to
elect Jules B. Kroll, Howard I. Smith, Michael G. Cherkasky and Marshall S.
Cogan as directors of O'Gara. At the O'Gara Meeting, holders of O'Gara Common
Stock also will be asked to consider and approve (i) a proposal (the "O'Gara
Option Proposal") to amend O'Gara's 1996 Stock Option Plan (the "Plan") to
increase the maximum number of shares of O'Gara Common Stock available for
issuance thereunder from 400,000 to 836,000 and to increase the maximum number
of shares of O'Gara Common Stock which may be subject to options issued under
the Plan to any one person in any twelve-month period from 50,000 to 125,000 and
(ii) a proposal (the "O'Gara Capitalization Proposal") to amend and restate the
O'Gara Articles to increase the number of shares of O'Gara's preferred stock,
$0.01 par value per share ("O'Gara Preferred Stock"), and the number of shares
of O'Gara Common Stock which O'Gara is authorized to issue to 1,000,000 and
50,000,000, respectively. Approval of the O'Gara Proposal, the O'Gara Option
Proposal and the O'Gara Capitalization Proposal are not conditioned upon one
another.
This Proxy Statement/Prospectus is also being mailed to holders of shares
of Class A common stock, par value $0.01 per share ("Kroll Class A Common
Stock"), and common stock, par value $0.01 per share ("Kroll Common Stock" and,
together with Kroll Class A Common Stock, the "Kroll Stock"), of Kroll for their
information in connection with the special meeting of shareholders of Kroll to
be held on December 1, 1997 (the "Kroll Meeting" and, together with the O'Gara
Meeting, the "Special Meetings"). The Kroll Meeting has been called to consider
and vote upon a proposal (the "Kroll Proposal") to approve and adopt the Merger
Agreement.
As a result of the Merger, Kroll will become a wholly owned subsidiary of
O'Gara. The Merger is intended to be a tax-free reorganization and will be
accounted for as a pooling of interests. The shares of O'Gara Common Stock to be
issued to holders of outstanding Kroll Stock in the Merger will constitute
approximately 47.7% of the outstanding shares of O'Gara Common Stock after the
Merger. After the Merger, O'Gara's directors and executive officers (including
those persons who will become directors and executive officers of O'Gara upon
consummation of the Merger) will beneficially own approximately 72.2% of the
outstanding O'Gara Common Stock.
The O'Gara Common Stock is traded on the Nasdaq National Market. On
November 5, 1997, the last reported sale price per share of the O'Gara Common
Stock was $18.00.
This Proxy Statement/Prospectus also serves as a prospectus of O'Gara with
respect to up to 6,650,000 shares of O'Gara Common Stock that will be issued to
holders of outstanding Kroll Stock upon consummation of the Merger. See "THE
MERGER AGREEMENT -- Conversion of Kroll Stock" and "COMPARISON OF SHAREHOLDERS'
RIGHTS."
CERTAIN RISK FACTORS SHOULD BE CONSIDERED BY SHAREHOLDERS OF O'GARA AND
KROLL IN EVALUATING THE MERGER. SEE "RISK FACTORS" ON PAGES 16-23.
This Proxy Statement/Prospectus is first being mailed to the shareholders
of O'Gara and Kroll on or about November 10, 1997. Shareholders of O'Gara are
also being mailed the accompanying form of proxy.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Proxy Statement/Prospectus is November 7, 1997.
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TABLE OF CONTENTS
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SUMMARY............................................................... 1
The Companies....................................................... 1
Reasons for the Merger.............................................. 1
The Merger.......................................................... 1
The Merger Agreement................................................ 4
Risk Factors........................................................ 4
The O'Gara Meeting.................................................. 4
The Kroll Meeting................................................... 5
Market Prices and Dividends......................................... 5
Summary Historical and Unaudited Pro Forma Combined Condensed
Financial Information............................................ 7
Comparative Per Share Data.......................................... 15
RISK FACTORS.......................................................... 16
Risk Factors Associated with the Merger............................. 16
Risk Factors Relating to the Business of O'Gara..................... 18
Risk Factors Relating to the Business of Kroll...................... 21
THE MERGER............................................................ 24
General............................................................. 24
Background of the Merger............................................ 24
Reasons for the Merger and Recommendations of the Boards of
Directors........................................................ 26
Financing the Merger................................................ 31
Interests of Certain Persons in the Merger.......................... 32
Ownership of O'Gara after the Merger................................ 32
Management of O'Gara after the Merger............................... 32
Accounting Treatment................................................ 34
Certain Federal Income Tax Consequences............................. 34
Federal Securities Law Consequences................................. 36
Dissenters' Rights.................................................. 36
Regulatory Requirements............................................. 39
Merger Expenses and Fees and Other Costs............................ 39
THE MERGER AGREEMENT.................................................. 40
THE SPECIAL MEETINGS.................................................. 44
The O'Gara Meeting.................................................. 44
The Kroll Meeting................................................... 45
MARKET PRICES AND DIVIDENDS........................................... 47
O'GARA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 51
RECENT DEVELOPMENTS -- O'GARA......................................... 58
KROLL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 59
BUSINESS OF O'GARA.................................................... 64
General............................................................. 64
Business Strategy................................................... 64
Products and Services............................................... 66
Customers........................................................... 69
Marketing and Sales................................................. 70
Engineering and Development......................................... 71
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U.S. Government Contracts........................................... 72
Competition......................................................... 73
Seasonality, Backlog and Related Matters............................ 74
Properties and Facilities........................................... 75
Employees........................................................... 76
Government Regulation............................................... 76
Environmental Matters............................................... 76
Legal Proceedings................................................... 77
Patents, Trademarks and Copyrights.................................. 77
BUSINESS OF KROLL..................................................... 78
Background.......................................................... 78
Services............................................................ 78
Clients............................................................. 80
Marketing and Sales................................................. 81
Competition......................................................... 81
Employees........................................................... 81
Government Regulation............................................... 82
Properties.......................................................... 82
Litigation.......................................................... 83
MANAGEMENT OF O'GARA.................................................. 84
THE O'GARA OPTION PROPOSAL............................................ 90
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS -- O'GARA........ 93
PRINCIPAL SHAREHOLDERS OF O'GARA...................................... 96
MANAGEMENT OF KROLL................................................... 97
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS -- KROLL......... 100
PRINCIPAL SHAREHOLDERS OF KROLL....................................... 101
THE O'GARA CAPITALIZATION PROPOSAL.................................... 102
DESCRIPTION OF O'GARA CAPITAL STOCK................................... 103
SHARES OF O'GARA COMMON STOCK ELIGIBLE FOR FUTURE SALE................ 104
COMPARISON OF SHAREHOLDERS' RIGHTS.................................... 105
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE............... 111
LEGAL MATTERS......................................................... 111
EXPERTS............................................................... 111
PROXY STATEMENT PROPOSALS............................................. 111
OTHER BUSINESS........................................................ 111
AVAILABLE INFORMATION................................................. 112
FINANCIAL STATEMENT INDEX............................................. F-1
APPENDICES
Plan and Agreement to Merge......................................... A-1
Amended and Restated Articles of Incorporation of O'Gara............ B-1
Opinion of SBC Warburg Dillon Read Inc. ............................ C-1
Sections 1701.84 and 1701.85 of the Ohio Revised Code............... D-1
Section 262 of the Delaware General Corporation Law................. E-1
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Upon consummation of the Merger (the "Effective Time"), O'Gara will be
renamed "The Kroll-O'Gara Company." References to "O'Gara" in this Proxy
Statement/Prospectus refer to The O'Gara Company prior to the Effective Time and
The Kroll-O'Gara Company after the Effective Time, as the context indicates, and
include its subsidiaries on a consolidated basis, unless the context otherwise
requires. References herein to "Kroll" refer to Kroll Holdings, Inc., a Delaware
corporation, and its subsidiaries on a consolidated basis, unless the context
otherwise requires. This Proxy Statement/Prospectus contains forward-looking
statements which involve risks and uncertainties. O'Gara's and Kroll's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "RISK
FACTORS" and elsewhere in this Proxy Statement/Prospectus.
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. This summary is not
intended to be complete and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement/Prospectus, the
Appendices hereto and the documents otherwise referred to herein. Shareholders
of O'Gara and Kroll are urged to review carefully this entire Proxy
Statement/Prospectus, including the Appendices hereto and such other documents.
THE COMPANIES
O'Gara. O'Gara is a worldwide integrated security company with three
business lines: security hardware products, security services and security
systems integration. The Security Hardware Products Group markets all of
O'Gara's armoring products, including ballistic and blast protected armoring
systems for commercial and military vehicles, aircraft and missile components.
The Security Services Group offers security-related products and services, such
as advanced driver training, background clearances, business intelligence,
country risk assessments, forensic auditing and force protection consulting. The
Security Systems Integration Group offers planning, design and hardware and
software integration services which are customized to meet specific portable
satellite communications needs of customers, as well as customized turn-key site
security systems to international customers. It also distributes global
positioning satellite equipment. The mailing address of O'Gara's principal
executive offices is 9113 LeSaint Drive, Fairfield, Ohio 45014; its telephone
number is (513) 874-2112. See "BUSINESS OF O'GARA."
Kroll. Kroll provides a broad array of corporate investigation, risk and
crisis management and business intelligence services on a global basis to
multinational and other large companies, including law firms, investment banks
and other financial institutions, government agencies and other clients. Kroll
believes that it is one of the largest companies in the world providing this
broad array of services and that it enjoys strong name recognition within its
customer base. The mailing address of Kroll's principal executive offices is 900
Third Avenue, New York, New York 10022; its telephone number is (212) 593-1000.
See "BUSINESS OF KROLL."
REASONS FOR THE MERGER
The O'Gara Board and the Board of Directors of Kroll (the "Kroll Board")
have approved the Merger for many reasons, including their belief that the
Merger will further the strategic objectives of each company by virtue of their
complementary businesses, managements and resources and that the Merger will
create a global integrated company with strong name recognition and
opportunities for cross selling of goods and services. See "THE
MERGER -- Reasons for the Merger and Recommendations of the Boards of
Directors."
THE MERGER
General. Upon consummation of the Merger, shareholders of Kroll will
receive (and options to purchase Kroll Stock will be converted into options to
purchase) an aggregate of 6,650,000 shares of O'Gara Common Stock and Kroll will
become a wholly owned subsidiary of O'Gara.
Recommendation of O'Gara Board. The O'Gara Board, by unanimous vote, has
determined that the Merger is in the best interests of the holders of O'Gara
Common Stock and recommends that holders of O'Gara
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Common Stock vote in favor of the O'Gara Proposal. The decision of the O'Gara
Board to enter into the Merger Agreement and to recommend that O'Gara
shareholders vote in favor of the O'Gara Proposal is based upon its evaluation
of a number of factors, including, among others, the indication by SBC Warburg
Dillon Read Inc. ("Dillon Read"), an advisor to O'Gara in connection with the
Merger, that, subject to receipt of the executed Merger Agreement substantially
in the form and containing the terms as presented at the August 6, 1997 O'Gara
Board meeting, Dillon Read was prepared to deliver an opinion (the "Dillon Read
Opinion") to the O'Gara Board that the consideration to be paid by O'Gara in
connection with the Merger was fair to O'Gara from a financial point of view.
Dillon Read was not requested to and did not render an opinion as to the
fairness of the Merger to the shareholders of O'Gara individually. The O'Gara
Board is aware that conflicts of interest may exist between O'Gara's directors
and executive officers and its shareholders since certain of its directors and
executive officers will receive additional option grants and increased salaries
in connection with the Merger. See "THE MERGER -- Interests of Certain Persons
in the Merger." The O'Gara Board also notes that the Merger will have a pro
forma dilutive impact on book value per share and earnings per share. See
" -- Comparative Per Share Data" and "PRO FORMA FINANCIAL STATEMENTS." However,
the O'Gara Board believes the Merger is fair to the shareholders of O'Gara. This
is based upon (i) the O'Gara Board's belief that the Merger is fair to O'Gara
from a financial point of view, as supported by the Dillon Read Opinion, (ii)
the fact that five of O'Gara's seven directors are not receiving increased
salaries or additional options and therefore have no such conflicts, and the
O'Gara Board's belief that any such conflicts of interest which do exist are not
significant, (iii) the O'Gara Board's belief that the Merger is consistent with
the overall business strategy of O'Gara, as described in its initial public
offering and its subsequent public filings, to enhance shareholder value by
increasing O'Gara's involvement in the security services industry, and (iv) the
fact that the Merger is supported by Thomas O'Gara, the majority shareholder of
O'Gara, and the O'Gara Board's belief that Thomas O'Gara's interests are aligned
with the other shareholders of O'Gara since he will be affected by the pro forma
dilutive impact more than any other shareholder, will receive only a modest
increase in salary and no additional options and will relinquish his position as
Chairman of O'Gara's Board of Directors upon completion of the Merger.
Accordingly, Thomas M. O'Gara will profit from the Merger only if it results in
enhanced shareholder value. For these reasons, and because (i) O'Gara will
become the parent of Kroll in the Merger, (ii) the O'Gara shareholders are not
receiving any consideration in the Merger, and (iii) the Merger will not
adversely affect the rights of the O'Gara shareholders, the O'Gara Board
believes that the interests of the O'Gara shareholders are aligned with those of
O'Gara. See "THE MERGER -- Reasons for the Merger and Recommendations of the
Boards of Directors" and "THE MERGER -- Opinion of Dillon Read."
Recommendation of Kroll Board. The Kroll Board, by unanimous vote, has
determined that the Merger Agreement and the Merger are fair to, and in the best
interests of, Kroll and its shareholders and recommends that shareholders of
Kroll vote for approval and adoption of the Merger Agreement at the Kroll
Meeting. See "THE MERGER -- Reasons for the Merger and Recommendations of the
Boards of Directors."
Opinion of Dillon Read. At the O'Gara Board meeting on August 6, 1997,
Dillon Read set forth its analysis of the proposed transaction, and based on
discussions and materials provided at the O'Gara Board meeting and subject to
receipt of the executed Merger Agreement substantially in the form and
containing the terms as presented at the meeting, Dillon Read indicated that it
was prepared to deliver an opinion that the consideration to be paid by O'Gara
in connection with the Merger is fair to O'Gara from a financial point of view.
The Dillon Read Opinion does not address the fairness of the Merger to the
shareholders of O'Gara or Kroll, nor does it constitute a recommendation
regarding whether or not it is advisable for such shareholders to vote in favor
of the Merger. The full text of the Dillon Read Opinion, dated September 12,
1997, which sets forth a description of the assumptions made, matters considered
and limitations on the review undertaken, is attached hereto as Appendix C. See
"THE MERGER -- Opinion of Dillon Read."
Interests of Certain Persons in the Merger. Certain members of the
management of O'Gara and Kroll and of the O'Gara Board and the Kroll Board have
certain interests in the Merger that may be different from, or in addition to,
the interests of shareholders of O'Gara and Kroll generally. O'Gara will cause
Kroll to repay certain indebtedness to Jules B. Kroll and American International
Group, Inc., a Delaware corporation ("AIG"). Jules B. Kroll and AIG are the
principal shareholders of Kroll. At the Effective Time, Jules B. Kroll, Howard
I. Smith (an executive officer of AIG), Michael G. Cherkasky and Marshall S.
Cogan will become directors of O'Gara, Jules B. Kroll will become Chairman and
Chief Executive Officer of O'Gara, Thomas M. O'Gara will become Vice
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Chairman of O'Gara, Wilfred T. O'Gara will become President and Chief Operating
Officer of O'Gara and certain other executive officers of Kroll will become
executive officers of O'Gara. O'Gara has entered into employment agreements or
amendments to employment agreements with certain executive officers which will
become effective at the Effective Time. It is contemplated that options to
purchase shares of O'Gara Common Stock will be issued to certain of such persons
at the Effective Time. " See "THE MERGER -- Interests of Certain Persons in the
Merger," "-- Management of O'Gara after the Merger," "PRINCIPAL SHAREHOLDERS OF
KROLL,""CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS -- O'GARA," and
"CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS -- KROLL." O'Gara has
executed agreements with Jules B. Kroll, Thomas M. O'Gara and AIG granting them
rights to require O'Gara, under certain conditions, to register all or a portion
of the O'Gara Common Stock to be owned by them after the Merger. See "THE MERGER
AGREEMENT -- Registration Rights Agreements."
Ownership of O'Gara after the Merger. Immediately following the Merger (i)
the former holders of O'Gara Common Stock will collectively own approximately
52% of the issued and outstanding shares of O'Gara Common Stock, (ii) the former
holders of Kroll Stock will collectively hold approximately 48% of the issued
and outstanding shares of O'Gara Common Stock, and (iii) Thomas M. O'Gara, Jules
B. Kroll and AIG will beneficially own approximately 29.0%, 26.5% and 10.4%,
respectively, of the issued and outstanding shares of O'Gara Common Stock. See
"THE MERGER -- Ownership of O'Gara after the Merger" and "PRINCIPAL SHAREHOLDERS
OF O'GARA."
Management of O'Gara after the Merger. At the Effective Time, Jules B.
Kroll, Howard I. Smith, Michael G. Cherkasky and Marshall S. Cogan will join the
O'Gara Board, Jules B. Kroll will become Chairman of the Board and Chief
Executive Officer of O'Gara, Thomas M. O'Gara will become Vice Chairman of
O'Gara, Wilfred T. O'Gara will become President and Chief Operating Officer of
O'Gara, and certain other changes in the executive officers of O'Gara will be
effected. Election of Jules B. Kroll and Howard I. Smith as directors of O'Gara
is a condition to the consummation of the Merger. Michael G. Cherkasky and
Marshall S. Cogan have been nominated for election as directors consistent with
the understanding of Kroll and O'Gara that Kroll could propose four candidates
(including Messrs. Kroll and Smith) for election to the O'Gara Board. See "THE
MERGER -- Management of O'Gara after the Merger."
Financing the Merger. O'Gara contemplates that at the Effective Time it
will cause Kroll to repay approximately $14.3 million principal amount of
indebtedness to Kroll's principal shareholders and other lenders. O'Gara
anticipates that, to the extent necessary, such funds will be provided by
borrowings under O'Gara's bank credit agreement, as amended. See "THE
MERGER -- Financing the Merger."
Accounting Treatment. The Merger will be accounted for under the pooling
of interests method of accounting in accordance with generally accepted
accounting principles. See "THE MERGER -- Accounting Treatment."
Certain Federal Income Tax Consequences. The Merger is intended to be a
tax-free reorganization for federal income tax purposes so that no gain or loss
will be recognized by the Kroll shareholders, the O'Gara shareholders, Kroll or
O'Gara, except as a result of cash received in lieu of fractional shares or upon
a shareholder's exercise of dissenters' or appraisal rights. See "THE
MERGER -- Certain Federal Income Tax Consequences."
Federal Securities Law Consequences. All shares of O'Gara Common Stock
received in the Merger by Kroll shareholders (other than persons who are
affiliates of Kroll prior to the Merger or O'Gara after the Merger) will be
freely transferable. O'Gara has agreed, under certain circumstances, to register
shares of O'Gara Common Stock held by Jules B. Kroll, Thomas M. O'Gara and AIG.
See "THE MERGER -- Federal Securities Law Consequences," "THE MERGER
AGREEMENT -- Registration Rights Agreements" and "SHARES OF O'GARA COMMON STOCK
ELIGIBLE FOR FUTURE SALE."
Dissenters' Rights. Holders of O'Gara Common Stock or Kroll Stock who do
not vote in favor of the Merger and who otherwise properly comply with Sections
1701.84 and 1701.85 of the Ohio General Corporation Law (the "OGCL") or Section
262 of the Delaware General Corporation Law (the "DGCL"), respectively, will be
entitled to dissenters' or appraisal rights. See "THE MERGER -- Dissenters'
Rights."
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THE MERGER AGREEMENT
General. The Merger Agreement provides, among other things, for the merger
of Newco with and into Kroll, which will result in Kroll, as the surviving
corporation of the Merger, becoming a wholly owned subsidiary of O'Gara.
Conversion of Kroll Stock. At the Effective Time, all shares of Kroll
Stock then issued and outstanding (other than treasury shares and shares owned
by O'Gara or Newco and other than shares subject to dissenters' or appraisal
rights ("Dissenting Shares")), including shares of Kroll Stock subject to
outstanding warrants, options or other stock issuance agreements, will be
converted into an aggregate of 6,650,000 shares of O'Gara Common Stock. On the
date of this Proxy Statement/Prospectus, 106,367 shares of Kroll Stock were
outstanding or subject to warrants, options or other stock issuance agreements.
If the Merger had been consummated on the date of this Proxy
Statement/Prospectus, each outstanding share of Kroll Stock would have been
converted into 62.52 shares of O'Gara Common Stock and each outstanding right to
purchase one share of Kroll Common Stock would have been converted into a right
to purchase 62.52 shares of O'Gara Common Stock. See "THE MERGER
AGREEMENT -- Conversion of Kroll Stock."
HOLDERS OF KROLL STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING KROLL
STOCK TO O'GARA OR KROLL AT THIS TIME. IF THE MERGER IS APPROVED, A LETTER OF
TRANSMITTAL WILL BE MAILED AFTER THE EFFECTIVE TIME TO EACH PERSON WHO WAS A
HOLDER OF OUTSTANDING KROLL STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. KROLL
SHAREHOLDERS SHOULD SEND CERTIFICATES REPRESENTING KROLL STOCK TO O'GARA'S
TRANSFER AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH, THE INSTRUCTIONS
CONTAINED IN THE LETTER OF TRANSMITTAL.
Conditions to the Merger. The obligations of O'Gara and Kroll to
consummate the Merger are subject to the fulfillment of various conditions,
including (i) the effectiveness of the Registration Statement of which this
Proxy Statement/Prospectus is a part and the absence of any stop order
suspending the effectiveness thereof or any threat thereof and (ii) approval of
the Merger by the shareholders of O'Gara and Kroll. Each of such conditions may
be waived, to the extent permitted by law, by the party or parties entitled to
the benefit thereof. At the current time, neither O'Gara nor Kroll believes that
any such waiver will be required. If any condition is not fulfilled, each of
O'Gara and Kroll will evaluate whether it is in its best interests to grant such
a waiver. See "THE MERGER AGREEMENT -- Conditions to the Merger."
Termination of the Merger Agreement. The Merger Agreement may be
terminated (i) by O'Gara or Kroll, if the Merger is not consummated on or prior
to January 31, 1998, (ii) by agreement of O'Gara, Newco, Kroll and Jules B.
Kroll, (iii) by the O'Gara Board, if any of the conditions to O'Gara's
obligations have not been satisfied prior to the closing of the Merger (the
"Closing"), or (iv) by the Kroll Board, if any of the conditions to Kroll's
obligations have not been satisfied prior to the Closing.
RISK FACTORS
An investment in O'Gara Common Stock involves a high degree of risk and
there are risks associated with the business of Kroll and with the Merger.
Accordingly, certain risk factors should be considered by shareholders of O'Gara
and Kroll in evaluating the Merger. See "RISK FACTORS."
THE O'GARA MEETING
The O'Gara Meeting will be held at The Omni Netherland Plaza Hotel, Fifth
and Race Streets, Cincinnati, Ohio on November 21, 1997, starting at 9:00 a.m.
local time. See "THE SPECIAL MEETINGS -- The O'Gara Meeting." At the O'Gara
Meeting, holders of O'Gara Common Stock will be asked to approve and adopt the
O'Gara Proposal. The Merger Agreement and the Amended and Restated Articles of
Incorporation of O'Gara are attached hereto as Appendices A and B, respectively.
At the O'Gara Meeting holders of O'Gara Common Stock also will be asked to
consider and approve the O'Gara Option Proposal and the O'Gara Capitalization
Proposal. The O'Gara Proposal, the O'Gara Option Proposal and the O'Gara
Capitalization Proposal are not conditioned upon one another.
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Holders of record of O'Gara Common Stock at the close of business on
October 15, 1997 (the "O'Gara Record Date"), have the right to receive notice of
and to vote at the O'Gara Meeting. On the O'Gara Record Date, there were
7,279,310 shares of O'Gara Common Stock outstanding and entitled to vote. Each
share of O'Gara Common Stock is entitled to one vote on each matter that is
properly presented to O'Gara shareholders for a vote at the O'Gara Meeting. The
affirmative vote of the holders of a majority of the outstanding shares of
O'Gara Common Stock is required to approve and adopt the O'Gara Proposal and the
O'Gara Capitalization Proposal. The affirmative vote of a majority of the shares
of O'Gara Common Stock represented at the O'Gara Meeting in person or by proxy
and entitled to vote on the O'Gara Option Proposal is required to approve the
O'Gara Option Proposal.
The presence at the O'Gara Meeting, in person or by proxy, of the holders
of a majority of the outstanding shares of O'Gara Common Stock entitled to vote
is necessary to constitute a quorum at the O'Gara Meeting. A shareholder of
O'Gara may revoke his or her proxy at any time prior to its use by delivering to
the Secretary of O'Gara a signed notice of revocation or a later dated signed
proxy or by attending the O'Gara Meeting and voting in person. Attendance at the
O'Gara Meeting will not in itself constitute the revocation of a proxy.
As of the O'Gara Record Date, directors and executive officers of O'Gara as
a group beneficially owned 4,760,016 outstanding shares of O'Gara Common Stock,
or approximately 65.4% of those shares outstanding as of such date. See
"PRINCIPAL SHAREHOLDERS OF O'GARA." As of the O'Gara Record Date, Thomas M.
O'Gara beneficially owned 4,041,838 shares of O'Gara Common Stock, or
approximately 55.5% of those outstanding. He has agreed to vote such shares in
favor of the O'Gara Proposal. Accordingly, it is expected that the O'Gara
Proposal will be approved regardless of the votes cast by other holders of
O'Gara Common Stock. See "THE MERGER AGREEMENT -- Stock Agreements."
THE KROLL MEETING
The Kroll Meeting will be held at the Kroll Offices, 900 Third Avenue, New
York, New York on December 1, 1997, starting at 11:00 a.m. local time. See "THE
SPECIAL MEETINGS -- The Kroll Meeting." At the Kroll Meeting, holders of Kroll
Stock will be asked to approve and adopt the Kroll Proposal.
Holders of record of Kroll Stock at the close of business on October 15,
1997 (the "Kroll Record Date") have the right to receive notice of and to vote
at the Kroll Meeting. On the Kroll Record Date, there were 23,100 shares of
Kroll Class A Common Stock and 74,446 shares of Kroll Common Stock outstanding
and entitled to vote. Each share of Kroll Stock is entitled to one vote on each
matter that is properly presented to Kroll shareholders for a vote at the Kroll
Meeting. The affirmative vote of the holders of a majority of the outstanding
shares of Kroll Stock and the affirmative vote of the holders of a majority of
the Kroll Class A Common Stock are required to approve and adopt the Kroll
Proposal.
As of the Kroll Record Date, directors and executive officers of Kroll who
will be directors or executive officers of O'Gara after the Merger as a group
beneficially owned 60,920 outstanding shares of Kroll Common Stock, or
approximately 81.8% of those shares outstanding on that date, and AIG
beneficially owned all of the outstanding Kroll Class A Common Stock. See
"PRINCIPAL SHAREHOLDERS OF KROLL." As of that date, Jules B. Kroll and AIG owned
an aggregate of 82,041 shares of Kroll Stock, or approximately 84.1% of those
outstanding. Jules B. Kroll and AIG have agreed to vote such shares in favor of
the Kroll Proposal. Accordingly, it is expected that the Kroll Proposal will be
approved regardless of the votes cast by other holders of Kroll Stock. See "THE
MERGER AGREEMENT -- Stock Agreements."
MARKET PRICES AND DIVIDENDS
The O'Gara Common Stock is traded on the Nasdaq National Market under the
symbol OGAR.
On August 7, 1997, the last full trading day preceding public announcement
of the proposed Merger, the last reported sale price per share of the O'Gara
Common Stock on the Nasdaq National Market was $12.75. On November 5, 1997, the
most recent practicable date prior to the printing of this Proxy
Statement/Prospectus, the last reported sale price per share of the O'Gara
Common Stock on the Nasdaq National Market was $18.00. See "MARKET PRICES AND
DIVIDENDS -- Price Range Of O'Gara Common Stock."
5
<PAGE> 9
There is no established market for the Kroll Stock.
HOLDERS OF KROLL STOCK AND O'GARA COMMON STOCK ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS FOR THE O'GARA COMMON STOCK PRIOR TO MAKING ANY DECISION WITH
RESPECT TO THE MERGER.
O'Gara anticipates that any future earnings will be retained to finance
O'Gara's operations and for the growth and development of its business.
Accordingly, O'Gara currently does not anticipate paying cash dividends on the
O'Gara Common Stock in the foreseeable future. See "MARKET PRICES AND
DIVIDENDS -- Dividend Policy."
6
<PAGE> 10
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
O'GARA HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The summary historical consolidated financial data set forth below with
respect to O'Gara's consolidated statements of operations for each of the three
years in the period ended December 31, 1996, and with respect to O'Gara's
consolidated balance sheets at December 31, 1995 and 1996, are derived from the
audited consolidated financial statements of O'Gara included elsewhere in this
Proxy Statement/Prospectus. The summary historical financial data set forth
below with respect to O'Gara's consolidated statement of operations for the year
ended December 31, 1993 and with respect to O'Gara's consolidated balance sheet
at December 31, 1994 is derived from audited consolidated financial statements
of O'Gara not included in this Proxy Statement/Prospectus. The summary
historical financial data set forth below with respect to O'Gara's consolidated
balance sheets at December 31, 1992 and 1993 and O'Gara's consolidated statement
of operations for the year ended December 31, 1992 are derived from unaudited
consolidated financial statements.
The summary historical financial data for O'Gara for the six months ended
June 30, 1996 and 1997 are derived from unaudited consolidated financial
statements of O'Gara included elsewhere in this Proxy Statement/Prospectus.
The data set forth below is qualified by reference to, and should be read
in conjunction with, the related consolidated financial statements and the notes
related thereto and "O'GARA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," included elsewhere in this Proxy
Statement/Prospectus. Unaudited interim data reflects, in the opinion of
O'Gara's management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of results for such
interim periods. Results of operations for unaudited interim periods are not
necessarily indicative of results which may be expected for any other interim or
annual period.
7
<PAGE> 11
<TABLE>
<CAPTION>
SIX MONTHS
TWELVE MONTHS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997(3)
------- ------- ------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $16,860 $21,054 $33,912 $32,817 $ 82,778 $41,521 $ 51,853
Cost of sales................ 11,511 14,640 24,505 25,237 61,523 31,383 37,484
------- ------- ------- ------- --------- ------- ---------
Gross profit............ 5,349 6,414 9,407 7,580 21,255 10,138 14,369
Selling and marketing
expenses................... 2,432 1,933 2,736 3,628 4,810 2,159 3,794
General and administrative
expenses................... 1,464 3,169 4,441 4,129 7,930 3,286 5,121
------- ------- ------- ------- --------- ------- ---------
Operating income
(loss)................ 1,453 1,312 2,230 (177) 8,515 4,693 5,454
Interest expense............. (481) (269) (410) (842) (1,300) (613) (1,404)
Other income (expense),
net........................ 92 (81) 60 (103) (38) (78) 329
------- ------- ------- ------- --------- ------- ---------
Income (loss) before
minority interest,
provision for income
taxes and extraordinary
item.................... 1,064 962 1,880 (1,122) 7,177 4,002 4,379
Minority interest............ -- -- -- -- -- -- (74)
------- ------- ------- ------- --------- ------- ---------
Income (loss) before
provision for income
taxes and extraordinary
item.................... 1,064 962 1,880 (1,122) 7,177 4,002 4,305
Provision for income
taxes(1)................... -- -- -- -- 518 -- 1,623
------- ------- ------- ------- --------- ------- ---------
Income (loss) before
extraordinary item...... 1,064 962 1,880 (1,122) 6,659 4,002 2,682
Extraordinary item, net of
tax benefit................ -- -- -- -- -- -- 194
------- ------- ------- ------- --------- ------- ---------
Net income (loss)............ $ 1,064 $ 962 $ 1,880 $(1,122) $ 6,659 $ 4,002 $ 2,488
======= ======= ======= ======= ========= ======= =========
Pro Forma earnings per
share(2)................... $ 0.69
=========
Earnings per share........... $ 0.35
=========
Pro Forma weighted average
shares outstanding......... 6,449,050
=========
Weighted average shares
outstanding................ 7,141,389
=========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)....... $(4,468) $(2,238) $(1,999) $(4,094) $ 4,279 $ (616) $32,332
Net property, plant and
equipment..................... 2,236 2,622 2,945 3,171 4,925 3,669 9,083
Total assets.................... 10,504 11,372 19,243 27,817 43,938 36,265 89,747
Total debt...................... 4,715 4,752 7,900 12,372 12,241 15,808 41,974
Shareholders' equity
(deficit)..................... (1,713) (1,023) 1,273 239 12,656 4,016 20,752
</TABLE>
- ---------------
(1) Prior to its initial public offering consummated in November 1996 (the
"Offering"), O'Gara's business was conducted by a group of corporations
affiliated by substantially common management and control (the "Related
Corporations"), which were combined on October 28, 1996 (the
"Reorganization"). The most significant of the Related Corporations had
elected to be treated as an S Corporation for federal and state income tax
purposes, rather than be taxed at the corporate level. Accordingly, the
O'Gara Historical Financial Data does not contain a provision for income
taxes prior to 1996. The provision for income taxes in 1996 reflects a tax
provision for the period subsequent to the Reorganization.
(2) The pro forma earnings per share present the pro forma effects on the
historical consolidated financial information reflecting certain
transactions as if they occurred on January 1, 1996. The pro forma
adjustments include amortization of intangible assets resulting from the
purchase of net assets of Palmer Associates, S.C. ("Palmer"), the
elimination of interest expense relating to the retirement of bank debt and
the application of corporate income taxes to O'Gara's consolidated income
before income taxes at an effective rate of approximately 40%. See the
Consolidated Statements of Operations and Notes to O'Gara's Consolidated
Financial Statements included elsewhere in this Proxy Statement/Prospectus.
(3) O'Gara completed certain acquisitions in the first quarter of 1997
(including the acquisition of Labbe, S.A. ("Labbe") which was effective for
accounting purposes on January 1, 1997) and the results of the acquired
entities are included from the dates of their respective acquisitions in the
consolidated statement of operations as well as in the consolidated balance
sheet data as of June 30, 1997.
8
<PAGE> 12
KROLL HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The summary historical consolidated financial data set forth below with
respect to Kroll's consolidated statements of operations for each of the three
years in the period ended December 31, 1996, and with respect to Kroll's
consolidated balance sheets at December 31, 1995 and 1996, are derived from the
audited consolidated financial statements of Kroll included elsewhere in this
Proxy Statement/Prospectus. The summary historical financial data set forth
below with respect to Kroll's consolidated statement of operations for the year
ended December 31, 1993, and with respect to Kroll's consolidated balance sheets
at December 31, 1993 and 1994, are derived from audited consolidated financial
statements of Kroll not included in this Proxy Statement/Prospectus. The summary
historical combined financial data presented for Kroll in 1992 is that of Kroll
Associates, Inc. and affiliated subsidiaries group ("KAI"). Kroll Holdings, Inc.
commenced operations in June 1993.
The summary historical financial data for Kroll for the six months ended
June 30, 1996 and 1997 are derived from unaudited consolidated financial
statements of Kroll included elsewhere in this Proxy Statement/Prospectus.
The data set forth below is qualified by reference to, and should be read
in conjunction with, the related consolidated financial statements and the notes
related thereto and "KROLL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," included elsewhere in this Proxy
Statement/Prospectus. Unaudited interim data reflects, in the opinion of Kroll's
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of results for such interim
periods. Results of operations for unaudited interim periods are not necessarily
indicative of results which may be expected for any other interim or annual
period.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
TWELVE MONTHS ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $57,144 $56,161 $52,872 $53,024 $70,883 $33,374 $36,746
Cost of sales(3)................ 29,181 31,024 31,684 35,206 47,900 21,772 21,073
------- ------- ------- ------- ------- ------- -------
Gross profit............... 27,963 25,137 21,188 17,818 22,983 11,602 15,673
Selling and marketing
expenses...................... 3,784 4,084 4,700 5,490 4,632 2,097 2,581
General and administrative
expenses...................... 17,273 16,301 18,076 16,788 18,350 8,689 9,513
------- ------- ------- ------- ------- ------- -------
Operating income (loss).... 6,906 4,752 (1,588) (4,460) 1 816 3,579
Interest expense................ (2,426) (2,423) (2,188) (1,970) (1,840) (950) (783)
Other income (expense), net..... 1,915 515 406 (282) 358 71 (135)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income tax
provision (benefit) and
cumulative effect of
accounting change............. 6,395 2,844 (3,370) (6,712) (1,481) (63) 2,661
Provision (benefit) for income
taxes(1)...................... 635 7,070 (1,751) (1,298) (679) (57) 1,326
------- ------- ------- ------- ------- ------- -------
Income (loss) before cumulative
effect of accounting change... 5,760 (4,226) (1,619) (5,414) (802) (6) 1,335
Cumulative effect of accounting
change(2)..................... -- (295) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)(3)............ $ 5,760 $(4,521) $(1,619) $(5,414) $ (802) $ (6) $ 1,335
======= ======= ======= ======= ======= ======= =======
</TABLE>
9
<PAGE> 13
<TABLE>
<CAPTION>
AS OF JUNE 30,
AS OF DECEMBER 31, (UNAUDITED)
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $15,630 $26,158 $16,510 $ 8,181 $ 6,321 $10,257 $ 3,838
Net property, plant and
equipment..................... 5,075 4,582 4,067 3,705 3,639 3,576 4,227
Total assets.................... 39,639 48,179 44,659 38,950 37,296 38,703 37,414
Total debt...................... 21,643 20,622 19,666 18,543 15,173 18,124 14,597
Stockholders' equity............ 5,126 11,362 9,803 4,418 4,212 4,376 3,019
</TABLE>
- ---------------
(1) Prior to 1993, Kroll had elected to be treated as an S Corporation for
federal and state income tax purposes and as such, income was allocable to
its shareholders for income tax purposes, rather than being taxed at the
corporate level. Income tax expense reflected in the consolidated statement
of operations for the year ended December 31, 1992, relates to those
jurisdictions which did not recognize Kroll's S Corporation status. During
1993, Kroll changed its tax filing status from an S to a C Corporation. The
deferred tax liability resulting from this tax status change has been
included in income tax expense for the year ended December 31, 1993.
(2) Effective January 1, 1993, Kroll adopted SFAS 109 and reported the
cumulative effect of a change in the method of accounting for income taxes
in the 1993 consolidated statement of operations.
(3) The net income (loss) and costs of sales for the year ended December 31,
1996 reflect a write-off by Kroll of approximately $5.0 million ($2.8
million, net of tax benefit) of uncollectible accounts receivable. See
"KROLL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" included elsewhere in this Proxy
Statement/Prospectus.
10
<PAGE> 14
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
The selected unaudited pro forma combined condensed financial data is
derived from the unaudited pro forma combined condensed financial statements,
which give effect to the Merger as a pooling of interests, and should be read in
conjunction with, and are qualified by reference to, such pro forma statements
and the notes thereto included elsewhere in this Proxy Statement/Prospectus. For
purposes of the unaudited pro forma operating data, O'Gara's consolidated
financial statements for the three fiscal years ended December 31, 1996, and for
the six months ended June 30, 1996 and 1997 have been combined with the
consolidated financial statements of Kroll for the three fiscal years ended
December 31, 1996 and for the six months ended June 30, 1996 and 1997,
respectively. For purposes of the unaudited pro forma combined balance sheet
data, O'Gara's consolidated financial data at June 30, 1997 has been combined
with Kroll's consolidated financial data at June 30, 1997. No dividends have
been declared or paid on the O'Gara Common Stock.
The pro forma data is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have been achieved if the Merger had been consummated as of the beginning of the
periods indicated, nor is it indicative of future financial position or results
of operations.
<TABLE>
<CAPTION>
SIX MONTHS
TWELVE MONTHS ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997(1)
------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net sales........................... $86,784 $85,841 $ 153,661 $74,895 $ 88,599
Cost of sales....................... 56,189 60,443 109,423 53,155 58,557
------- ------- ---------- ------- ----------
Gross profit................... 30,595 25,398 44,238 21,740 30,042
Selling and marketing expenses...... 7,436 9,118 9,442 4,256 6,375
General and administrative
expenses.......................... 22,517 20,917 26,280 11,975 14,634
------- ------- ---------- ------- ----------
Operating income (loss)........ 642 (4,637) 8,516 5,509 9,033
Interest expense.................... (2,598) (2,812) (3,140) (1,563) (2,187)
Other income (expense), net......... 466 (385) 320 (7) 194
------- ------- ---------- ------- ----------
Income (loss) before minority
interest, provision (benefit)
for income taxes and
extraordinary item........... (1,490) (7,834) 5,696 3,939 7,040
Minority interest................... -- -- -- -- (74)
------- ------- ---------- ------- ----------
Income (loss) before provision
(benefit) for income taxes
and extraordinary item....... (1,490) (7,834) 5,696 3,939 6,966
Income tax provision (benefit)(2)... (1,751) (1,298) (161) (57) 2,949
------- ------- ---------- ------- ----------
Income (loss) before
extraordinary item........... 261 (6,536) 5,857 3,996 4,017
Extraordinary item, net of tax
benefit........................... -- -- -- -- 194
------- ------- ---------- ------- ----------
Net income (loss) (3)............... $ 261 $(6,536) $ 5,857 $ 3,996 $ 3,823
======= ======= ========== ======= ==========
Pro Forma earnings per share (4).... $ 0.28
==========
Earnings per share.................. $ 0.28
==========
Weighted average shares
outstanding....................... 13,099,050 13,791,389
========== ==========
</TABLE>
11
<PAGE> 15
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
--------------
<S> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 36,170
Net property, plant and equipment........................... 13,310
Total assets................................................ 127,161
Total debt.................................................. 56,571
Shareholders' equity........................................ 23,771
</TABLE>
- ---------------
(1) O'Gara completed certain acquisitions in the first quarter of 1997
(including Labbe, which was effective for accounting purposes on January 1,
1997) and the results of the acquired entities are included from the
effective dates of their respective acquisitions in the consolidated
statement of operations as well as in the consolidated balance sheet data as
of June 30, 1997.
(2) Prior to the Offering, O'Gara's business was conducted by the Related
Corporations, which were combined on October 28, 1996, in the
Reorganization. The most significant of the Related Corporations had elected
to be treated as an S Corporation for federal and state income tax purposes,
rather than be taxed at the corporate level. Accordingly, the O'Gara
Historical Financial Data does not contain a provision for income taxes
prior to 1996. The provision for income taxes in 1996 reflects a tax
provision for the period subsequent to the Reorganization.
(3) The unaudited pro forma net income (loss) for the year ended December 31,
1996 reflects a write-off by Kroll of approximately $5.0 million ($2.8
million, net of tax benefit) of uncollectible accounts receivable. See
"KROLL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" included elsewhere in this Proxy
Statement/Prospectus.
(4) The pro forma earnings per share present the pro forma effects on the
historical consolidated financial information reflecting certain
transactions as if they occurred on January 1, 1996. The pro forma
adjustments include amortization of intangible assets resulting from the
acquisition of Labbe and the purchase of net assets of Palmer, the
additional interest expense relating to debt incurred to fund the Labbe
acquisition (net of debt retired upon completion of the Offering) and the
application of corporate income taxes to O'Gara's consolidated income before
income taxes at an effective rate of approximately 40% (net of recognition
of the benefit for income taxes from Labbe pro forma adjustments at an
effective rate of approximately 37%). See the Consolidated Statements of
Operations and Notes to O'Gara's Consolidated Financial Statements.
NOTES TO SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
1. The unaudited pro forma combined condensed financial statements of O'Gara and
Kroll give retroactive effect to the Merger using the pooling of interests
method of accounting, and, as a result, the unaudited pro forma combined
condensed balance sheet and statements of operations are presented as if the
combining companies had been combined for all periods presented. The unaudited
pro forma combined condensed financial statements will become the historical
financial statements of O'Gara upon issuance of financial statements for a
period that includes the date on which the Merger is consummated. The unaudited
pro forma combined condensed financial statements reflect the issuance of
6,650,000 shares of O'Gara Common Stock in exchange for all shares of Kroll
Stock outstanding or subject to stock options to effect the Merger. The
unaudited pro forma combined condensed financial statements, including the notes
thereto, should be read in conjunction with the historical financial statements
of O'Gara and Kroll included elsewhere in this Proxy Statement/Prospectus.
2. The unaudited pro forma data is presented for informational purposes only and
does not give effect to any synergies that may occur due to the combining of
O'Gara's and Kroll's existing operations. O'Gara expects to incur charges
currently estimated to be approximately $2.4 million, net of estimated tax
benefit of approximately $1.6 million, to reflect costs associated with
transaction fees and costs incident to the Merger. In addition, following the
Merger, O'Gara expects to incur additional expenses, net of any tax benefits,
associated with integrating the operations of the two companies. It is currently
estimated that these nonrecurring charges will not exceed $0.5 million, and such
charges are not reflected in the unaudited pro forma combined condensed balance
sheet or statement of operations.
12
<PAGE> 16
3. In connection with the Merger, O'Gara will realize a charge to shareholders'
equity of $3.5 million, net of an estimated tax benefit of $2.4 million, related
to the accelerated vesting of certain stock options issued by Kroll.
4. Following the consummation of the Merger, O'Gara will cause Kroll to repay
its indebtedness to certain of the Kroll shareholders of approximately $6.2
million.
5. In 1997, O'Gara incurred an extraordinary charge resulting from the
refinancing of certain debt obligations.
6. The accounting policies of the separate companies are currently being studied
from a conformity perspective. The impact of conforming accounting policies, if
any, is not presently estimable.
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA INCLUDING LABBE
The following selected unaudited pro forma combined condensed financial
data is derived from the unaudited pro forma combined condensed financial
statements, which give effect to the Merger as a pooling of interests, after
giving effect to O'Gara's acquisition of Labbe. The selected unaudited pro forma
combined condensed financial data should be read in conjunction with, and are
qualified by reference to, such pro forma statements and the notes thereto
included elsewhere in this Proxy Statement/Prospectus. For purposes of the
unaudited pro forma operating data, O'Gara's pro forma consolidated financial
statements for the fiscal year ended December 31, 1996 have been combined with
the consolidated financial statements of Kroll for the fiscal year ended
December 31, 1996.
The pro forma data is presented for illustrative purposes only, and is not
indicative of the operating results that would have been achieved if the
acquisition of Labbe or the Merger had been consummated as of the beginning of
the period indicated, nor is it indicative of future results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
O'GARA
PRO FORMA KROLL TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................. $ 106,896 $ 70,883 $ 177,779
Cost of sales......................................... 81,179 47,900 129,079
---------- ---------- -----------
Gross profit..................................... 25,717 22,983 48,700
Selling and marketing expenses........................ 5,894 4,632 10,526
General and administrative expenses................... 9,323 18,350 27,673
---------- ---------- -----------
Operating income (loss).......................... 10,500 1 10,501
Interest expense...................................... (2,769) (1,840) (4,609)
Other income (expense), net........................... (201) 358 157
---------- ---------- -----------
Income (loss) before provision (benefit) for
income taxes................................... 7,530 (1,481) 6,049
Provision (benefit) for income taxes (1).............. 676 (679) (3)
---------- ---------- -----------
Net income (loss) (2)................................. $ 6,854 $ (802) $ 6,052
========== ========== ===========
Pro Forma net income (loss) (3)....................... $ 4,644 $ (802) $ 3,842
========== ========== ===========
Earnings per share.................................... $ 0.68 $ 0.29
========== ===========
Weighted average shares outstanding................... 6,825,647 6,650,000 13,475,647
========== ========== ===========
</TABLE>
(1) Prior to the Offering, O'Gara's business was conducted by the Related
Corporations, which were combined on October 28, 1996, in the
Reorganization. The most significant of the Related Corporations had elected
to be treated as an S Corporation for federal and state income tax purposes,
rather than be taxed at the corporate level. Accordingly, the O'Gara
Historical Financial Data does not contain a provision for income taxes
prior to 1996. The provision for income taxes in 1996 reflects a tax
provision for the period subsequent to the Reorganization.
13
<PAGE> 17
(2) The unaudited pro forma net income (loss) for the year ended December 31,
1996 reflects a write-off by Kroll of approximately $5.0 million ($2.8
million, net of tax benefit) of uncollectible accounts receivable. See
"KROLL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" included elsewhere in this Proxy
Statement/Prospectus.
(3) The pro forma earnings per share present the pro forma effects on the
historical consolidated financial information reflecting certain
transactions as if they occurred on January 1, 1996. The pro forma
adjustments include amortization of intangible assets resulting from the
acquisition of Labbe and the purchase of net assets of Palmer, the
additional interest expense relating to debt incurred to fund the Labbe
acquisition (net of debt retired upon completion of the Offering) and the
application of corporate income taxes to O'Gara's consolidated income before
income taxes at an effective rate of approximately 40% (net of recognition
of the benefit for income taxes from Labbe pro forma adjustments at an
effective rate of approximately 37%). See the Consolidated Statements of
Operations and Notes to O'Gara's Consolidated Financial Statements included
elsewhere in this Proxy Statement/Prospectus.
14
<PAGE> 18
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of O'Gara
and Kroll and combined per share data on an unaudited pro forma basis after
giving effect to the Merger on a pooling of interests basis of accounting. This
data should be read in conjunction with the selected historical financial data,
the unaudited pro forma combined condensed financial data and the separate
historical consolidated financial statements of O'Gara and Kroll, and notes
thereto and the O'Gara and Kroll Managements' Discussion and Analyses of
Financial Condition and Results of Operations included elsewhere in this Proxy
Statement/Prospectus. The pro forma combined financial data is not indicative of
the operating results that would have been achieved had the Merger been
consummated as of the beginning of the periods indicated nor is such data
indicative of future financial condition or results of operations. For purposes
of the comparative per share data, O'Gara's financial data at December 31, 1996
and June 30, 1997 have been combined with Kroll's financial data at December 31,
1996 and June 30, 1997, respectively.
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
<S> <C> <C>
Historical -- O'Gara:
Net income per share(3).................................. $ 0.69 $ 0.35
Book value per share(1).................................. $ 1.90 $ 2.85
Dividends per share...................................... $ -- $ --
Pro Forma -- O'Gara(4):
Net income (loss) per share.............................. $ 0.68 $ 0.35
Book value per share(1).................................. $ 2.36 $ 2.85
Dividends per share...................................... $ -- $ --
Historical -- Kroll:
Net income (loss) per share(5)........................... $ (7.35) $ 12.54
Book value per share(1).................................. $ 38.62 $ 28.38
Dividends per share...................................... $ -- $ --
Pro Forma Combined Per O'Gara Share(6):
Net income per share..................................... $ 0.28 $ 0.28
Book value per share(1).................................. $ 1.27 $ 1.71
Dividends per share...................................... $ -- $ --
Equivalent Pro Forma Combined Per Kroll Share(2):
Net income (loss) per share.............................. $ 17.51 $ 17.51
Book value per share..................................... $ 79.40 $ 106.91
Dividends per share...................................... $ -- $ --
</TABLE>
- ---------------
(1) The historical book value per share of each of O'Gara and Kroll,
respectively, is computed by dividing the respective shareholders' equity by
the number of shares of common stock outstanding at the end of each period.
The pro forma book value per share is computed by dividing pro forma
shareholders' equity by the pro forma number of shares of O'Gara Common
Stock outstanding at the end of each period.
(2) The equivalent Kroll pro forma per share amounts are calculated by
multiplying the O'Gara combined pro forma per share amounts by the exchange
ratio.
(3) Represents pro forma earnings per share reflecting the pro forma effects on
the historical consolidated financial information of certain transactions as
if they occurred on January 1, 1996. The pro forma adjustments include
amortization on intangible assets resulting from the purchase of net assets
of Palmer, the elimination of interest expense relating to the retirement of
bank debt and the application of corporate income taxes to O'Gara's
consolidated income before income taxes at an effective rate of
approximately 40%. See the Consolidated Statements of Operations and Notes
to O'Gara's Consolidated Financial Statements included elsewhere in this
Proxy Statement/Prospectus.
(4) Represents pro forma earnings per share assuming the acquisition of Labbe
occurred on January 1, 1996 and reflecting the pro forma effects on the
historical O'Gara and Labbe consolidated financial information of certain
transactions as if they occurred on January 1, 1996. The pro forma
adjustments include amortization of intangible assets resulting from the
acquisition of Labbe and the purchase of net assets of Palmer, the
additional interest expense relating to debt incurred to fund the Labbe
acquisition (net of debt retired upon completion of the Offering) and the
application of corporate income taxes to O'Gara's consolidated income before
income taxes at an effective rate of approximately 40% (net of recognition
of the benefit for income taxes from Labbe pro forma adjustments at an
effective rate of approximately 37%). See the Consolidated Statements of
Operations and Notes to O'Gara's Consolidated Financial Statements included
elsewhere in this Proxy Statement/Prospectus.
(5) Includes Class A and common stock as well as the dilutive impact of
outstanding common stock equivalents.
(6) The unaudited pro forma data are presented for informational purposes only
and do not give effect to any synergies that may occur due to the combining
of O'Gara's and Kroll's existing operations. O'Gara expects to incur charges
currently estimated to be approximately $2.4 million, net of estimated tax
benefit of approximately $1.6 million, to reflect costs associated with
transaction fees and costs incident to the Merger. In addition, following
the Merger, O'Gara expects to incur additional expenses, net of any tax
benefits, associated with integrating the operations of the two companies.
It is currently estimated that these nonrecurring charges will not exceed
$0.5 million, and such charges are not reflected in the unaudited pro forma
combined condensed balance sheet or statement of operations.
15
<PAGE> 19
RISK FACTORS
The following risk factors should be considered by shareholders of O'Gara
and Kroll in evaluating the Merger. After the Effective Time, the risk factors
described under "Risk Factors Relating to the Business of O'Gara" and "Risk
Factors Relating to the Business of Kroll" will relate to the business of the
combined companies.
RISK FACTORS ASSOCIATED WITH THE MERGER
Uncertainties Relating to Integration of Operations. The anticipated
benefits of the Merger may not be achieved unless the operations of Kroll are
combined successfully with those of O'Gara in a coordinated, timely and
efficient manner, and there can be no assurance that this will occur. Even if
the two companies' operations are integrated successfully, there can be no
assurance that the benefits anticipated by the Merger will be achieved. The
transition to a combined company will require substantial attention from
management. The diversion of the attention of management and any difficulties
encountered in the transition process could have an adverse impact on the
revenues and operating results of the combined companies. These difficulties may
be increased by the necessity of integrating personnel with disparate business
backgrounds and combining two different corporate cultures. In addition, the
process of combining the two organizations could cause the interruption of, or a
loss of momentum in, the activities of either or both of the companies'
businesses, which could have an adverse effect on their combined operations. The
uncertainties associated with such integration may result in the loss of key
management and other employees. Failure to achieve the anticipated benefits of
the Merger or to integrate successfully the operations of the companies could
have a material adverse effect upon the business, operating results and
financial condition of O'Gara after the Merger. Even if the benefits of the
Merger are achieved and the two companies' operations are integrated
successfully, there can be no assurance that the operating results and financial
condition of O'Gara after the Merger will not be materially and adversely
affected by any number of economic, market or other factors that are not related
to the Merger, including those described under "Risk Factors Relating to the
Business of O'Gara" and "Risk Factors Relating to the Business of Kroll."
Transaction Expenses; Costs of Integration. O'Gara and Kroll estimate that
they will together incur direct transaction costs (including financial advisors,
legal, accounting, registration and printing fees) of approximately $4.0 million
associated with the Merger. In addition, following the Merger, O'Gara expects to
incur additional expenses, which at this time are not expected to exceed $0.5
million, relating to information systems integration, promotional materials
reflecting the Merger, integration of benefit plans, and travel and other costs
relating to transitional planning and implementation. These costs (except for
any such costs which are capitalized) are expected to be charged against income
of O'Gara in the fiscal quarter in which they are incurred. There can be no
assurance that O'Gara will not incur unforeseen costs, which could be material,
in subsequent periods to reflect additional costs associated with the Merger.
Dependence on Key Personnel. After the Merger, the combined companies'
operations will depend on the continued efforts of their executive officers and
senior management, particularly Jules B. Kroll, Thomas M. O'Gara and Wilfred T.
O'Gara. If the executive officers of O'Gara and Kroll become unable or decide
not to continue with O'Gara after the Merger, or if a number of senior managers
fail to continue with O'Gara and O'Gara is unable to attract and retain
appropriate replacements, the combined companies' business could be materially
and adversely affected. See "THE MERGER -- Management of O'Gara after the
Merger."
Control by Management. After the Merger, O'Gara's directors and executive
officers will beneficially own approximately 72.2% of the outstanding O'Gara
Common Stock and will be able to control most matters requiring approval by
shareholders, including the election of directors. See "THE MERGER -- Ownership
of O'Gara after the Merger" and "PRINCIPAL SHAREHOLDERS OF O'GARA."
Possible Volatility of Stock. The market price for the O'Gara Common Stock
may be highly volatile after the Merger. O'Gara believes that a variety of
factors, including announcements by O'Gara or its competitors, quarterly
variations in financial results, trading volume, general market trends and other
factors, could cause the market price of the O'Gara Common Stock to fluctuate
substantially. In addition, the stock market has experienced extreme price and
volume fluctuations that are often unrelated to the operating performance of
particular companies. These market fluctuations may adversely affect the price
of the O'Gara Common Stock.
16
<PAGE> 20
Changes in the market value of the O'Gara Common Stock will affect the value to
be received by holders of Kroll Stock in the Merger.
Dilutive Effect of the Merger on Current Shareholders' Voting Power. After
the Merger, the current shareholders of O'Gara will initially own approximately
52% of the outstanding O'Gara Common Stock, and the current shareholders of
Kroll will initially own approximately 48% of the outstanding O'Gara Common
Stock. This represents substantial dilution of their current percentage voting
power in O'Gara and Kroll, respectively.
Dilutive Effect of the Merger on O'Gara's Earnings Per Share and Book Value
Per Share. On a pro forma basis, the Merger is dilutive to O'Gara's net income
per share for the twelve months ended December 31, 1996 and the six months ended
June 30, 1997. O'Gara's net income per share for such periods was $0.69 and
$0.35, respectively. On a pro forma basis, giving effect to the Merger as if it
had occurred on the first day of each such period, net income per share for such
periods would have been $0.28 and $0.28, respectively, representing dilution of
$0.41 and $0.07 per share, respectively. On a pro forma basis, the Merger also
is dilutive to O'Gara's book value per share at December 31, 1996 and June 30,
1997. O'Gara's book value per share at such dates was $1.90 and $2.85,
respectively. On a pro forma basis, giving effect to the Merger, book value per
share would have been $1.27 and $1.71, respectively, a reduction of $0.63 and
$1.14 per share, respectively. See "SUMMARY -- Comparative Per Share Data."
There can be no assurance that the Merger will not similarly dilute O'Gara's net
income and book value per share in the future.
Shares Eligible for Future Sale. Sales of a substantial number of shares
of O'Gara Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the O'Gara Common Stock and may
make it more difficult for O'Gara to sell shares of O'Gara Common Stock in the
future at times and for prices that it deems appropriate. Upon consummation of
the Merger, there will be outstanding 13,929,310 shares of O'Gara Common Stock
(assuming the exercise of all Kroll stock options and no exercise of outstanding
O'Gara stock options). The 6,650,000 shares of O'Gara Common Stock to be issued
in the Merger (except for shares received by any affiliate of O'Gara or Kroll),
and the shares of O'Gara Common Stock issued in the Offering, will be or are
freely tradeable without restriction under the Securities Act of 1933 (the
"Act"). The remaining approximately 5.2 million shares (the "Restricted Shares")
of currently outstanding O'Gara Common Stock have been owned beneficially by
certain of O'Gara's executive officers and directors since prior to the Offering
or were issued in the Acquisitions or as stock bonuses to certain executive
officers of O'Gara paid in the first quarter of 1997 and may not be resold
unless they are registered under the Act or sold pursuant to an applicable
exemption from registration, including Rule 144 under the Act. Pursuant to Rule
145 under the Act, resale of the shares of O'Gara Common Stock acquired in the
Merger by any affiliate of Kroll prior to the Merger or O'Gara thereafter will
be subject to the provisions of Rule 144 (other than the holding period
requirements). See "SHARES OF O'GARA COMMON STOCK ELIGIBLE FOR FUTURE SALE."
Absence of Dividends. O'Gara does not anticipate paying any dividends on
the O'Gara Common Stock in the foreseeable future. Additionally, the terms of
the $35.0 million principal amount of O'Gara's Senior Notes due May 30, 2004,
issued and sold by O'Gara to certain institutional investors on June 3, 1997
(the "Senior Notes"), and O'Gara's credit agreement with its bank require
maintenance of certain financial ratios which may limit the funds available for
cash dividends. See "MARKET PRICES AND DIVIDENDS -- Dividend Policy."
Potential Anti-Takeover Effect and Potential Adverse Impact on Market Price
of Certain Charter and Code of Regulations Provisions and the OGCL. Certain
provisions of the O'Gara Articles and O'Gara's Code of Regulations (the "O'Gara
Code") and of the OGCL, together or separately, could discourage potential
acquisition proposals, delay or prevent a change in control of O'Gara and limit
the price that certain investors might be willing to pay in the future for
O'Gara Common Stock.
The O'Gara Board has authority to issue up to 100,000 (to be increased to
1,000,000 if the O'Gara Capitalization Proposal is approved) shares of O'Gara
Preferred Stock without further shareholder approval. Such O'Gara Preferred
Stock could have dividend, liquidation, conversion, voting and other rights and
privileges that are superior or senior to the O'Gara Common Stock. Issuance of
shares of O'Gara Preferred Stock could result in the dilution of the voting
power of the O'Gara Common Stock, adversely affect holders of the O'Gara Common
Stock in the event of liquidation of O'Gara or delay, defer or prevent a change
in control of O'Gara.
17
<PAGE> 21
In addition, Sections 1701.01 and 1701.831 of the OGCL contain provisions
that require shareholder approval of any proposed "control share acquisition" of
any Ohio corporation at any of three ownership thresholds: 20%, 33 1/3% and 50%;
and Chapter 1704 of the Ohio Revised Code contains provisions that restrict
certain business combinations and other transactions between an Ohio corporation
and interested shareholders. See "DESCRIPTION OF O'GARA CAPITAL
STOCK -- Provisions Affecting Business Combinations and Changes in Control."
RISK FACTORS RELATING TO THE BUSINESS OF O'GARA
An investment in O'Gara Common Stock involves a high degree of risk. O'Gara
operates in a highly competitive environment that involves a number of risks,
some of which are beyond its control. The following discussion highlights some
of these risks, which should be considered by shareholders of O'Gara and Kroll
in considering the Merger.
Risks Associated with Business Strategy. O'Gara's strategy is to become a
fully integrated global security company. Part of this strategy requires
developing relatively new lines of business by expanding O'Gara's Security
Systems Integration and Security Services Groups. Historically, O'Gara has not
generated substantial revenues from these lines of business. O'Gara's primary
business and experience has been in vehicle armoring. Although the O'Gara Board
believes the Merger will further this strategy, it believes that full
implementation of this strategy will require further steps to continue the
development of these lines of business. There can be no assurance that O'Gara
will be able to build or manage profitably these businesses without substantial
costs, delays or other problems, which could have a material adverse effect upon
O'Gara's financial condition, results of operations and cash flows.
As O'Gara's business develops and expands, O'Gara will need to implement
enhanced operational and financial systems and will require additional
employees, management and operational and financial resources. There can be no
assurance that O'Gara will successfully implement and maintain such operational
and financial systems or successfully obtain, integrate or utilize the
employees, management and operational and financial resources required to manage
a developing and expanding business. Failure to implement such systems
successfully and use such resources effectively could have a material adverse
effect on O'Gara's financial condition, results of operations and cash flows.
O'Gara's business strategy requires substantial capital. In addition, the
expansion of O'Gara's business into related products and services may require
additional capital. Such capital may be obtained by borrowings under O'Gara's
credit facilities, through the issuance of long-term or short-term indebtedness
or through the issuance of equity securities in private or public transactions.
This strategy could result in increased interest expense and/or dilution of
existing equity positions. There can be no assurance that acceptable capital
financing for future growth can be obtained on suitable terms, if at all. See
"O'GARA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS."
Risks Associated with Acquisition Strategy. A further part of O'Gara's
strategy is to grow through the acquisition of companies that will complement
its existing operations or provide it with an entry into markets it does not
currently serve. Although the O'Gara Board believes the Merger is consistent
with this strategy, growth through acquisitions involves substantial risks,
including the risk of improper valuation of the acquired business and the risk
of inadequate integration. There can be no assurance that O'Gara will be able to
acquire suitable companies or manage them profitably or that acquisitions will
produce returns that justify O'Gara's investments. In addition, O'Gara may
compete for acquisition and expansion opportunities with companies that have
significantly greater resources than O'Gara.
O'Gara may finance future acquisitions with cash from operations or
additional debt or equity financings. There can be no assurance that O'Gara will
be able to generate internal cash or obtain financing from external sources or
that, if available, such financing will be on terms acceptable to O'Gara. The
issuance of additional O'Gara Common Stock to finance acquisitions may result in
substantial dilution to holders of O'Gara Common Stock. Any debt financing may
significantly increase O'Gara's leverage and may involve restrictive covenants
which limit O'Gara's operations. Future acquisitions by O'Gara also will require
the approval of KeyBank National Association ("KeyBank") under O'Gara's loan
agreement. See "O'GARA MANAGEMENT'S
18
<PAGE> 22
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Liquidity and Capital Resources."
If O'Gara is successful in its acquisition strategy, O'Gara may experience
a period of rapid growth which could place significant additional demands on
O'Gara's management, resources and management information systems. O'Gara's
failure to manage any such rapid growth effectively could have a material
adverse effect on O'Gara's financial condition, results of operations and cash
flows.
Competition. The markets in which O'Gara does or intends to do business
are highly competitive. There are a large number of companies, both public and
private, involved in one or more aspects of security hardware, security systems
integration and security services, as well as distribution of satellite
telecommunications and navigation products and services. Furthermore, O'Gara may
encounter additional competition from future industry entrants. Certain of
O'Gara's current competitors have, and new competitors may have, substantially
greater financial and other resources than O'Gara. There can be no assurance
that O'Gara will continue to develop and market products or services that will
be accepted in the marketplace or that it will be able to compete effectively in
the future, either of which could have a material adverse effect on O'Gara's
financial condition, results of operations and cash flows. See "BUSINESS OF
O'GARA -- Competition."
Risks Associated with U.S. Military Contracts. Since August 1993, U.S.
Military contracts have accounted for a substantial portion of O'Gara's
business, representing 28.5%, 50.1%, 45.6%, 66.0% and 37.3% of net sales for
1993, 1994, 1995, 1996 and the six months ended June 30, 1997, respectively.
Prior to August 1993, O'Gara's business did not include armoring military
vehicles. O'Gara's U.S. Military contracts are funded in annual increments and
require subsequent authorization and appropriation which may not occur or which
may provide less than the total amount of the contract due to budgetary or other
considerations. O'Gara's current prime contract to armor and blast protect 360
High Mobility Multi-Purpose Wheeled Vehicles ("HMMWVs"; a HMMWV which has been
armored and blast-protected is referred to herein as an "Up-Armored HMMWV") is
scheduled to be completed by July 31, 1998. 68 of these HMMWVs had been shipped
as of October 21, 1997. There can be no assurance that future contracts will be
received or as to the size of any contracts that are received. Fluctuations in
spending by the U.S. Government for national defense could adversely affect
O'Gara's ability to receive future contracts. Moreover, U.S. Government
contracts, in general, are cancelable unilaterally at the convenience of the
U.S. Government and a variety of international and/or domestic political factors
or decisions could result in the cancellation of the HMMWV armoring project or a
curtailing of its scope. The loss of, or a significant reduction in, this
business would have a material adverse effect on O'Gara's financial condition,
results of operations and cash flows. See "BUSINESS OF O'GARA -- U.S. Government
Contracts."
Risk of U.S. Government Shut Down. On several occasions during the U.S.
Government's 1996 fiscal year, certain operations of the U.S. Government
essentially were "shut down" because of budget impasses between the U.S.
Congress and the President. During these periods, payments to O'Gara under its
U.S. Military contracts were delayed. Future U.S. Government shut downs, if
sufficiently prolonged, could have a material adverse effect on O'Gara's
financial condition, results of operations and cash flows.
Single and Primary Source Suppliers. The HMMWVs armored by O'Gara are
manufactured under separate U.S. Military contracts by AM General Corporation
("AM General"). Should AM General for any reason be unable to deliver HMMWVs to
O'Gara, as occurred during 1995, or should the U.S. Military elect or be
obligated to select a new HMMWV supplier, there could be a material adverse
effect on O'Gara's financial condition, results of operations and cash flows.
The unanticipated six-month delay in the delivery of HMMWV chassis in 1995 led
to the production of 116 fewer Up-Armored HMMWV's than originally planned and a
reduction in net sales of $1.1 million from 1994. During the period, it was
necessary to maintain manufacturing and engineering support personnel to ensure
production deadlines could be met once the chassis were delivered. These support
costs of approximately $0.6 million occurred without a corresponding increase in
net sales.
In 1996 and the first six months of 1997, O'Gara obtained approximately 80%
and 70%, respectively, of the glass used in armoring its vehicles from
Pilkington Aerospace Limited. Should O'Gara at some time find it necessary to
select one or more additional or substitute suppliers, delays could be
encountered in obtaining glass which meets O'Gara's specifications.
19
<PAGE> 23
A majority of O'Gara's cost of armoring HMMWVs consists of components which
are purchased from various vendors and suppliers. Component prices are generally
negotiated based on, among other things, O'Gara's expected manufacturing volume.
There can be no assurance that O'Gara will be able to predict accurately the
anticipated manufacturing volume. As a result, O'Gara may be subject to future
cost increases which could have a material adverse effect on O'Gara's financial
condition, results of operations and cash flows.
Fluctuations in Operating Results. Approximately 37.3% of O'Gara's net
sales for the six months ended June 30, 1997 were derived from U.S. Military
contracts and an additional 5.0% were derived from commercial contracts with
U.S. governmental agencies or foreign governments. These contracts generally are
awarded on a periodic and/or sporadic basis. O'Gara frequently receives
substantial orders, and begins to incur related expenses, in one quarter, the
revenues from which will not be received until one or more subsequent quarters.
As a result, O'Gara generally has significant fluctuations from time to time in
its business. Historically, these fluctuations have not been seasonal.
Period-to-period comparisons within a given year or between years may not be
meaningful or indicative of operating results over a full fiscal year. The
following table sets forth O'Gara's net sales, net income and net income as a
percentage of net sales for the last six calendar quarters. See "BUSINESS OF
O'GARA -- Seasonality, Backlog and Related Matters" and "O'GARA MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
1997
1996 --------------------
--------------------------------------------
(DOLLARS IN
(DOLLARS IN THOUSANDS) THOUSANDS)
Q1 Q2 Q3 Q4 Q1 Q2
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $21,417 $20,104 $18,804 $22,453 $23,817 $28,036
Net income..................... $2,836 $1,166 $1,845 $812 $1,227 $1,261
Percent of net sales........... 13.2% 5.8% 9.8% 3.6% 5.2% 4.5%
</TABLE>
Risks Associated with Fixed Price Contracts. A substantial portion of
O'Gara's projects are currently performed on a fixed-price basis. O'Gara
attempts to cover anticipated increases in labor, material and service costs of
long-term fixed-price contracts through an estimation of such increases which is
reflected in the original price. Despite these attempts, however, the revenue,
cost and gross profit realized on a fixed-price contract will often vary from
the estimated amounts due to unforeseen conditions or changes in job conditions
and variations in productivity over the term of the contract. These variations
and the risks generally inherent in fixed-price contracts may result in the
gross profits realized by O'Gara being different from those originally estimated
and may result in O'Gara's experiencing reduced profitability or losses on
projects. Depending on the size of a contract, these variations from estimated
contract performance could have a material adverse effect on O'Gara's results of
operations for any quarter or year.
Risks Associated with Percentage-of-Completion Accounting. O'Gara's net
sales from government contracts and most commercial contracts are recognized
using the percentage-of-completion method. Under this method, estimated contract
revenues are accrued based generally on the percentage that costs to date bear
to total estimated costs. Estimated contract losses are recognized in full when
determined. Accordingly, contract revenues and total cost estimates are reviewed
and revised periodically as the work progresses and as change orders are
approved, and adjustments based upon the percentage of completion are reflected
in contract revenues in the period when such estimates are revised. To the
extent that these adjustments result in an increase, a reduction or an
elimination of previously reported contract revenues, O'Gara would recognize a
credit or a charge against current earnings, which could be material. See
"O'GARA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Impact on Operations."
Political and Economic Risks of Doing Business Outside the United
States. In addition to its U.S. facilities, O'Gara has operations and assets in
Brazil, France, Italy, Mexico, the Philippines, Russia and the United Kingdom.
In addition, O'Gara sells its products and services in other foreign countries
and is seeking to increase its level of international business activity.
Accordingly, O'Gara is subject to various risks, including exchange rate
fluctuations, foreign currency restrictions, U.S. imposed embargoes of sales to
specific countries, expropriation of assets, war, civil uprisings and riots,
government instability and legal systems of decrees, laws, regulations,
interpretations and court decisions which are not always fully developed and
which may be retroactively applied. O'Gara's operations in foreign countries may
be materially adversely affected in that certain governmental agencies in such
countries may interpret laws, regulations or court decisions in a manner
20
<PAGE> 24
which might be considered inconsistent or inequitable in other countries. O'Gara
may be subject to unanticipated income taxes, excise duties, import taxes,
export taxes or other governmental assessments. There can be no assurance that
such risks will not result in a loss of business or other unexpected costs which
could have a material adverse effect on O'Gara's financial condition, results of
operations and cash flows. See "BUSINESS OF O'GARA."
Government Regulation. As a contractor with agencies of the U.S.
Government, O'Gara is obligated to comply with a variety of regulations
governing certain aspects of its operations and the workplace. Additionally,
O'Gara's contracts give the contracting agency the right to conduct audits of
O'Gara's facilities and operations, and such audits occur routinely. An audit
involves a U.S. Governmental agency's review of O'Gara's compliance with the
prescribed procedures established in connection with the applicable government
contract. O'Gara also may be subject to investigations as a result of an audit
or for other causes. Adverse findings in an audit or other investigation,
including violations of environmental or labor laws, could result in fines or
other penalties up to and including disqualification as a U.S. Government
contractor. In addition, U.S. Government contracts may contain cost or
performance incentives based on stated targets or other criteria. Failure to
meet these stated targets or other criteria could result in penalties or lost
profits to O'Gara. Any or all of these matters could have a material adverse
effect on O'Gara's financial condition, results of operations and cash flows.
O'Gara is subject to federal licensing requirements with respect to the
sale in foreign countries of certain of its hardware products. Regulations
promulgated by the U.S. Commerce Department require O'Gara to obtain a general
destination license in connection with the sale of certain commercial products
in foreign countries, and certain U.S. State Department regulations require
O'Gara to file an export license in connection with sales of military equipment
in foreign countries. Furthermore, the U.S. State Department prohibits all sales
of military equipment to certain countries, including Cuba, Iran, Iraq, Libya
and China. There can be no assurance that such regulations will not become more
restrictive in the future, which could limit O'Gara's ability to market its
products internationally. If such additional restrictions were imposed, they
could have a material adverse effect on O'Gara's financial condition, results of
operations and cash flows. See "BUSINESS OF O'GARA -- U.S. Government
Regulation."
Management of Labor Force. Due to the nature of O'Gara's contracts, which
are awarded periodically and are not assured for future periods, O'Gara may need
to hire, lay-off and rehire workers. As a result, O'Gara may spend substantial
time and effort training and supervising new, essentially unskilled, personnel
hired to supplement its existing trained work force. There can be no assurance
that sufficient workers will be available at any time, or can be trained in
time, so as not to interfere with O'Gara's ability to accept large new orders or
to meet contractual delivery deadlines. Alternatively, if O'Gara were to
experience production delays, as occurred with respect to O'Gara's Up-Armored
HMMWV production in 1995, it may be necessary to maintain manufacturing and
engineering support personnel in order to meet contract deadlines once
production resumes. These circumstances could have a material adverse effect on
O'Gara's financial condition, results of operations and cash flows.
Dependence on Key Personnel. O'Gara's operations currently depend on the
continued efforts of its executive officers and on its senior management,
particularly Thomas M. O'Gara, its current Chairman of the Board, and Wilfred T.
O'Gara, its current President and Chief Executive Officer. If the executive
officers of O'Gara become unable or decide not to continue in their present
positions, or if a number of senior managers fail to continue with O'Gara and
O'Gara is unable to attract and retain replacements, O'Gara's business could be
materially and adversely affected. See "MANAGEMENT OF O'GARA."
Product Liability. Although O'Gara has never had a product liability claim
made against it, there can be no assurance that O'Gara will not be subject to
claims of liability in the future. O'Gara carries liability insurance in the
amount of $10.0 million; however, a successful claim could result in liability
in excess of coverage limits and have a material adverse effect on O'Gara's
financial condition, results of operations and cash flows.
RISK FACTORS RELATING TO THE BUSINESS OF KROLL
Kroll operates in a highly competitive environment that involves a number
of risks, some of which are beyond its control. The following discussion
highlights some of these risks, which should be considered by shareholders of
O'Gara and Kroll in considering the Merger.
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<PAGE> 25
Dependence on Key Employees. Jules B. Kroll founded Kroll in 1972 and has
been actively involved in the management and growth of Kroll since that date as
its chairman and chief executive officer. Other members of Kroll's senior
management play key roles in the management and direction of Kroll, and Kroll is
highly dependent on the quality and efforts of its professional staff to provide
its services and attract and retain clients. Competition for these types of
employees is intense. If Jules B. Kroll ceased to be employed by Kroll or if the
services of any of Kroll's other senior management, or the services of any
significant number of its professional staff, were no longer available to Kroll,
Kroll's financial condition, results of operations and cash flows could be
materially and adversely affected. See "MANAGEMENT OF KROLL."
Competition. Kroll faces significant and increasing competition in the
United States and elsewhere in the world from a variety of companies that
provide some of the services offered by Kroll. These competitors consist of
local, regional, national and international firms. In most service areas in
which Kroll operates, there is at least one competitor that is significantly
larger or more established than Kroll. Many of the national and international
accounting firms provide consulting services similar to some of the services
provided by Kroll. Some of these firms have indicated an interest in providing
corporate investigation and business intelligence services on a broader scale.
The accounting firms have significantly larger financial and other resources
than Kroll and have long-established relationships with their clients, which are
also likely to be clients or prospective clients of Kroll. In addition, large
multinational security product and service providers have indicated an interest
in expanding their services to include value-added services such as certain of
the investigation and consulting services provided by Kroll. The accounting
firms and other service providers could prove to be formidable competitors if
they elect to devote the necessary resources to such competitive businesses. In
that event, there can be no assurance that Kroll will be able to continue to
provide its services on existing financial terms and conditions, which would
have a material adverse effect on Kroll's financial condition, results of
operations and cash flows.
Dependance on Key Customer. In 1995, 1996 and the first six months of
1997, services performed for AIG, a principal shareholder of Kroll, constituted
7.3%, 7.5% and 9.3% of Kroll's revenues, respectively. The loss of, or a
significant reduction in, this business could have a material adverse effect on
Kroll's financial condition, results of operations and cash flows.
Fluctuations in Operating Results. Kroll generally does not have long term
contracts with its clients and its ability to generate net sales is dependent
upon obtaining many new projects each year, most of which are of relatively
short duration. As a result, Kroll's net sales and net income from year to year
and period to period are not necessarily predictable and historically there has
not been a consistent year-to-year pattern of growth. The following table sets
forth Kroll's net sales, net income (loss) and net income (loss) as a percentage
of net sales for the last six calendar quarters. See "BUSINESS OF
KROLL -- Clients."
<TABLE>
<CAPTION>
1996 1997
-------------------------------------------- --------------------
(DOLLARS IN
(DOLLARS IN THOUSANDS) THOUSANDS)
Q1 Q2 Q3 Q4 Q1 Q2
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $14,812 $18,562 $18,153 $19,356 $17,422 $19,324
Net income (loss).............. $341 $(347) $2,122 $(2,918) $303 $1,032
Percent of net sales........... 2.3% (1.9%) 11.7% (15.1%) 1.7% 5.3%
</TABLE>
The demand for Kroll's services is affected by general economic conditions
and the level of corporate acquisitions and other financial transactions, and
clients may reduce their reliance on Kroll's services during periods when there
is a decline in such activities.
Political and Economic Risks of Doing Business Outside the United
States. Kroll provides services in many foreign countries and has offices in a
number of foreign countries, including Australia, Brazil, China, France,
Germany, India, Japan, the Philippines, Russia, Singapore and the United
Kingdom. Kroll plans to expand its marketing efforts for services. There can be
no assurance that Kroll will be successful in such expansion or that any such
expansion will increase Kroll's net income. See "BUSINESS OF KROLL."
Kroll is and will be subject to various risks in the foreign countries in
which it operates, including exchange rate fluctuations, foreign currency
restrictions, U.S. imposed embargoes on doing business with specific countries,
expropriation of assets, war, civil uprisings and riots, government instability
and legal systems of decrees, laws,
22
<PAGE> 26
regulations, interpretations and court decisions which are not always fully
developed and which may be retroactively applied. Kroll's operations in foreign
countries may be adversely affected in that certain governmental agencies in
such countries may interpret laws, regulations or court decisions in a manner
which might be considered inconsistent or inequitable in other countries. In
addition, Kroll may be subject to unanticipated income taxes, excise duties or
other governmental assessments. There can be no assurance that such risks will
not result in a loss of business or significant unexpected write-offs of assets
or other unexpected costs which could have a material adverse effect on Kroll's
financial condition, results of operations and cash flows.
Collection of Accounts Receivable. In the past Kroll occasionally
encountered difficulties in collecting significant accounts receivable for
services. This problem has been exacerbated if the receivable obligor is located
in a foreign country. If such problems recur, they could have a material adverse
effect on Kroll's financial condition, results of operations and cash flows.
Liability to Clients and Others. Although Kroll has never had a
substantial claim by a client alleging negligence in the performance of its
services, there can be no assurance that such a claim may not be asserted
against it in the future. Certain of the matters with respect to which Kroll
provides services are extremely large and complex financial transactions in
which very substantial amounts of money may be at risk. Kroll maintains a
Miscellaneous Professional Liability Coverage, Errors and Omissions insurance
policy with limits of $10.0 million; however, no assurance can be given that
this will afford Kroll adequate protection if such a claim is asserted against
Kroll. Furthermore, in the ordinary course of its business, Kroll is subject to
claims of third parties other than clients alleging trespass, invasion of
privacy and other tortious conduct by its investigators and other personnel. See
"BUSINESS OF KROLL -- Litigation." Although Kroll endeavors to minimize the risk
of such claims, there can be no assurance that such a claim could not have a
material adverse effect on Kroll's financial condition, results of operations
and cash flows.
Government Regulation. Kroll's services are subject to various federal,
state, local and foreign laws, including laws designed to protect the privacy of
persons. A wholly owned subsidiary of Kroll holds private investigative licenses
from, and its investigative activities are regulated by, government agencies in
the following jurisdictions: California, Connecticut, Florida, Illinois,
Maryland, Massachusetts, Michigan, New Jersey, New York, Pennsylvania and the
District of Columbia. In addition, an application to obtain a private detective
license on behalf of such subsidiary is pending with the Georgia Board of
Private Detective and Security Agencies. See "BUSINESS OF KROLL -- Government
Regulation." Kroll utilizes certain data from outside sources, including data
from third party vendors and various government and public record services, in
performing its services. To the present time, laws and regulations of the
foregoing jurisdictions have not interfered materially with the conduct of the
business or operations of Kroll, including Kroll's access to data used in its
business. However, there can be no assurance that new regulations, such as
changes in governmental regulations relating to the protection of privacy, will
not be enacted that could interfere materially with the manner in which Kroll
obtains information, conducts its operations and provides its services, with a
resulting material adverse effect on Kroll's financial condition, results of
operations and cash flows.
23
<PAGE> 27
THE MERGER
GENERAL
Upon consummation of the Merger, shareholders of Kroll will receive (and
options to purchase Kroll Stock will be converted into options to purchase) an
aggregate of 6,650,000 shares of O'Gara Common Stock and Kroll will become a
wholly owned subsidiary of O'Gara.
BACKGROUND OF THE MERGER
Background. Over the last several years Kroll has considered strategies
to: (i) increase the size and scope of its organization, (ii) increase its
domestic and international presence, (iii) increase its access to capital to
fund its plans for growth, (iv) continue to attract and retain talented
professionals, and (v) diversify and expand its products and services. The
alternatives Kroll considered included a sale of its business to a publicly
traded or other entity pursuant to a merger or other business combination or a
public offering by Kroll. Either solution would have provided Kroll with an
increased presence in the competitive marketplace, access to capital and the
ability to provide key employees with equity interests having greater liquidity.
In furtherance of these strategies, the Kroll Board retained Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") in January 1996 to advise it on
strategic alternatives.
In the fall of 1996, Kroll examined several potential transactions. In
January 1997, Kroll determined to focus on merger discussions with ChoicePoint,
Inc. ("ChoicePoint"), a subsidiary of Equifax, Inc. that was planned to be spun
off to the shareholders of Equifax as an independent public company, and
terminated all other discussions. ChoicePoint is much larger than Kroll and
provides a variety of investigative, security and other services that are
similar to certain services provided by Kroll. The discussions with ChoicePoint
led to an announcement on April 1, 1997 of an agreement in principle under which
ChoicePoint would acquire Kroll after it had been spun off from Equifax, Inc.
ChoicePoint and Kroll subsequently were unable to reach agreement on several
substantive issues, including, but not limited to, the amount of the purchase
price (as well as the allocation between cash and equity) to be paid for the
purchase of Kroll, the amount and nature of certain indemnities and the
treatment of certain principal shareholders of Kroll. On August 7, 1997,
ChoicePoint and Kroll acknowledged that the agreement in principle had been
terminated. After the termination of the agreement in principle, Kroll did not
hold discussions regarding a strategic combination with any party other than
O'Gara.
Following its November 12, 1996 initial public offering, O'Gara pursued its
strategy of expanding its business by acquiring compatible businesses. See
"BUSINESS OF O'GARA -- Business Strategy." In furtherance of this strategy,
during the first three months of 1997, O'Gara acquired the businesses of Next
Destination Limited ("Next Destination"), Labbe, and International Training,
Incorporated ("ITI"). See "O'GARA MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- General."
In continuation of this strategy, in the spring of 1997, after learning of
the announcement of the agreement in principle between ChoicePoint and Kroll
described above, Thomas M. O'Gara, Chairman of the Board of O'Gara, discussed
with Jules B. Kroll, Chairman of the Board of Kroll, the potential purchase by
O'Gara of certain divisions of Kroll that might be available for sale after the
then contemplated acquisition of Kroll by ChoicePoint. In April 1997, O'Gara
instructed J. Jeffrey Brausch & Company ("Brausch"), one of O'Gara's advisors,
to develop a proposal to acquire these divisions and, depending upon the status
of Kroll's transaction with ChoicePoint, to acquire Kroll in its entirety.
In June 1997, after receiving assurances from Kroll that its negotiations
with ChoicePoint had not been concluded and that several substantive issues
remained unresolved, Thomas M. O'Gara, Wilfred T. O'Gara and J. Jeffrey Brausch
met with Jules B. Kroll to propose that O'Gara acquire Kroll in a merger in
which the shareholders of Kroll would receive shares of O'Gara Common Stock.
Kroll reviewed the O'Gara proposal and determined, at that point, that it
preferred to merge with a company which had a business more closely related to
the current business of Kroll. The consideration proposed to be paid to
shareholders of Kroll by O'Gara pursuant to that proposal was similar to the
consideration to be paid by O'Gara in the Merger. Although Kroll did not then
accept this proposal, during July 1997, several discussions and meetings between
senior executive officers of
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<PAGE> 28
O'Gara and senior executive officers of Kroll and their respective financial
advisors took place. At these meetings, the respective businesses of O'Gara and
Kroll, among other matters, were discussed.
On July 30, 1997, the parties determined that discussions relating to a
proposed combination of Kroll and O'Gara had advanced to the point where the
parties thought it might be possible to reach a definitive agreement on the
essential terms of such a transaction. Commencing on August 1, 1997, members of
senior management of O'Gara and Kroll, together with their respective legal,
accounting and other advisors, exchanged financial and legal due diligence
materials, conducted other due diligence and negotiated the definitive terms and
conditions of the Merger Agreement. As a result of such discussions, Kroll
determined that a merger with O'Gara would provide a good strategic fit for
Kroll.
On August 3, 1997, Dillon Read was engaged by the O'Gara Board to provide
an opinion as to the fairness of the Merger to O'Gara from a financial point of
view. The engagement letter between O'Gara and Dillon Read does not require
Dillon Read to render an opinion as to the fairness of the Merger to the O'Gara
shareholders. The O'Gara Board is aware that conflicts of interest may exist
between O'Gara's directors and executive officers and its shareholders since
certain of its directors and executive officers will receive additional option
grants and increased salaries in connection with the Merger. See "THE
MERGER -- Interests of Certain Persons in the Merger." The O'Gara Board also
notes that the Merger will have a pro forma dilutive impact on book value per
share and earnings per share. See "SUMMARY -- Comparative Per Share Data" and
"PRO FORMA FINANCIAL STATEMENTS." However, the O'Gara Board believes the Merger
is fair to the shareholders of O'Gara. This is based upon (i) the O'Gara Board's
belief that the Merger is fair to O'Gara from a financial point of view, as
supported by the Dillon Read Opinion, (ii) the fact that five of O'Gara's seven
directors are not receiving increased salaries or additional options and
therefore have no such conflicts, and the O'Gara Board's belief that any
conflicts of interest which do exist are not significant, (iii) the O'Gara
Board's belief that the Merger is consistent with the overall business strategy
of O'Gara, as described in its initial public offering and its subsequent public
filings, to enhance shareholder value by increasing O'Gara's involvement in the
security services industry, and (iv) the fact that the Merger is supported by
Thomas O'Gara, the majority shareholder of O'Gara, and the O'Gara Board's belief
that Thomas O'Gara's interests are aligned with the other shareholders of O'Gara
since he will be affected by the pro forma dilutive impact more than any other
shareholder, will receive only a modest increase in salary and no additional
options and will relinquish his position as Chairman of O'Gara's Board of
Directors upon completion of the Merger. Accordingly, Thomas M. O'Gara will
profit from the Merger only if it results in enhanced shareholder value. For
these reasons, and because (i) O'Gara will become the parent of Kroll in the
Merger, (ii) the O'Gara shareholders are not receiving any consideration in the
Merger, and (iii) the Merger will not adversely affect the rights of O'Gara
shareholders, the O'Gara Board believes the interests of the O'Gara shareholders
are aligned with those of O'Gara. Accordingly, O'Gara did not request that the
Dillon Read Opinion address the fairness of the Merger to the O'Gara
shareholders individually.
The O'Gara Board held a special meeting on August 6, 1997, to consider the
proposed Merger Agreement and the transaction contemplated thereby, including
the proposed consideration to be paid to Kroll shareholders. At this meeting,
members of O'Gara's senior management, together with Taft, Stettinius &
Hollister, its legal advisors, representatives of Brausch, and Arthur Andersen
LLP, its independent public accountants, reviewed with the O'Gara Board, among
other things, the strategic fit between the two companies, the background of the
proposed transaction, financial evaluation analysis of the transaction, the
terms of the Merger Agreement and the accounting treatment of the transaction.
Representatives of Taft, Stettinius & Hollister and Arthur Andersen LLP made
presentations to the O'Gara Board and discussed with the O'Gara Board their
views and analysis of various aspects of the proposed transaction. In addition,
at the August 6, 1997, meeting, Dillon Read set forth its analysis of the
proposed transaction to the O'Gara Board and, based on discussions and materials
provided at the meeting and subject to receipt of the executed Merger Agreement
substantially in the form and containing the terms as presented at the meeting,
Dillon Read indicated that it was prepared to deliver an opinion that the
consideration to be paid by O'Gara in connection with the Merger is fair to
O'Gara from a financial point of view. O'Gara did not request an opinion as to
the fairness of the Merger to the shareholders of O'Gara from Brausch. After
extensive discussion and consideration, the O'Gara Board unanimously approved
the Merger substantially on the terms presented to it and authorized the
execution of the Merger Agreement on such terms with such changes as the
executive officers approved.
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<PAGE> 29
The Kroll Board unanimously approved the Merger and the Merger Agreement by
written consent dated August 8, 1997.
On August 8, 1997, Kroll and O'Gara agreed to a merger that provided for
the issuance of up to 6,750,000 shares of O'Gara Common Stock and announced such
agreement; however the parties subsequently agreed to revise the terms of the
merger to reduce the number of shares of O'Gara Common Stock to be issued to
6,650,000 based on further quantification of Kroll's prior payments and existing
liabilities to a former shareholder in connection with the repurchase of such
former shareholder's Kroll Stock in 1997. The parties agreed to share this cost
of approximately $2.6 million by reducing the number of shares of O'Gara Common
Stock to be issued in the Merger by 100,000. This revision is reflected in the
Merger Agreement.
REASONS FOR THE MERGER AND RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
O'Gara Reasons for the Merger. At the meeting held on August 6, 1997, the
O'Gara Board, by unanimous vote, determined that the terms of the Merger
Agreement and the Merger are in the best interests of O'Gara and its
shareholders, and approved the Merger Agreement and the Merger. At such meeting
the O'Gara Board also recommended that O'Gara shareholders approve the O'Gara
Proposal. In reaching these conclusions and recommendations, the O'Gara Board
consulted with O'Gara management and its legal counsel and financial advisors
and considered a number of factors, including the following:
(i) the O'Gara Board's belief that the combination of the two
companies will continue and enhance O'Gara's strategy to become a global
integrated company due to:
(a) the nature and scope of Kroll's business, including the quality
and breadth of its assets, strong name recognition in the security
industry, competitive position and prospects for future development;
(b) the strategic fit between O'Gara and Kroll, including the
complementary nature of the businesses of the two companies, which have
little overlap and which present opportunities for cross promotion and
cross selling by each company with respect to the operations of the
other and which would create significant opportunities for developing
the combined businesses;
(c) the quality and breadth of the Kroll management, which would
enhance the management of the combined companies;
(d) the belief that the combined companies would be better able to
respond to the needs of their customers and clients and to exploit
opportunities that changes in the security industry may bring; and
(e) the stronger platform for future acquisitions within the
security industry that would be provided by the combined companies;
(ii) the long-term interests of O'Gara and its shareholders, as well
as the interests of its employees, customers, clients, creditors and
suppliers;
(iii) the indication by Dillon Read that, subject to receipt of the
executed Merger Agreement substantially in the form and containing the
terms as presented at such meeting, it was prepared to deliver an opinion
to the O'Gara Board that the consideration to be paid by O'Gara in
connection with the Merger was fair to O'Gara from a financial point of
view (see "-- Opinion of Dillon Read"); for the reasons described on the
preceding page, O'Gara believes that the interests of the O'Gara
shareholders are aligned with those of O'Gara. Accordingly, O'Gara did not
request that the Dillon Read Opinion address the fairness of the Merger to
the O'Gara shareholders individually, and the O'Gara Board concurred in
this decision;
(iv) the terms of recent comparable transactions in the security
industry;
(v) the terms and conditions of the Merger Agreement;
(vi) the results of the due diligence review of Kroll conducted by
O'Gara management and its legal and financial advisors; and
(vii) the sources of capital available to O'Gara to finance the Merger
and the effects of the Merger on the financial condition of the combined
companies.
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<PAGE> 30
The O'Gara Board also determined that, because the Merger would enhance the
value of O'Gara for the reasons described above, the consideration to be paid by
O'Gara in the Merger was fair to O'Gara from a financial point of view and there
are no conflicts in interest that materially adversely affect the O'Gara
shareholders, the interests of the O'Gara shareholders are aligned with those of
O'Gara. Accordingly, the Merger is in the best interests of, and fair to, the
O'Gara shareholders.
The O'Gara Board considered not only the benefits that could arise from the
Merger, but considered also certain adverse effects relating to the Merger,
including the dilution to O'Gara shareholders resulting from the issuance of
shares of O'Gara Common Stock pursuant to the Merger, certain nonrecurring costs
that would result from the Merger, the risks inherent in any merger, and other
risks and uncertainties relating to the business of O'Gara and Kroll, including
those described in "RISK FACTORS."
The foregoing discussion of the information and factors considered by the
O'Gara Board is not intended to be exhaustive, but includes all material factors
considered by the O'Gara Board. In view of the variety of factors considered in
connection with its evaluation of the Merger, the O'Gara Board did not quantify
or otherwise attempt to assign relative weights to the specific factors
considered in reaching its determination. A determination of the relative weight
of such factors would, in the view of the O'Gara Board, be impractical. Rather,
the O'Gara Board viewed its position and recommendations as being based on the
totality of the information presented to, and considered by, it. In addition,
individual members of the O'Gara Board may have given different weight to
different factors.
Recommendation of O'Gara Board. The O'Gara Board believes the terms of the
Merger Agreement and the Merger are in the best interests of O'Gara and its
shareholders.
THE O'GARA BOARD UNANIMOUSLY RECOMMENDS THAT HOLDERS OF O'GARA COMMON STOCK
VOTE FOR THE O'GARA PROPOSAL.
Kroll Reasons for the Merger. The Kroll Board believes that the Merger
will further Kroll's strategic objectives because: (i) the greater market float
and liquidity represented by the shares of O'Gara Common Stock after the Merger
should provide the combined companies with additional and better alternatives to
meet their capital needs to fund their growth and allow the implementation of an
equity incentive plan that should be helpful in attracting and retaining
talented key employees, (ii) the greater marketing and financial resources of
the combined companies compared to Kroll alone and the opportunities that should
emerge from the cross selling of goods and services among the clients of Kroll
and O'Gara should allow the combined companies to broaden their domestic and
international customer base, (iii) by virtue of Jules B. Kroll being named
Chairman of the Board of Directors and Chief Executive Officer of O'Gara and the
large position of Kroll shareholders in the combined companies, former
shareholders of Kroll can expect to have a meaningful role in the management and
policies of O'Gara after the Merger, (iv) the expected accounting treatment of
the Merger as a pooling of interests will avoid the reduction in future earnings
of the combined companies that would result from the creation and amortization
of goodwill under the purchase method of accounting, and (v) the expected
federal income tax treatment of the Merger as a tax-free reorganization to the
parties and to Kroll's shareholders.
The Kroll Board determined that there were no material adverse factors that
would affect its decision to recommend that Kroll shareholders approve the
Merger.
Recommendation of Kroll Board. The Kroll Board unanimously has determined
that the Merger Agreement and the Merger are fair to, and in the best interests
of, Kroll and its shareholders, and has approved the Merger Agreement and the
transactions contemplated thereby.
THE KROLL BOARD UNANIMOUSLY RECOMMENDS THAT HOLDERS OF KROLL STOCK VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AT THE KROLL MEETING.
Opinion of Dillon Read. At the O'Gara Board meeting held on August 6, 1997,
Dillon Read advised the O'Gara Board that based on the August 4, 1997 closing
price of the O'Gara Common Stock of $12.25 per share and the terms of the Merger
as presented to Dillon Read, and, subject to receipt of the executed Merger
Agreement substantially in the form and containing the terms presented to such
meeting, Dillon Read was
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<PAGE> 31
prepared to render an opinion as to the fairness to O'Gara from a financial
point of view of the consideration to be paid by O'Gara pursuant to the Merger.
The engagement letter between O'Gara and Dillon Read does not require Dillon
Read to render an opinion as to the fairness of the Merger to the O'Gara
shareholders. The O'Gara Board is aware that conflicts of interest may exist
between O'Gara's directors and executive officers and its shareholders since
certain of the directors and executive officers will receive additional option
grants and increased salaries in connection with the Merger. See "THE
MERGER -- Interest of Certain Persons in the Merger." The O'Gara Board also
notes that the Merger will have a pro forma dilutive impact on book value per
share and earnings per share. See "SUMMARY -- Comparative Per Share Data" and
"PRO FORMA FINANCIAL STATEMENTS." However, the O'Gara Board believes the Merger
is fair to the shareholders of O'Gara. This is based upon (i) the O'Gara Board's
belief that the Merger is fair to O'Gara from a financial point of view, as
supported by the Dillon Read Opinion, (ii) the fact that five of O'Gara's seven
directors are not receiving increased salaries or additional options and
therefore have no such conflicts, and the O'Gara Board's belief that any such
conflicts of interest which do exist are not significant, (iii) the O'Gara
Board's belief that the Merger is consistent with the overall business strategy
of O'Gara, as described in its initial public offering and its subsequent public
filings, to enhance shareholder value by increasing O'Gara's involvement in the
security services industry, and (iv) the fact that the Merger is supported by
Thomas M. O'Gara, the majority shareholder of O'Gara, and the O'Gara Board's
belief that Thomas M. O'Gara's interests are aligned with the other shareholders
of O'Gara since he will be affected by the pro forma dilutive impact more than
any other shareholder, will receive only a modest increase in salary and no
additional options and will relinquish his position as Chairman of O'Gara's
Board of Directors upon completion of the Merger. Accordingly, Thomas M. O'Gara
will profit from the Merger only if it results in enhanced shareholder value.
For these reasons, and because (i) O'Gara will become the parent of Kroll in the
Merger, (ii) the O'Gara shareholders are not receiving any consideration in the
Merger and (iii) the Merger will not adversely affect the rights of the O'Gara
shareholders, the O'Gara Board believes the interests of the O'Gara shareholders
are aligned with those of O'Gara. Accordingly, the O'Gara Board did not request
that the Dillon Read Opinion address the fairness of the Merger to the O'Gara
shareholders individually. The Dillon Read Opinion, dated September 12, 1997,
that the consideration to be paid by O'Gara, as set forth in the Merger
Agreement, is fair to O'Gara from a financial point of view, is attached hereto
as Appendix C.
SHAREHOLDERS ARE ENCOURAGED TO READ THE FULL TEXT OF THE DILLON READ
OPINION IN ITS ENTIRETY FOR INFORMATION WITH RESPECT TO THE PROCEDURES FOLLOWED,
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY
DILLON READ IN ARRIVING AT ITS OPINION. THE DILLON READ OPINION DOES NOT ADDRESS
THE FAIRNESS OF THE MERGER TO THE SHAREHOLDERS OF O'GARA OR KROLL, NOR DOES IT
CONSTITUTE A RECOMMENDATION REGARDING WHETHER OR NOT IT IS ADVISABLE FOR SUCH
SHAREHOLDERS TO VOTE IN FAVOR OF THE MERGER. THE SUMMARY OF THE DILLON READ
OPINION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
Dillon Read has consented to the use of Appendix C, containing its opinion
dated September 12, 1997 and incorporated elsewhere in this Proxy
Statement/Prospectus, and to the references to Dillon Read under the headings
"Summary" and "The Merger" in this Proxy Statement/Prospectus. In giving such
consent, Dillon Read does not admit that it comes within the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Securities and Exchange Commission (the "Commission")
promulgated thereunder, nor does Dillon Read admit that it is an expert with
respect to any part of the Registration Statement in which this Proxy
Statement/Prospectus is included, within the meaning of the term "experts" as
used in the Act or the rules and regulations of the Commission promulgated
thereunder.
In arriving at its opinion, Dillon Read has, among other things: (i)
reviewed the Merger Agreement and the exhibits thereto; (ii) reviewed certain
publicly available business and financial information relating to O'Gara; (iii)
reviewed the reported price and trading activity for the O'Gara Common Stock;
(iv) reviewed certain internal financial information and other data provided to
Dillon Read by each of O'Gara and Kroll relating to the business and prospects
of O'Gara and Kroll, respectively, including financial projections prepared by
the management of O'Gara and Kroll, respectively, and the Consolidated Financial
Statements for the year ended December 31, 1996, and other audited financial
statements for Kroll and O'Gara; (v) conducted discussions with members of the
senior management of O'Gara and Kroll; (vi) reviewed the financial terms, to the
extent publicly available, of certain acquisition transactions which Dillon Read
believed to be generally comparable to the Merger; (vii) reviewed publicly
available
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<PAGE> 32
financial and securities market data pertaining to certain publicly held
companies in lines of business which Dillon Read believed to be generally
comparable to Kroll; and (viii) conducted such other financial studies, analyses
and investigations, and considered such other information, as Dillon Read deemed
necessary and appropriate.
In connection with its review, with O'Gara's consent, Dillon Read did not
assume any responsibility for independent verification of any of the foregoing
information and relied upon its being complete and accurate in all material
respects. Dillon Read was not requested to and did not make an independent
evaluation or appraisal of any assets or liabilities (contingent or otherwise)
of Kroll, nor was Dillon Read furnished with any such evaluation or appraisal.
Further, Dillon Read assumed, with O'Gara's consent, that all of the
information, including the projections, provided to Dillon Read by management of
O'Gara and Kroll was prepared in good faith and was reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of O'Gara and Kroll as to the future financial performance of Kroll,
and was based upon the historical performance of Kroll and certain estimates and
assumptions which were reasonable at the time made. With O'Gara's consent,
Dillon Read assumed that the Merger would be accounted for as a pooling of
interests. In addition, the Dillon Read Opinion was based on economic, monetary
and market conditions as they existed and could be evaluated on the date of the
Dillon Read Opinion.
In rendering its opinion, Dillon Read considered a variety of valuation
methods. The following discussion constitutes a summary of the material analyses
considered by Dillon Read assuming the terms of the Merger Agreement as
presented at the August 6, 1997 meeting of the O'Gara Board (the "Proposed
Merger"):
Contribution Analysis. Dillon Read calculated the contribution of Kroll to
O'Gara with respect to historical 1996 and projected 1997 (based on management
estimates) net income available to common shareholders, operating income, and
revenues, as well as historical 1996 assets, debt and book value of common
equity. These calculations yielded amounts reflecting Kroll's contribution
ranging from 33% to 49% of the total pro forma combined amount, with an average
contribution of 43%. Based on the terms of the Proposed Merger and giving effect
to the Proposed Merger, Dillon Read reported to the O'Gara Board and the O'Gara
Board considered the fact that this 43% average contribution was less than the
approximately 48% of the outstanding O'Gara Common Stock that Kroll shareholders
would own after the Merger.
Public Company Analysis. Using publicly available information, Dillon Read
compared, based upon market trading values at the time, multiples of certain
financial criteria of Kroll to certain other companies in the security related
business that were deemed generally comparable to Kroll for purposes of this
analysis. The group of companies used in the comparison consisted of Armor
Holdings, Inc.; Borg-Warner Security Corporation; Code-Alarm, Inc.; Command
Security Corporation; Detection Systems, Inc.; ICTS International N.V.; ITI
Technologies, Inc.; NAPCO Security Systems, Inc.; Pinkerton's, Inc.; Pittston
Brink's Group; Pittway Corporation; Protection One, Inc.; and The Wackenhut
Corporation (collectively, the "Comparison Companies").
Dillon Read analyzed the unlevered market value (equity market value plus
debt, minus cash) of the Comparison Companies as multiples of revenues,
operating income, and earnings before interest, taxes, depreciation and
amortization ("EBITDA") for the latest twelve month period ("LTM"), the equity
market value of the Comparison Companies as multiples of LTM net income and the
stock price of the Comparison Companies as multiples ("P/E ratios") as provided
by First Call, Inc., estimated 1997 earnings per share ("EPS") and estimated
1998 EPS, and compared these figures to similar multiples based on financial
data for Kroll and Kroll management estimates for 1997 and 1998 for Kroll at the
Proposed Merger price.
An analysis of the unlevered market value to LTM revenues yielded ranges of
0.2x to 2.0x with a mean of 0.9x for the Comparison Companies, which compares
with an implied ratio of 1.3x for Kroll at the Proposed Merger price. An
analysis of the unlevered market value to LTM EBITDA yielded ranges of 5.5x to
15.4x with a mean of 8.3x for the Comparison Companies, which compares with an
implied ratio of 10.8x for Kroll at the Proposed Merger price. An analysis of
the unlevered market value to LTM operating income yielded ranges of 8.1x to
18.4x with a mean of 12.2x for the Comparison Companies, which compares with an
implied ratio of 18.7x for Kroll at the Proposed Merger price. An analysis of
the equity market value to LTM net income yielded ranges of 13.3x to 41.2x with
a mean of 23.2x for the Comparison Companies, which compares with an implied
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<PAGE> 33
ratio of 23.6x for Kroll at the Proposed Merger price. An analysis of 1997
estimated P/E ratios yielded ranges of 14.2x to 36.0x with a mean of 21.6x for
the Comparison Companies, which compares with an implied 1997 estimated P/E
ratio of 12.5x for Kroll at the Proposed Merger price. An analysis of 1998
estimated P/E ratios yielded ranges of 10.5x to 21.6x with a mean of 16.7x for
the Comparison Companies, which compares with an implied 1998 estimated P/E
ratio of 8.6x for Kroll at the Proposed Merger price. Dillon Read reported to
the O'Gara Board, and the O'Gara Board acknowledged, that the Kroll P/E ratio
was below the mean and range for the Comparison Companies, as shown above.
Discounted Cash Flow Analysis. Dillon Read performed a discounted cash
flow evaluation of Kroll based upon projections supplied by the management of
O'Gara and Kroll. Utilizing these projections, Dillon Read discounted to present
value, under varying assumed discount rates, estimated future unlevered cash
flows. Such analysis indicated that assuming terminal value multiples ranging
from 4.0x to 8.0x EBITDA and discount rates ranging from 12% to 16%, the net
present value of Kroll's unlevered future after-tax cash flows ranged from $75.5
million to $164.1 million.
Acquisition Analysis. Using publicly available information, Dillon Read
compared, based upon the total transaction values, price multiples of certain
financial criteria of Kroll to certain completed acquisitions which Dillon Read
deemed relevant. Dillon Read determined that there was limited publicly
available financial data on acquisitions in the security services industry, and
there were few completed acquisitions of companies generally comparable to Kroll
because of Kroll's substantial revenue base, unique business mix, and leading
market position. Two acquisitions were analyzed: Armor Holdings, Inc.'s
acquisition of DSL Holdings Limited and O'Gara's acquisition of Palmer
(collectively, the "Comparison Acquisitions"). For the Comparison Acquisitions,
Dillon Read analyzed the adjusted aggregate purchase price (equity value plus
debt less cash, where available) of the acquired company as multiples of the
acquired company's LTM revenues. Dillon Read determined that other financial
data for the acquired companies was not available or not meaningful in this
analysis. Based on analysis of the unlevered market value to LTM, revenues
yielded ranges of 0.9x to 1.0x with a mean of 0.95x, which compares with an
implied ratio of 1.3x for Kroll at the Proposed Merger price.
Pro Forma Merger Analysis. Dillon Read also analyzed certain pro forma
financial effects of the Merger on O'Gara. This analysis was based upon certain
assumptions made by Dillon Read with O'Gara's consent, O'Gara's management
projections, and Kroll projections for the fiscal years 1997 through 1999
prepared by the management of O'Gara and Kroll, respectively. No revenue
enhancements or operating cost savings were assumed in these projections.
Based upon such assumptions, Dillon Read's pro forma analysis of the
financial effects of the Merger indicated that these effects (before the impact
of one-time transaction related costs) were neutral to O'Gara's net income per
share for the forecasted period ended December 31, 1997 and accretive to
O'Gara's net income per share for the years in the forecasted periods ending
December 31, 1998 through December 31, 1999.
Subsequent to (i) Dillon Read's analysis of the Proposed Merger (as
summarized above), (ii) the August 6, 1997 meeting of the O'Gara Board at which
the Proposed Merger was unanimously approved, (iii) the August 8, 1997 approval
of the Proposed Merger by the Kroll Board, (iv) the August 8, 1997 agreement to
a merger between Kroll and O'Gara that provided for the issuance of up to
6,750,000 shares of O'Gara Common Stock, and (v) the public announcement of such
agreement, Kroll and O'Gara agreed to revise the terms of the Merger to reduce
the number of shares of O'Gara Common Stock to be issued to 6,650,000, based on
further consideration of Kroll's prior payments and existing liabilities to a
former shareholder in connection with the repurchase of such former
shareholder's Kroll Stock in 1997. Dillon Read reviewed the revised terms of the
Merger as reflected in the Merger Agreement, and the Dillon Read Opinion, dated
September 12, 1997, and attached hereto as Appendix C, considers and reflects
such revised terms of the Merger.
In arriving at its opinion, Dillon Read did not assign any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments based upon its experience in rendering such opinions and on economic,
monetary, and market conditions then present as to the significance and
relevance of each analysis and factor. Accordingly, Dillon Read believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and other factors considered by it, without considering all factors and
analyses, could create a misleading or incomplete view of the valuation process
underlying its opinion. With O'Gara's consent,
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<PAGE> 34
Dillon Read relied upon information provided by O'Gara and Kroll with respect to
Kroll's historical and projected financial and industry performance. Dillon Read
also assumed, with O'Gara's consent, that currently existing general business
and economic conditions, many of which are beyond Kroll's, O'Gara's and Dillon
Read's control, and other matters discussed herein, would remain constant
throughout the period of the projections. Any assumed estimates contained in
Dillon Read's analyses are not necessarily indicative of actual values, which
may be significantly more or less favorable than as set forth herein.
Dillon Read is an internationally recognized investment banking firm which,
as part of its investment banking business, is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. The O'Gara Board selected Dillon Read on the basis
of the firm's expertise and reputation.
Dillon Read has performed and continues to perform investment banking
services for O'Gara. Dillon Read is familiar with O'Gara, having served (i) as
lead underwriter in O'Gara's initial public offering on November 12, 1996; (ii)
as financial advisor to O'Gara in the acquisition of Labbe on February 12, 1997;
and (iii) as sole placement agent for the Senior Notes. For such services,
Dillon Read has received customary fees. Pursuant to the terms of an engagement
letter dated August 4, 1997, Dillon Read received $450,000 for services rendered
in connection with providing its opinion and O'Gara has agreed to reimburse
Dillon Read for all of its expenses associated with this engagement. O'Gara has
also agreed to indemnify Dillon Read and its officers, directors, employees,
agents and controlling persons against certain liabilities arising in connection
with its engagement. In addition, in the ordinary course of business, Dillon
Read trades securities of O'Gara for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
FINANCING THE MERGER
The Merger Agreement provides that, promptly after the Effective Time,
O'Gara will cause Kroll to repay certain of its indebtedness to Jules B. Kroll
and all of its indebtedness to AIG in an aggregate principal amount not to
exceed $7.5 million. At August 31, 1997, the aggregate outstanding principal
amount of the debt to be repaid was $6.2 million, of which $2.0 million was owed
to AIG and $4.2 million was owed to Jules B. Kroll. The $2.0 million principal
amount of indebtedness to AIG is due on demand and bears interest at an annual
rate 2% in excess of the base rate of Citibank N.A. All of the indebtedness to
be repaid to Jules B. Kroll represents the net amount of advances made by him on
account, which advances are due on demand. Of the indebtedness to be repaid to
Jules B. Kroll, $3.0 million bears interest at an annual rate 1% in excess of
the prime rate and the balance bears interest at the broker loan rate, currently
7.625% per annum. The approximately $0.3 million net principal amount of certain
other loans by Jules B. Kroll to Kroll will remain outstanding, will be
evidenced by a new promissory note issued by a subsidiary of Kroll and will bear
interest at an annual rate 1/2% below the Prime Rate. See "CERTAIN RELATED
PARTY TRANSACTIONS -- KROLL." In addition, O'Gara contemplates that, at the
Effective Time, it will cause Kroll to repay all of its indebtedness under the
Note Purchase Agreement, dated as of December 15, 1989, as amended, among Kroll,
certain of its subsidiaries and Teachers Insurance and Annuity Association of
America ("Teachers"). At June 30, 1997, the outstanding principal amount of such
indebtedness was $8.1 million. This indebtedness bears interest at an annual
rate of 10.95% and matures December 15, 1999. Prepayment of this indebtedness
will require payment of a $37,500 additional fee to Teachers. O'Gara
contemplates that the source of funds for repayment of such indebtedness will be
the cash on hand of O'Gara and Kroll (an aggregate of $5.1 million at September
30, 1997) and, to the extent necessary, borrowings under an amended and restated
credit facility to be entered into with KeyBank prior to the effective time,
which will provide for a $7.0 million term loan, a $7.0 million revolving credit
loan, a $6.0 million standby letter of credit facility and a foreign exchange
line of credit. The term loan will mature on January 4, 1999, will bear interest
at a rate equal to KeyBank's prime rate or 2.5% in excess of the 30-day LIBOR
rate and will be secured by a lien on the assets of Kroll and certain of its
subsidiaries. The revolving credit loan will mature on May 31, 1999, will bear
interest at a rate equal to (x) for advances of less than $4.5 million, 0.5%
less than KeyBank's prime rate or 2.0% in excess of the 30-day LIBOR rate or (y)
for advances of $4.5 million or more, KeyBank's prime rate or 2.5% in excess of
the 30-day LIBOR rate, and will be unsecured. The amended and restated credit
facility will contain customary financial covenants, including limitations on
capital expenditures and acquisitions and will require that Thomas M. O'Gara,
Wilfred
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T. O'Gara, Nicholas P. Carpinello and Abram S. Gordon remain in the executive
capacities described below during the term of the loans. See "O'GARA
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the respective recommendations of the O'Gara Board and the
Kroll Board with respect to the Merger Agreement and the transactions
contemplated thereby, shareholders of O'Gara and Kroll should be aware that
certain members of the management of O'Gara and Kroll, the O'Gara Board and the
Kroll Board may have certain interests in the Merger that may be different from,
or in addition to, the interests of shareholders of O'Gara and Kroll generally.
At the Effective Time, the O'Gara Board will be expanded to eleven members
and Jules B. Kroll, Howard I. Smith, Michael G. Cherkasky and Marshall S. Cogan
will become directors of O'Gara. Mr. Smith and Mr. Cogan will be non-employee
directors of O'Gara. Non-employee directors of O'Gara currently receive an
annual fee of $10,000, plus options to purchase 1,000 shares of O'Gara Common
Stock. They also receive $500 for each O'Gara Board meeting attended, including
telephone meetings, and $500 per committee meeting attended, unless the
committee meeting occurs on the same day as an O'Gara Board meeting. The
consideration to be paid to directors of O'Gara is determined by, and subject to
change at the discretion of, the O'Gara Board. See "-- Management of O'Gara
after the Merger" and "MANAGEMENT OF O'GARA -- Directors' Compensation."
Pursuant to the Merger Agreement, at the Effective Time, Jules B. Kroll
will become Chairman and Chief Executive Officer of O'Gara and certain other
executive officers of Kroll will become executive officers of O'Gara. Certain
executive officers of O'Gara and Kroll have entered into new employment
agreements or amendments to existing employment agreements which will become
effective at the Effective Time. It also is contemplated that options to
purchase shares of O'Gara Common Stock will be granted to certain of such
executive officers (other than Jules B. Kroll and Thomas M. O'Gara) at the
Effective Time. The employment agreement with Jules B. Kroll provides that he
shall receive an annual salary of $375,000 (compared to $500,000 in salary
received by him in 1996) and insurance benefits consistent with other employees.
The employment agreements with Wilfred T. O'Gara and Michael Lennon provide that
they shall receive increases in base annual salary from $230,000 and $145,000,
respectively, to $350,000 and $185,000, respectively. Wilfred T. O'Gara and
Michael Lennon will also receive additional stock options for 75,000 and 15,000
shares of O'Gara Common Stock, respectively. See "-- Management of O'Gara after
the Merger."
O'Gara has executed agreements with Jules B. Kroll, Thomas M. O'Gara and
AIG granting them rights to require O'Gara, under certain conditions, to
register for sale under the Act all or a portion of the O'Gara Common Stock
owned by them after the Merger. See "THE MERGER AGREEMENT -- Registration Rights
Agreements."
Kroll is currently indebted to Jules B. Kroll and AIG for money borrowed in
the net principal amounts of $4.5 million and $2.0 million, respectively. At the
Effective Time, O'Gara will cause Kroll to repay all of such indebtedness to AIG
and all but approximately $0.3 million principal amount of such indebtedness to
Jules B. Kroll, together in each case with accrued interest thereon. The
remaining indebtedness to Jules B. Kroll will be reflected by a new promissory
note issued by a subsidiary of Kroll and will bear interest at an annual rate
1/2% below the Prime Rate. See "-- Financing the Merger" and "CERTAIN RELATED
PARTY TRANSACTIONS -- KROLL."
OWNERSHIP OF O'GARA AFTER THE MERGER
Immediately following the Merger (i) the former holders of O'Gara Common
Stock will collectively own approximately 52% of the issued and outstanding
shares of O'Gara Common Stock, (ii) the former holders of Kroll Stock will
collectively hold approximately 48% of the issued and outstanding shares of
O'Gara Common Stock, and (iii) Thomas M. O'Gara, Jules B. Kroll and AIG will
hold approximately 29.0%, 26.5% and 10.4%, respectively, of the issued and
outstanding shares of O'Gara Common Stock. See "PRINCIPAL SHAREHOLDERS OF
O'GARA."
MANAGEMENT OF O'GARA AFTER THE MERGER
At the Effective Time, the number of directors of O'Gara will be increased
to eleven, and Jules B. Kroll, Howard I. Smith, Michael G. Cherkasky and
Marshall S. Cogan will join the O'Gara Board. Election of Jules B.
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Kroll and Howard I. Smith as directors of O'Gara is a condition to the
consummation of the Merger. Michael G. Cherkasky and Marshall S. Cogan have been
nominated for election as directors consistent with the understanding of Kroll
and O'Gara that Kroll could propose four candidates (including Messrs. Kroll and
Smith) for election to the O'Gara Board. For biographical information relating
to Messrs. Kroll, Smith and Cherkasky, see "MANAGEMENT OF KROLL."
Marshall S. Cogan has been Vice Chairman of Foamex International Inc. since
May 30, 1997 and Chairman and Chief Executive Officer of United Auto Group (a
franchisor of car and light truck dealerships) since April 17, 1997. Mr. Cogan
was Chairman of the Board and Chairman of the Executive Committee of Foamex
International Inc. (a manufacturer of polyurethane foam products) from September
1993 until May 30, 1997, and was Chief Executive Officer of Foamex International
Inc. from January 1994 until May 30, 1997. In addition, Mr. Cogan was Vice
Chairman of Foamex L.P. (a subsidiary of Foamex International, Inc.) from
January 1993 until January 1994, and was Chairman and Chief Executive Officer of
Foamex L.P. from January 1994 until May 30, 1997. Since 1974, Mr. Cogan has been
the principal stockholder, Chairman or Co-Chairman of the Board of Directors of
and Chief Executive Officer or Co-Chief Executive Officer of Trace International
Holdings, Inc. (a holding company operating businesses in the auto sales, foam,
textile, and publishing industries). Mr. Cogan has also served as director or
chairman of companies formerly owned by Trace Holdings International, Inc.,
including General Felt Industries, Inc., Knoll International, Inc. and
Sheller-Globe Corporation. Mr. Cogan is 59 years old.
The following table sets forth the names and titles of the persons expected
to be the executive officers of O'Gara immediately following the Effective Time:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------
<S> <C> <C>
Jules B. Kroll................ 56 Chairman of the Board and Chief Executive
Officer
Thomas M. O'Gara.............. 47 Vice Chairman of the Board
Wilfred T. O'Gara............. 40 President, Chief Operating Officer and
Director
Michael G. Cherkasky.......... 47 Chief Operating Officer -- Kroll
Michael J. Lennon............. 41 Chief Operating Officer -- O'Gara-Hess &
Eisenhardt Armoring Co.
Nazzareno E. Paciotti......... 51 Chief Financial Officer
Nicholas P. Carpinello........ 47 Controller and Treasurer
Abram S. Gordon............... 34 Vice President, General Counsel and Secretary
</TABLE>
For biographical information relating to these executive officers, see
"MANAGEMENT OF O'GARA" and "MANAGEMENT OF KROLL."
O'Gara, Kroll or one of their respective subsidiaries has entered into new
employment agreements, or amendments to existing employment agreements, which
will commence at the Effective Time and expire on November 30, 2000, with each
of these executive officers (other than Mr. Cherkasky), providing for annual
base salaries in the respective amounts set forth in the table below. Each
executive officer will also be entitled to participate in an annual bonus plan
to be established by the Compensation Committee of the O'Gara Board and to
receive up to 50% of such bonus in shares of O'Gara Common Stock. Pursuant to
these employment agreements, employment may be terminated by O'Gara at any time
with or without cause, except that, in a case of termination without cause, the
employee is entitled to receive compensation for the greater of the balance of
the term of the agreement and one year. The agreements also provide that if the
employer does not renew the agreement for one year or more at the end of the
term, the employee will receive an amount equal to one year's base salary. Each
employment agreement restricts the executive officer from competing with O'Gara
during the term of the agreement, and for two years thereafter if termination of
employment is for cause or at the volition of the employee. Each of Thomas M.
O'Gara and Wilfred T. O'Gara has further agreed that during his employment and
for a period of 10 years thereafter he will not directly or indirectly own any
interest in or perform any services for any entity which uses the word "O'Gara"
as a business or trade name and competes with O'Gara. Additionally, Jules B.
Kroll has agreed that during his employment with O'Gara and for a period of 10
years thereafter he will not directly or indirectly own any interest in or
perform any services for any entity which uses the word "Kroll" as a business or
trade name and competes with O'Gara. It is also contemplated that, at the
Effective Time, O'Gara
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will issue to certain of the executive officers options to purchase shares of
O'Gara Common Stock as set forth in the following table:
<TABLE>
<CAPTION>
OPTIONS TO PURCHASE
SHARES OF O'GARA
NAME BASE SALARY COMMON STOCK(1)
------------------------------------------------------- ----------- -------------------
<S> <C> <C>
Jules B. Kroll......................................... $ 375,000 -- 0 --
Thomas M. O'Gara....................................... $ 275,000 -- 0 --
Wilfred T. O'Gara...................................... $ 350,000 75,000
Michael G. Cherkasky................................... $ 400,000 25,000
Michael J. Lennon...................................... $ 185,000 15,000
Nazzareno E. Paciotti.................................. $ 275,000 15,000
Nicholas P. Carpinello................................. $ 140,000 10,000
Abram S. Gordon........................................ $ 135,000 10,000
</TABLE>
- ---------
(1) All of such options will be issued pursuant to the Plan and will be priced
at the market price of the O'Gara Common Stock at the Effective Time.
ACCOUNTING TREATMENT
O'Gara will account for the Merger in its consolidated financial statements
by the pooling of interests method of accounting. Under the pooling of interests
method of accounting, the recorded assets and liabilities of Kroll and O'Gara
will be carried forward to the O'Gara financial statements at their recorded
amounts; income of O'Gara will include income of O'Gara and Kroll for the entire
fiscal year in which the Merger occurs; and the reported income of the separate
corporations for prior periods will be combined and restated as income of O'Gara
on a consolidated basis. It is a condition to the consummation of the Merger
that O'Gara receive an opinion from Arthur Andersen LLP, its independent public
accountants, confirming the appropriateness of this accounting treatment under
generally accepted accounting principles. Each of Arthur Andersen LLP and
Deloitte & Touche LLP, Kroll's independent public accountants, has issued a
letter to the effect that no state of facts exists with respect to O'Gara or
Kroll, respectively, which would be reasonably expected to result in a failure
of the Merger to constitute a pooling of interests. Availability of the pooling
of interests method requires, among other things, that not more than 10% of the
Merger consideration be paid in cash. Accordingly, if holders of a sufficient
number of shares of O'Gara Common Stock or Kroll Stock were to exercise
dissenters' or appraisal rights, this condition would not be satisfied. See "THE
MERGER AGREEMENT -- Conditions to the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSEQUENCES IS NOT
INTENDED TO CONSTITUTE ADVICE REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER. THIS SUMMARY DOES NOT DISCUSS TAX CONSEQUENCES UNDER THE LAWS OF
STATES OR LOCAL GOVERNMENTS OR OF ANY OTHER JURISDICTION OR TAX CONSEQUENCES TO
CATEGORIES OF SHAREHOLDERS THAT MAY BE SUBJECT TO SPECIAL RULES, SUCH AS FOREIGN
PERSONS, TAX-EXEMPT ENTITIES, INSURANCE COMPANIES, FINANCIAL INSTITUTIONS AND
DEALERS IN STOCKS AND SECURITIES. EACH HOLDER OF KROLL STOCK AND/OR O'GARA
COMMON STOCK IS URGED TO OBTAIN, AND SHOULD RELY ONLY UPON, HIS OR HER OWN TAX
ADVICE.
The Merger is intended to be a tax-free reorganization for federal income
tax purposes so that no gain or loss will be recognized by the Kroll
shareholders, the O'Gara shareholders, Kroll or O'Gara, except as a result of
cash received in lieu of fractional shares or a shareholder's exercise of
appraisal rights.
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Kroll and O'Gara have received opinions (the "Tax Opinions") from their
respective legal counsel to the effect that, for federal income tax purposes,
the Merger will constitute a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended ("the Code"), and that
the federal income tax consequences of the Merger to the Kroll shareholders, the
O'Gara shareholders, Kroll and O'Gara will be as follows:
(i) No gain or loss will be recognized to the shareholders of Kroll
upon their receipt of shares of O'Gara Common Stock in exchange for their
Kroll Stock;
(ii) The basis in the shares of O'Gara Common Stock to be received by
the shareholders of Kroll in the Merger will be the same as their basis in
the Kroll Stock exchanged therefor, reduced by the basis allocable to
fractional shares;
(iii) The holding period of the shares of O'Gara Common Stock to be
received by the shareholders of Kroll will include the period during which
they held their Kroll Stock exchanged therefor, provided such Kroll Stock
was held as a capital asset at the time of the Merger;
(iv) Neither O'Gara nor Kroll will recognize gain or loss as a result
of the Merger;
(v) Cash payments received by holders of Kroll Stock in lieu of a
fractional share will be treated as if a fractional share of O'Gara Common
Stock had been issued in the Merger and then redeemed by O'Gara for cash. A
holder of Kroll Stock will generally recognize gain or loss upon such
payment, equal to the difference (if any) between such holder's basis in
the fractional share and the amount of cash received; and
(vi) A holder of Kroll Stock or O'Gara Common Stock who exercises
appraisal rights in respect to all of such holder's shares will generally
recognize gain or loss for federal income tax purposes, measured by the
difference between the holder's basis in such shares and the amount of cash
received, provided that the payment is not essentially equivalent to a
dividend within the meaning of Section 302 of the Code, which will be the
case if the dissenting shareholder does not directly or constructively own
any shares of O'Gara Common Stock or Kroll Stock after the Merger. Such
gain or loss will be a capital gain or loss, provided that such shares are
held as a capital asset at the time of the Merger. If the payment is
essentially equivalent to a dividend, it will be treated as ordinary income
to the extent of the paying corporation's current and accumulated earnings
and profits, and any remaining amount will first be applied against the
holder's basis in his, her, or its shares and will then be treated as gain
from the exchange of property, as described above.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. The Tax Opinions neither bind the IRS or
the courts nor preclude the IRS from adopting a contrary position. In addition,
the Tax Opinions are subject to certain assumptions and qualifications and are
based on the truth and accuracy of certain representations made by Kroll, O'Gara
and certain shareholders of Kroll. Of particular importance are those
assumptions and representations relating to the "continuity of interest,"
"control" and "continuity of business enterprise" requirements.
To satisfy the continuity of interest requirement, Kroll shareholders must
not, pursuant to a plan or intent existing at or prior to the Merger, dispose of
or transfer so much of either (i) their Kroll Stock prior to the Merger or (ii)
their shares of O'Gara Common Stock to be received in the Merger (collectively,
"Planned Dispositions"), such that the Kroll shareholders, as a group, would no
longer have a substantial proprietary interest in the Kroll business being
conducted by O'Gara after the Merger. Planned Dispositions include, among other
things, shares disposed of pursuant to the exercise of dissenters' or appraisal
rights. Kroll shareholders will generally be regarded as having retained a
substantial proprietary interest as long as the shares of O'Gara Common Stock
received in the Merger (after reduction for any Planned Dispositions), in the
aggregate, represent at least 50% of the entire consideration received by the
Kroll shareholders in the Merger. To satisfy the "continuity of business
enterprise" requirement, O'Gara must either (i) continue the historic business
conducted by Kroll, or (ii) use a significant portion of the historic business
assets of Kroll in a business. To satisfy the control requirement, Kroll
shareholders owning (1) at least 80% of the total voting power of all classes of
Kroll Stock entitled to vote, and (2) at least 80% of the total number of shares
of all other classes of Kroll Stock must exchange their shares of Kroll Stock
for shares of O'Gara Common Stock. For purposes of the control requirement, the
amount of stock constituting control is measured immediately before the
transaction, and therefore, is affected by the number of
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shares of Kroll Stock voted against the merger by shareholders who thereafter
exercise their appraisal rights as dissenting shareholders and receive cash
provided by O'Gara.
A successful IRS challenge to the "reorganization" status of the Merger (as
a result of a failure to satisfy the "continuity of interest" or "continuity of
business enterprise" requirements or otherwise) would result in a Kroll
shareholder recognizing gain or loss with respect to each share of Kroll Stock
surrendered equal to the difference between the shareholder's basis in such
share and the fair market value, as of the Effective Time of the Merger, of the
shares of O'Gara Common Stock received in exchange therefor. In such event, a
shareholder's aggregate basis in the shares of O'Gara Common Stock so received
would equal their fair market value and the holding period for such shares would
begin the day after the Merger.
Holders of options to acquire shares of Kroll Stock granted pursuant to the
Kroll Holdings, Inc. Management Stock Option Plan (the "Kroll Management Stock
Option Plan") will not recognize income upon the conversion of the options into
options to purchase O'Gara Common Stock. Holders will recognize ordinary income
when the options are exercised in an amount equal to the difference between the
fair market value of the O'Gara Common Stock received upon exercise and the
exercise price of the options.
Holders of non-vested restricted shares of Kroll Stock awarded pursuant to
the Kroll Holdings, Inc. Restricted Stock Plan (the "Kroll Restricted Stock
Plan") will recognize ordinary income upon the exchange of such shares for fully
vested unrestricted shares of O'Gara Common Stock in an amount equal to the fair
market value of the O'Gara Common Stock received. No gain will be recognized,
however, if the holder of the restricted shares made a valid election pursuant
to Section 83(b) of the Code at the time the shares were awarded.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of O'Gara Common Stock received by Kroll shareholders in the
Merger will be freely transferable, except that shares of O'Gara Common Stock
received by any person who is deemed to be an "affiliate" (as such term is
defined under the Act) of Kroll prior to the Merger or O'Gara after the Merger
may be resold by them only in transactions permitted by the resale provisions of
Rule 145 promulgated under the Act (or Rule 144 in the case of a person who
becomes an affiliate of O'Gara) or as otherwise permitted under the Act. Persons
who may be deemed to be an affiliate of O'Gara or Kroll generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include certain officers and directors of such
party as well as principal shareholders of such party.
O'Gara has agreed under certain circumstances to register for sale under
the Act shares of O'Gara Common Stock held by Jules B. Kroll, Thomas M. O'Gara
and AIG. See "THE MERGER AGREEMENT -- Registration Rights Agreements."
DISSENTERS' RIGHTS
O'Gara Shareholders. The following is a summary of the principal steps
which an O'Gara shareholder must take to perfect dissenters' rights under
Section 1701.85 of the OGCL. The summary is qualified in its entirety by
Sections 1701.84 and 1701.85 of the OGCL, copies of which are attached hereto as
Appendix D and incorporated herein by reference. Failure to take any one of the
required steps may result in termination of the rights of the shareholder under
the OGCL. If an O'Gara shareholder has a beneficial interest in O'Gara Common
Stock that is held of record in the name of another person, and such shareholder
desires to perfect whatever appraisal rights such beneficial shareholder may
have, such beneficial shareholder must act promptly to cause the shareholder of
record timely and properly to follow the steps summarized below. Any holder of
shares of O'Gara Common Stock who is considering dissenting should consult his
or her legal advisor.
Exercise of dissenters' rights under the OGCL may result in a judicial
determination that the "fair cash value" of the dissenting shareholder's shares
is higher, the same, or lower than the market value of the shares of O'Gara
Common Stock on the date of the Merger.
A holder of shares of O'Gara Common Stock which are not voted for adoption
of the Merger Agreement may be entitled, if the Merger is consummated, to be
paid the "fair cash value" of such shares held of record on the record date. Any
O'Gara shareholder who is eligible to, and does, exercise his or her dissenters'
rights with
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respect to the Merger is referred to herein as an "O'Gara Dissenting
Shareholder," and the shares of O'Gara Common Stock with respect to which such
rights are exercised are referred to herein as "O'Gara Dissenting Shares." An
O'Gara Dissenting Shareholder must serve a written demand for the "fair cash
value" of all (but not less than all) of the shares of O'Gara Common Stock held
by such O'Gara Dissenting Shareholder upon O'Gara on or before the tenth day
after the shareholder vote adopting the Merger Agreement and must otherwise
comply with Section 1701.85 of the OGCL. O'Gara will not inform shareholders of
the expiration of the ten-day period and therefore dissenting shareholders are
advised to retain this Proxy Statement/Prospectus. A vote for adoption of the
O'Gara Proposal and the Merger Agreement constitutes a waiver of dissenters'
rights. Submission of a properly executed Proxy Card without a designation of
"against" or "abstain" will constitute a vote for the O'Gara Proposal including
the Merger. Failure to vote does not constitute a waiver of dissenters' rights.
The required written demand must specify the shareholder's name and address, the
number of O'Gara Dissenting Shares held of record on the record date and the
amount claimed as the "fair cash value" of the shares. Voting against adoption
of the O'Gara Proposal will not of itself constitute a written demand as
required by Section 1701.85 of the OGCL.
If O'Gara requests, O'Gara Dissenting Shareholders must submit their O'Gara
Dissenting Share certificates to O'Gara within 15 days after the making of such
request for endorsement thereon by O'Gara of a legend that demand for appraisal
has been made. Such certificates will be returned promptly to the O'Gara
Dissenting Shareholders by O'Gara. O'Gara intends to make such a request to
O'Gara Dissenting Shareholders.
If O'Gara and any O'Gara Dissenting Shareholder cannot agree on the "fair
cash value" of the O'Gara Dissenting Shares held by such O'Gara Shareholder,
either may, within three months after service of the demand by the shareholder,
file a complaint in the Court of Common Pleas of Butler County, Ohio (the
"Court"), for a determination of the "fair cash value" of such O'Gara Dissenting
Shareholder's O'Gara Dissenting Shares. The Court, if it determines that such
O'Gara Dissenting Shareholder is entitled to be paid the "fair cash value" of
the O'Gara Dissenting Shares, may appoint one or more appraisers to determine
its value. If the Court approves the appraisers' report, judgment will be
entered therefor, and the costs of the proceeding, including reasonable
compensation to the appraisers, shall be assessed or apportioned as the Court
considers equitable. "Fair cash value" is the amount which a willing seller,
under no compulsion to sell, would be willing to accept, and which a willing
buyer, under no compulsion to purchase, would be willing to pay, but in no event
in excess of the amount specified in the O'Gara Dissenting Shareholder's demand.
"Fair cash value" is determined as of the day prior to that on which the
shareholder vote is taken at the Special Meeting and would exclude any
appreciation or depreciation in market value of O'Gara Dissenting Shares
resulting from the Merger. O'Gara does not intend to file such a complaint.
Therefore, an O'Gara Dissenting Shareholder must timely file such a complaint to
protect his rights to a judicial determination under the OGCL.
The right of any O'Gara Dissenting Shareholder to be paid the "fair cash
value" of the O'Gara Dissenting Shares will terminate if: (i) for any reason the
Merger, although adopted by shareholder vote, does not become effective; (ii)
the O'Gara Dissenting Shareholder fails to serve an appropriate timely written
demand upon O'Gara; (iii) the O'Gara Dissenting Shareholder does not, upon
request of O'Gara, timely surrender certificates for an endorsement thereon of a
legend to the effect that demand for the "fair cash value" of such O'Gara
Dissenting Shares has been made; (iv) the demand is withdrawn by the O'Gara
Dissenting Shareholder, with the consent of the O'Gara Board; (v) O'Gara and the
O'Gara Dissenting Shareholder shall not have come to an agreement as to the
"fair cash value" of the O'Gara Dissenting Shares and neither shall have filed a
complaint in the Court as described above; or (vi) the O'Gara Dissenting
Shareholder has otherwise not complied with the requirements of Section 1701.85
of the OGCL.
From the time an O'Gara Dissenting Shareholder's demand is made until the
termination of the right arising from that demand, all rights accruing from such
O'Gara Dissenting Shares, including dividend and voting rights, shall be
suspended. If, during such suspension, any cash dividend is paid with respect to
O'Gara Common Stock, an amount equal to such dividend is to be paid to the
holder of record of the O'Gara Dissenting Shares as a credit upon the fair cash
value thereof. If the right to receive "fair cash value" is terminated other
than by purchase by O'Gara of the O'Gara Dissenting Shareholder's O'Gara
Dissenting Shares, all such O'Gara Dissenting Shareholder's rights with respect
to O'Gara Dissenting Shares shall be restored to the O'Gara Dissenting
Shareholder.
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Kroll Shareholders. The following summary of the material provisions of
Section 262 of the DGCL ("Section 262") is qualified in its entirety by
reference to the full text of Section 262, a copy of which is attached hereto as
Appendix E and incorporated herein by reference.
If the Merger is approved by the required vote of Kroll and O'Gara
shareholders and the Merger becomes effective, and a holder of Kroll Stock
exercises appraisal rights in connection with the Merger under Section 262, any
shares of Kroll Stock with respect to which such appraisal rights have been
exercised and perfected will not be converted into O'Gara Common Stock but,
instead, will be converted into the right to receive such consideration as may
be determined by the Delaware Court of Chancery (the "Delaware Court") to be due
with respect to such shares pursuant to the DGCL. This discussion and Section
262 of the DGCL should be reviewed carefully by any shareholder who wishes to
exercise statutory appraisal rights or wishes to preserve the right to do so
since failure to comply with the required procedures will result in the loss of
such rights. A Kroll shareholder who votes for the adoption and approval of the
Merger will be deemed to have waived such shareholder's right to exercise
appraisal rights with respect to all shares of Kroll Stock held by such
shareholder. Any holder of shares of Kroll Stock who is considering dissenting
should consult his or her legal advisor. If a Kroll shareholder has a beneficial
interest in shares of Kroll Stock that are held of record in the name of another
person, and such shareholder desires to perfect whatever appraisal rights such
beneficial shareholder may have, such beneficial shareholder must act promptly
to cause the shareholder of record timely and properly to follow the steps
summarized below.
The shareholders of record of shares of Kroll Stock which are eligible to,
and do, exercise their appraisal rights with respect to the Merger are referred
to herein as "Kroll Dissenting Shareholders," and the shares of Kroll Stock with
respect to which they exercise appraisal rights are referred to herein as "Kroll
Dissenting Shares." If the Merger is consummated, the Kroll Dissenting
Shareholders will be entitled, if they strictly comply with the provisions of
the DGCL, to have the "fair value" of their shares of Kroll Stock judicially
determined and paid to them. To exercise appraisal rights, a shareholder must
(i) file with Kroll, before the taking of the shareholders' vote on the approval
and adoption of the Merger Agreement and the Merger at the Kroll Meeting, a
written objection to the Merger Agreement and the Merger stating the intention
of such shareholder to demand payment for Kroll Stock owned by such shareholder
if the Merger Agreement and the Merger are adopted and approved and the Merger
becomes effective, and (ii) the shareholder must not vote in favor of the Merger
Agreement and the Merger. A vote in favor of the Merger Agreement and the Merger
will waive such shareholder's appraisal rights. However, a shareholder's failure
to vote on the Merger Agreement and the Merger will not in itself be a waiver of
such holder's appraisal rights. A designation of proxy or vote against the
Merger Agreement and the Merger does not, alone, constitute a demand. A
shareholder who dissents and demands appraisal rights must do so as to all
shares of Kroll Stock owned by such shareholder.
Within 120 days after the Effective Time, Kroll or any shareholder who gave
notice, before the taking of the shareholders' vote on the Merger Agreement and
the Merger at the Kroll Meeting, of such shareholder's objection to the Merger
Agreement and the Merger and who did not vote in favor of the Merger Agreement
and the Merger and who otherwise complied with the DGCL, may (i) file a petition
in the Delaware Court demanding a determination of the value of the Kroll
Dissenting Shares of all such shareholders and (ii) upon written request,
receive from the surviving corporation a statement setting forth the aggregate
number of shares of Kroll Stock not voted in favor of the Merger and the Merger
Agreement and with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares. Kroll does not intend to file
such a petition. Upon the filing of any such petition by a shareholder, a copy
must be served on Kroll.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Delaware Court is required to determine the holders of Kroll
Dissenting Shares entitled to appraisal rights and to determine the "fair value"
of the Kroll Dissenting Shares, taking into account all relevant factors,
exclusive of any element of value arising from the accomplishment or expectation
of the Merger, together with a fair rate of interest, if any.
Any holder of Kroll Dissenting Shares who has demanded an appraisal under
Section 262 will not, after the Effective Time, be entitled to vote the shares
subject to such demand for any purpose or to receive payment of dividends or
other distributions on such Kroll Dissenting Shares (except dividends or other
distributions, if any, payable to shareholders of record as of a date prior to
the Effective Time).
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The shares of any Kroll shareholder who demands appraisal under Section 262
and subsequently withdraws or loses his, her or its right to appraisal will be
converted into a right to receive that number of shares of O'Gara Common Stock
as is determined in accordance with the Merger Agreement. A shareholder will
effectively lose a right to appraisal if he, she or it fails to file a written
objection prior to the vote or votes, or executes and delivers a proxy, in favor
of the approval of the Merger Agreement, if no petition for appraisal is filed
within 120 days after the Effective Time, or if the holder withdraws such
holder's demand for appraisal within 60 days after the Effective Time. A holder
of stock represented by certificates may also lose his, her or its right to
appraisal if such holder fails to comply with the Delaware Court's direction to
submit such certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings. All court costs, including
appraisers' fees, shall be allocated by the Delaware Court in a manner it
determines to be fair and equitable.
REGULATORY REQUIREMENTS
Other than the effectiveness of the Registration Statement, no material
federal or state regulatory requirements must be complied with or regulatory
approval obtained in connection with the Merger.
MERGER EXPENSES AND FEES AND OTHER COSTS
O'Gara and Kroll estimate that they will incur direct transaction costs of
approximately $4.0 million associated with the Merger. All of such costs will be
charged against operations in the accounting period in which the Effective Date
occurs. O'Gara anticipates incurring additional costs and expenses relating to
integrating the companies. Except to the extent these costs are capitalized,
they will also be charged against operations as they are incurred. It is
currently anticipated that such costs will not exceed $0.5 million.
Whether or not the Merger is consummated, each of O'Gara and Kroll will
bear its own costs and expenses in connection with the Merger. O'Gara has paid
to Dillon Read for its services in rendering the Dillon Read Opinion a fee of
$450,000. Kroll has paid to DLJ for its services a fee of $100,000 and has
agreed to pay DLJ an additional fee of $1.2 million ($200,000 of which will be
paid by Jules B. Kroll) upon the Closing. DLJ has also rendered services to
O'Gara in connection with the Merger, for which O'Gara has agreed to pay DLJ
$200,000 upon the closing of the Merger. O'Gara has also agreed to pay Brausch,
upon the Closing, a fee of $500,000 for its services. Each of O'Gara and Kroll
has also agreed to reimburse the reasonable expenses of the advisors mentioned
in this paragraph, and to indemnify them against certain liabilities, in
connection with their respective engagements.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Appendix A to this Proxy
Statement/Prospectus and is incorporated herein by reference. This summary is
qualified in its entirety by reference to the full and complete text of the
Merger Agreement. Capitalized terms used herein without definition have the
respective meanings assigned to them in the Merger Agreement.
The Merger. Pursuant to the Merger Agreement and subject to its terms and
conditions, Newco will be merged with and into Kroll. As a result of the Merger,
Kroll will become a wholly owned subsidiary of O'Gara and all of the Kroll Stock
(with certain exceptions described below) will be converted into O'Gara Common
Stock.
Subject to the terms and conditions of the Merger Agreement, the Closing
will be held as soon as practicable after the shareholders of O'Gara, Newco and
Kroll approve the Merger, but in no event more than 10 business days after such
approval. The Effective Time will occur, and the Merger will become effective,
as of the close of business on the date that a certificate of merger is filed
with the office of the Secretary of State of the State of Delaware.
Conversion of Kroll Stock. Pursuant to the Merger Agreement, upon the
consummation of the Merger, each share of Kroll Stock issued and outstanding
immediately prior to the Effective Time (other than shares held in the treasury
of Kroll or owned by O'Gara or Newco and other than Dissenting Shares) will be
converted into that number of fully paid and nonassessable shares of O'Gara
Common Stock equal to one times the Share Conversion Multiplier. The Share
Conversion Multiplier is a fraction, the numerator of which is 6,650,000, and
the denominator of which is equal to the sum of (1) the total number of shares
of Kroll Stock issued and outstanding immediately prior to the Effective Time,
and (2) the total number of shares of Kroll Stock issuable pursuant to all
warrants, options and other stock issuance agreements (including conversion
rights under any instruments convertible into shares of Kroll Stock
(collectively the "Kroll Issuance Agreements")) existing immediately prior to
the Effective Time, assuming all of such Kroll Issuance Agreements are fully
exercisable and the rights of the holders thereof are fully vested therein and
in the stock issuable pursuant thereto. On the date of this Proxy
Statement/Prospectus, 106,367 shares of Kroll Stock were outstanding or subject
to Kroll Issuance Agreements. If the Merger had been consummated as of the date
of this Proxy Statement/Prospectus, each outstanding share of Kroll Stock would
have been converted into 62.52 shares of O'Gara Common Stock and each
outstanding right to purchase one share of Kroll Stock would have been converted
into a right to purchase 62.52 shares of O'Gara Common Stock at the same
aggregate purchase price.
Pursuant to the Merger Agreement, all Kroll Issuance Agreements will, to
the extent the shares of Kroll Stock issuable pursuant thereto have been
included in the denominator in determining the Share Conversion Multiplier, be
converted into the right to receive, upon exercise, subject to and in accordance
with the terms of such Kroll Issuance Agreements and further subject to payment
in full of the exercise price under such Kroll Issuance Agreements, that number
of shares of O'Gara Common Stock which is equal to the product of (i) the number
of shares of Kroll Stock issuable upon exercise of such Kroll Issuance
Agreements and (ii) the Share Conversion Multiplier. To the extent any Kroll
Stock issuable pursuant to a Kroll Issuance Agreement was not included in the
denominator of the Share Conversion Multiplier, such Kroll Issuance Agreement
will automatically be cancelled at the Effective Time and neither Kroll Stock
nor O'Gara Common Stock will thereafter be issued or issuable with respect to
such Kroll Issuance Agreement.
Exchange Procedure. Promptly after the Effective Time, O'Gara will mail to
each registered holder of a certificate or certificates which immediately prior
to the Effective Time evidenced outstanding shares of Kroll Stock (the "Kroll
Certificates") a letter of transmittal providing for the surrender of such Kroll
Certificates to O'Gara's transfer agent, The Fifth Third Bank, for exchange.
HOLDERS OF KROLL STOCK SHOULD NOT SEND ANY KROLL CERTIFICATES TO KROLL OR
O'GARA AT THIS TIME. KROLL SHAREHOLDERS SHOULD SEND KROLL CERTIFICATES TO
O'GARA'S TRANSFER AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH, THE
INSTRUCTIONS CONTAINED IN THE LETTER OF TRANSMITTAL.
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Dividends. No dividends or other distributions with respect to O'Gara
Common Stock with a record date after the Effective Time will be paid to the
holder of an unsurrendered Kroll Certificate with respect to the shares of
O'Gara Common Stock represented thereby, and no cash payment in lieu of
fractional shares will be made to any such holder, in each case unless and until
the holder of record of such Kroll Certificate surrenders such Kroll
Certificate.
Fractional Shares. No fractional shares of O'Gara Common Stock will be
issued pursuant to the Merger. In lieu of any such fractional shares, cash equal
to the product of such fractional amount and the average of the last reported
prices per share of O'Gara Common Stock for the 10 consecutive trading days
ending with the last trading day prior to the Effective Time will be paid with
respect thereto.
Representations and Warranties. The Merger Agreement contains customary
representations and warranties by Kroll and Jules B. Kroll as to, among other
things, Kroll's: (i) organization, good standing and capitalization, (ii)
corporate authorization to conduct business and enter into the Merger Agreement,
(iii) Subsidiaries, (iv) stock options and similar arrangements, (v) financial
statements, (vi) liabilities, (vii) litigations and similar proceedings, (viii)
assets, (ix) operations since December 31, 1996, including the absence of any
material change therein, (x) tax status, (xi) insurance coverage, (xii)
contracts, (xiii) employee benefit plans, (xiv) defaults under contracts, (xv)
information about Kroll to be included in this Proxy Statement/Prospectus, (xvi)
compliance with law, (xvii) need to obtain approvals from governmental agencies
and others to consummate the Merger, (xviii) patents, trademarks and copyrights,
(xix) environmental law compliance, (xx) actions relating to the accounting
treatment of the Merger, (xxi) licenses and permits, (xxii) orders and
judgments, (xxiii) labor relations and (xxiv) use of a broker.
The Merger Agreement also contains customary representations and warranties
by O'Gara and Newco as to, among other things, their (i) organization, good
standing and capitalization, (ii) corporate authorization to conduct business
and enter into the Merger Agreement, (iii) Subsidiaries, (iv) stock options and
similar arrangements, (v) financial statements and filings made with the
Commission, (vi) liabilities, (vii) litigations and similar proceedings, (viii)
assets, (ix) operations since December 31, 1996, including the absence of any
material change therein, (x) tax status, (xi) insurance coverage, (xii)
contracts, (xiii) employee benefit plans, (xiv) defaults under contracts, (xv)
information to be included in this Proxy Statement/Prospectus, (xvi) compliance
with laws, (xvii) need to obtain approvals from governmental agencies and others
to consummate the Merger, (xviii) patents, trademarks and copyrights, (xix)
environmental law compliance, (xx) licenses and permits, (xxi) orders and
judgments, (xxii) labor relations, (xxiii) use of a broker and (xxiv) actions
relating to the accounting treatment of the Merger.
Covenants. Pursuant to the Merger Agreement, each of O'Gara and Kroll has
made various customary covenants relating to the Merger, including those
described below.
Registration of O'Gara Common Stock. Pursuant to the Merger Agreement,
O'Gara agreed to file with the Commission a registration statement on Form S-4
(together with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Act relating to the O'Gara Common Stock to be issued in
the Merger and to use its commercially reasonable best efforts to cause it to be
declared effective as soon as practicable and to distribute this Proxy
Statement/Prospectus to the shareholders of O'Gara and Kroll as soon as
practicable thereafter. In furtherance thereof, Kroll and O'Gara agreed to
cooperate with each other and to furnish the information required to be included
in the Registration Statement.
Conduct of Business Pending the Merger. Each of Kroll and O'Gara has
agreed that, prior to the Effective Time, it and its Subsidiaries will operate
in all material respects in the ordinary course of business and each agreed to
use commercially reasonable best efforts to maintain its properties and
facilities, to retain its key employees and to maintain its material assets and
relationships with customers. Specifically, Kroll has agreed, among other
things, not to (i) declare any dividends or purchase any shares of Kroll Stock,
(ii) create or incur any indebtedness (except indebtedness of up to $1.0 million
to Jules B. Kroll) or incur any liability except in the ordinary course of
business, (iii) make any capital expenditure except as specified therein, (iv)
increase the rate of compensation of any officer or employee other than in the
ordinary course of business, (v) make any material contract not in the ordinary
course of business, (vi) default in any material respect under any material
contract, (vii) adopt, amend or terminate any employee benefit plan, (viii)
acquire, sell or lease any material asset,
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(ix) change any accounting principle, (x) make any material tax election, (xi)
pay any material claim or write off any material asset other than in the
ordinary course of business or (xii) take or agree to take any action which
would cause any condition to the Merger not to be satisfied.
O'Gara has agreed, among other things, not to (i) declare any dividends or
purchase any shares of O'Gara Common Stock, (ii) create or incur any liability
except in the ordinary course of business or increase its indebtedness by more
than $30.0 million, (iii) increase the compensation of its officers or employees
other than in the ordinary course of business, (iv) default in any material
respect under any material contract, (v) adopt, amend or terminate any employee
benefit plan, (vi) sell or lease any material asset, (vii) change any accounting
principle, (viii) make any material tax election with a material adverse effect,
(ix) take or agree to take any action which would cause any condition to the
Merger not to be satisfied, (x) make any material contract outside the ordinary
course of business with specified exceptions, (xi) write off any material asset
outside the ordinary course of business, or (xii) issue O'Gara Common Stock
except as permitted by the Merger Agreement.
Other Proposals. Kroll and Jules B. Kroll have agreed not to provide
information or participate in discussions or negotiations with respect to any
proposal for a merger involving Kroll or any of its Subsidiaries or any proposal
to acquire an equity interest in or a substantial portion of the assets of Kroll
or any of its Subsidiaries. The Merger Agreement provides that it would be a
breach of such Agreement for Jules B. Kroll or Kroll to participate in
discussions or negotiations with respect to a proposal from a party, other than
O'Gara, with respect to a merger or other business combination. Each of Jules B.
Kroll and Kroll believes that entering into the Merger Agreement with this
provision was consistent with each of their fiduciary obligations.
Repayment of Debt. O'Gara has agreed to cause Kroll to repay promptly
after the Effective Time certain of its indebtedness to Jules B. Kroll and all
of its indebtedness to AIG in an aggregate principal amount not to exceed $7.5
million.
Shareholders' Meetings. Each of O'Gara and Kroll has agreed duly to call
and hold the O'Gara Meeting and the Kroll Meeting, respectively, and to
recommend to its shareholders the approval of the Merger Agreement.
Indemnification. No claim for breach of the representations and warranties
by Kroll, Jules B. Kroll or O'Gara in the Merger Agreement will survive the
Effective Time. However, Jules B. Kroll has agreed in the Merger Agreement,
after the Effective Time and subject to certain conditions and time limitations,
to indemnify and hold O'Gara and Kroll harmless from any loss arising if (i) the
Registration Statement contains an untrue statement of a material fact regarding
any Kroll Matters or omits to state a material fact regarding any Kroll Matters
required to be stated therein or necessary to make the statements regarding
Kroll Matters not misleading, (ii) any written or oral communication by Kroll
Representatives to any holder of Kroll Stock who owns O'Gara Common Stock after
the Merger contains any such untrue statement or omission, unless Jules B. Kroll
can prove that the Kroll Representative did not know, and in the exercise of
reasonable care could not have known, of such untruth or omission or (iii) this
Proxy Statement/Prospectus includes any such untrue statement or omission,
unless Jules B. Kroll can prove that the Kroll Representative did not know, and
in the exercise of reasonable care could not have known, of such untruth or
omission.
Other Actions. Pursuant to the Merger Agreement, O'Gara, Newco, Kroll and
Jules B. Kroll have agreed to use their commercially reasonable best efforts to
cause the conditions to the Merger to be satisfied at the earliest practicable
date. O'Gara and Kroll have also agreed to provide each other with access to
their respective properties and records and to exchange certain tax information.
Conditions to the Merger. The obligations of O'Gara, Newco and Kroll to
consummate the Merger are conditioned on the fulfillment of the following: (i)
the receipt of all necessary governmental approvals, (ii) the Registration
Statement having become effective and the absence of any stop order suspending
the effectiveness of the Registration Statement or any threat thereof, (iii) the
absence of any temporary restraining order, injunction or other order preventing
the consummation of the Merger, and (iv) if requested by AIG, the election of an
individual nominated by AIG and reasonably acceptable to O'Gara as a director of
O'Gara.
The obligations of O'Gara and Newco to consummate the Merger are also
conditioned on the fulfillment of the following: (i) the representations and
warranties of Kroll and Jules B. Kroll being true and complete when made and
true and complete in all material respects at the Effective Time as if then
made, (ii) Kroll having
42
<PAGE> 46
performed in all material respects all of its obligations under the Merger
Agreement, (iii) receipt by O'Gara of an opinion of Kramer, Levin, Naftalis &
Frankel, counsel to Kroll, (iv) receipt by O'Gara of "comfort letters" from
Kroll's independent public accountants (if requested by O'Gara), (v) receipt by
O'Gara of an opinion of its independent public accountants confirming that the
Merger will constitute a pooling of interests for financial accounting purposes,
(vi) receipt by the O'Gara Board of the Dillon Read Opinion and such Opinion not
being withdrawn, (vii) approval of the Merger by the O'Gara shareholders at the
O'Gara Meeting, and (viii) receipt of specified consents under contracts between
Kroll and third parties.
The obligation of Kroll to consummate the Merger is also conditioned on the
fulfillment of the following: (i) the representations and warranties of O'Gara
and Newco being true and complete when made and true and complete in all
material respects at the Effective Time as if then made, (ii) O'Gara and Newco
having performed in all material respects all of their obligations under the
Merger Agreement, (iii) receipt by Kroll of an opinion of Taft, Stettinius &
Hollister, counsel to O'Gara, (iv) receipt by Kroll of "comfort letters" from
O'Gara's independent public accountants (if requested by Kroll), (v) receipt of
specified consents under contracts between O'Gara and third parties, (vi)
election of Jules B. Kroll as a director and Chief Executive Officer of O'Gara
effective as of the Effective Time, (vii) the absence of any strike involving
more than 20% of O'Gara's United States workforce and (viii) O'Gara not having
received notice of the termination of, or intent to terminate, the HMMWV
contract.
Each of such conditions may be waived, to the extent permitted by law, by
the party or parties entitled to the benefit thereof. At the current time,
neither O'Gara nor Kroll believes that any such waiver will be required. If any
condition is not fulfilled, each of O'Gara and Kroll will evaluate whether it is
in its best interests to grant such a waiver.
Termination of the Merger Agreement. The Merger Agreement may be
terminated (i) by Kroll or O'Gara, if the Merger is not consummated on or prior
to January 31, 1998, (ii) by agreement of O'Gara, Newco, Kroll and Jules B.
Kroll, (iii) by the O'Gara Board if any of the conditions to O'Gara's
obligations have not been satisfied prior to the Closing, or (iv) by the Kroll
Board if any of the conditions to Kroll's obligations have not been satisfied
prior to the Closing.
Stock Agreements. Pursuant to letter agreements dated August 8, 1997 (the
"Stock Agreements"), (i) each of Jules B. Kroll and AIG agreed to vote all
shares of Kroll Stock owned or otherwise controlled by him or it in favor of the
Merger and not to sell, transfer or pledge any of such shares prior to the
sooner of the termination of the Merger Agreement and the Effective Time, unless
the transferee agrees to be bound by such agreement, and (ii) Thomas M. O'Gara
agreed to vote all shares of O'Gara Common Stock owned or otherwise controlled
by him in favor of the Merger and not to sell, transfer or pledge any of such
shares prior to the sooner of the termination of the Merger Agreement and the
Effective Time, unless the transferee agrees to be bound by such agreement.
AIG's agreement was conditioned upon the execution by O'Gara and AIG of a
registration rights agreement as described below and to the recommendation by
the O'Gara Board of an AIG nominee for election as a director of O'Gara as of
the Effective Time.
Registration Rights Agreements. Pursuant to a letter agreement dated
August 8, 1997, Jules B. Kroll, Thomas M. O'Gara and O'Gara have agreed that if
after the Effective Time O'Gara registers any shares of O'Gara Common Stock
pursuant to the Act and any shares of O'Gara Common Stock owned by either Jules
B. Kroll or Thomas M. O'Gara are included therein, then O'Gara will also afford
to Thomas M. O'Gara or Jules B. Kroll, as the case may be, the opportunity to
include therein his shares of O'Gara Common Stock pro rata and otherwise on the
same terms and conditions.
Pursuant to the Stock Agreement with AIG, O'Gara and AIG have entered into
a registration rights agreement providing for one "demand" and unlimited
"piggyback" registration rights for AIG at the cost and expense of O'Gara (other
than underwriting discounts, if any) for a period of three years after the
Effective Time, subject to customary limitations with respect to underwriter
cutbacks, pending announcements or transactions involving O'Gara and certain
other terms and conditions.
43
<PAGE> 47
THE SPECIAL MEETINGS
This Proxy Statement/Prospectus is furnished to holders of O'Gara Common
Stock in connection with the solicitation of proxies from them by the O'Gara
Board for use at the O'Gara Meeting. This Proxy Statement/Prospectus is also
being furnished to holders of Kroll Stock. Neither the O'Gara Board nor the
Kroll Board is soliciting proxies from the holders of Kroll Stock for use at the
Kroll Meeting and holders of Kroll Stock are requested not to send proxies to
the O'Gara Board or the Kroll Board.
THE O'GARA MEETING
Time and Place; Purpose. The O'Gara Meeting will be held at The Omni
Netherland Plaza Hotel, Fifth and Race Streets, Cincinnati, Ohio on November 21,
1997, starting at 9:00 a.m. local time. At the O'Gara Meeting, the shareholders
of O'Gara will be asked to consider and vote upon the O'Gara Proposal, the
O'Gara Option Proposal, the O'Gara Capitalization Proposal and such other
matters as may properly come before the O'Gara Meeting. Copies of the Merger
Agreement and the proposed Amended and Restated Articles of Incorporation of
O'Gara are included as Appendix A and Appendix B, respectively, to this Proxy
Statement/Prospectus.
Voting Rights; Votes Required for Approval. The O'Gara Board has fixed the
close of business on October 15, 1997 as the O'Gara Record Date. Only holders of
record of shares of O'Gara Common Stock on the O'Gara Record Date are entitled
to notice of and to vote at the O'Gara Meeting. As of the O'Gara Record Date,
there were 7,279,310 shares of O'Gara Common Stock outstanding and entitled to
vote held by approximately 62 shareholders of record.
Each holder of record, as of the O'Gara Record Date, of O'Gara Common Stock
is entitled to cast one vote per share on each matter presented to shareholders.
The presence at the O'Gara Meeting, in person or by proxy, of the holders of a
majority of the outstanding shares of O'Gara Common Stock entitled to vote is
necessary to constitute a quorum at the O'Gara Meeting.
Under the OGCL and the O'Gara Articles, the affirmative vote at the O'Gara
Meeting, in person or by proxy, of the holders of a majority of the shares of
O'Gara Common Stock outstanding on the O'Gara Record Date is required to approve
and adopt the O'Gara Proposal and the O'Gara Capitalization Proposal. Under the
O'Gara Code and the OGCL, the affirmative vote of a majority of the shares of
O'Gara Common Stock represented at the O'Gara Meeting in person or by proxy and
entitled to vote on the O'Gara Option Proposal is required to approve the O'Gara
Option Proposal if a quorum is present. The O'Gara Common Stock has no
cumulative voting rights. O'Gara has not established a procedure for
confidential voting.
The O'Gara Proposal, the O'Gara Option Proposal and the O'Gara
Capitalization Proposal are not conditioned upon one another.
As of the O'Gara Record Date, directors and executive officers of O'Gara as
a group beneficially owned 4,760,016 shares of O'Gara Common Stock, or
approximately 65.4% of those shares of O'Gara Common Stock outstanding as of
such date. As of the O'Gara Record Date, Thomas M. O'Gara beneficially owned
4,041,838 shares of O'Gara Common Stock, or approximately 55.5% of those
outstanding. He has agreed to vote such shares in favor of the O'Gara Proposal.
Accordingly, it is expected that the O'Gara Proposal will be approved regardless
of the votes cast by other holders of O'Gara Common Stock. See "THE MERGER
AGREEMENT -- Stock Agreements."
If fewer shares of O'Gara Common Stock are voted in favor of the O'Gara
Proposal than the number required for approval, it is expected that the O'Gara
Meeting will be postponed or adjourned for the purpose of allowing additional
time for soliciting and obtaining additional proxies or votes, and, at any
subsequent reconvening of the O'Gara Meeting, all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the O'Gara Meeting, except for any proxies that have theretofore effectively
been revoked or withdrawn.
Proxies. All shares of O'Gara Common Stock represented by properly
executed proxies received prior to or at the O'Gara Meeting and not revoked will
be voted in accordance with the instructions indicated in such
44
<PAGE> 48
proxies. If no instructions are indicated on a properly executed returned proxy,
such proxy will be voted FOR the O'Gara Proposal, FOR the O'Gara Option Proposal
and FOR the O'Gara Capitalization Proposal. A properly executed proxy marked
"ABSTAIN," although counted for purposes of determining whether there is a
quorum, will not be voted. Accordingly, because the affirmative vote of a
majority of the shares of O'Gara Common Stock outstanding on the O'Gara Record
Date is required for approval of the O'Gara Proposal and the O'Gara
Capitalization Proposal, and the affirmative vote of a majority of the shares of
O'Gara Common Stock represented at the O'Gara Meeting is required for approval
of the O'Gara Option Proposal, a proxy marked "ABSTAIN" will have the effect of
a vote against the O'Gara Proposal, the O'Gara Capitalization Proposal and the
O'Gara Option Proposal. In accordance with applicable rules, brokers and
nominees are precluded from exercising their voting discretion on the O'Gara
Proposal, the O'Gara Option Proposal and the O'Gara Capitalization Proposal and
thus, absent specific instructions from the beneficial owner of such shares, are
not empowered to vote such shares with respect thereto. Because the affirmative
vote of a majority of the shares of O'Gara Common Stock outstanding on the
O'Gara Record Date is required for approval of the O'Gara Proposal and the
O'Gara Capitalization Proposal, a broker non-vote (i.e., shares held by brokers
or nominees which are represented at a meeting but with respect to which the
broker or nominee is not empowered to vote on a particular proposal) with
respect to the O'Gara Proposal or the O'Gara Capitalization Proposal will have
the effect of a vote against the O'Gara Proposal or the O'Gara Capitalization
Proposal, respectively, but will not be counted with respect to the O'Gara
Option Proposal. Shares represented by broker non-votes will, however, be
counted for purposes of determining whether there is a quorum at the O'Gara
Meeting.
General. A shareholder of O'Gara may revoke his or her proxy at any time
prior to its use by delivering to the Secretary of O'Gara a signed notice of
revocation or a later dated signed proxy or by attending the O'Gara Meeting and
voting in person. Attendance at the O'Gara Meeting will not in itself constitute
the revocation of a proxy. The cost of solicitation of the O'Gara proxies will
be paid by O'Gara. In addition to solicitation by mail, proxies may be solicited
in person by directors, officers and employees of O'Gara without additional
compensation, and by telephone, telegram, teletype, facsimile or similar method.
Arrangements will be made with brokerage houses and other custodians, nominees
and fiduciaries to send proxy material to beneficial owners; and O'Gara will,
upon request, reimburse them for their reasonable expenses in so doing. To the
extent necessary in order to ensure sufficient representation at the O'Gara
Meeting, O'Gara may request by telephone or telegram the return of proxies. The
extent to which this will be necessary depends entirely upon how promptly
proxies are returned.
THE KROLL MEETING
Time and Place; Purpose. The Kroll Meeting will be held at the Kroll
offices, 900 Third Avenue, New York, New York, on December 1, 1997, starting at
11:00 a.m. local time. At the Kroll Meeting, the shareholders of Kroll will be
asked to consider and vote upon the Kroll Proposal and such other matters as may
properly come before the Kroll Meeting.
Voting Rights; Votes Required for Approval. The Kroll Board has fixed the
close of business on October 15, 1997 as the Kroll Record Date. Only holders of
record of shares of Kroll Stock on the Kroll Record Date are entitled to notice
of and to vote at the Kroll Meeting. On the Kroll Record Date, there were 23,100
shares of Kroll Class A Common Stock outstanding and entitled to vote at the
Kroll Meeting held by one shareholder of record, AIG, and 74,446 shares of Kroll
Common Stock outstanding and entitled to vote at the Kroll Meeting held by
approximately 50 shareholders of record.
Each holder of record, as of the Kroll Record Date, of Kroll Stock is
entitled to cast one vote per share. The presence at the Kroll Meeting, in
person or by proxy, of the holders of a majority of the outstanding shares of
Kroll Stock entitled to vote is necessary to constitute a quorum at the Kroll
Meeting.
Under the DGCL, the affirmative vote, in person or by proxy, of the holders
of a majority of the shares of Kroll Stock outstanding on the Kroll Record Date
and entitled to vote on the Kroll Proposal and, in addition, the affirmative
vote of the holders of a majority of the shares of Kroll Class A Common Stock,
are required to approve and adopt the Kroll Proposal.
45
<PAGE> 49
As of the Kroll Record Date, directors and executive officers of Kroll who
will be directors or executive officers of O'Gara after the Merger, as a group,
beneficially owned 60,920 outstanding shares of Kroll Common Stock, or
approximately 81.8% of those shares outstanding on that date, and AIG
beneficially owned all of the outstanding Kroll Class A Common Stock. As of the
Kroll Record Date, Jules B. Kroll and AIG owned an aggregate of 82,041 shares of
Kroll Stock, approximately 84.1% of those outstanding. Jules B. Kroll and AIG
have agreed to vote such shares of Kroll Stock in favor of the Kroll Proposal.
Accordingly, it is expected that the Kroll Proposal will be approved regardless
of the votes cast by other holders of Kroll Stock. See "THE MERGER
AGREEMENT -- Stock Agreements."
If fewer shares of Kroll Stock are voted in favor of the Kroll Proposal
than the number required for approval, it is expected that the Kroll Meeting
will be postponed or adjourned for the purpose of allowing additional time for
soliciting and obtaining proxies or additional votes.
HOLDERS OF KROLL STOCK SHOULD NOT SEND ANY CERTIFICATES REPRESENTING KROLL
STOCK TO KROLL OR O'GARA AT THIS TIME. IF THE MERGER IS APPROVED, A LETTER OF
TRANSMITTAL WILL BE MAILED AFTER THE EFFECTIVE TIME TO EACH PERSON WHO WAS A
HOLDER OF OUTSTANDING KROLL STOCK IMMEDIATELY PRIOR TO THE EFFECTIVE TIME. KROLL
SHAREHOLDERS SHOULD SEND CERTIFICATES REPRESENTING KROLL STOCK TO THE TRANSFER
AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE WITH, THE INSTRUCTIONS
CONTAINED IN THE LETTER OF TRANSMITTAL.
46
<PAGE> 50
MARKET PRICES AND DIVIDENDS
Price Range Of O'Gara Common Stock. Following the Offering at $9.00 per
share, the O'Gara Common Stock commenced trading on the Nasdaq National Market
under the symbol OGAR. The following table sets forth, for the periods
indicated, the high and low sale prices for the O'Gara Common Stock as reported
on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
Fourth Quarter (from November 13, 1996)........... $ 9.750 $ 8.250
1997
First Quarter..................................... $13.250 $ 9.125
Second Quarter.................................... $13.000 $ 9.625
Third Quarter..................................... $16.625 $10.250
Fourth Quarter (through November 5, 1997)......... $18.125 $16.000
</TABLE>
On August 7, 1997, the last full trading date preceding public announcement
of the Merger, the last reported sale price of the O'Gara Common Stock on the
Nasdaq National Market was $12.75 per share. On November 5, 1997, the most
recent practicable date prior to the printing of this Proxy
Statement/Prospectus, the last reported sale price per share of the O'Gara
Common Stock on the Nasdaq National Market was $18.00. As of the O'Gara Record
Date, there were approximately 62 record holders of the outstanding shares of
O'Gara Common Stock.
Kroll Stock. There is no established market for the Kroll Stock.
HOLDERS OF KROLL STOCK AND O'GARA COMMON STOCK ARE URGED TO OBTAIN CURRENT
MARKET QUOTATIONS FOR O'GARA COMMON STOCK PRIOR TO MAKING ANY DECISION WITH
RESPECT TO THE MERGER.
Dividend Policy. O'Gara anticipates that any future earnings will be
retained to finance O'Gara's operations and for the growth and development of
its business. Accordingly, O'Gara does not anticipate paying cash dividends on
O'Gara Common Stock in the foreseeable future. Additionally, the terms of
O'Gara's Senior Notes and the credit agreement with its bank require maintenance
of certain financial ratios which may limit the funds available for cash
dividends. If and when permitted, the payment of any future dividends will be
subject to the discretion of the O'Gara Board and will depend on O'Gara's
results of operations, financial position and capital requirements, general
business conditions, restrictions imposed by financing arrangements, if any,
legal restrictions on the payment of dividends and other factors the O'Gara
Board deems relevant.
47
<PAGE> 51
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below with respect to
O'Gara's consolidated statements of operations for each of the three years in
the period ended December 31, 1996, and with respect to O'Gara's consolidated
balance sheets at December 31, 1995 and 1996, are derived from the audited
consolidated financial statements of O'Gara, which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report
included elsewhere in this Proxy Statement/Prospectus. The selected historical
financial data set forth below with respect to O'Gara's consolidated statement
of operations for the year ended December 31, 1993 and with respect to O'Gara's
consolidated balance sheet at December 31, 1994 are derived from the audited
consolidated financial statements of O'Gara which have been audited by Arthur
Andersen LLP, independent public accountants, not included in this Proxy
Statement/Prospectus. The selected historical financial data set forth below
with respect to O'Gara's consolidated balance sheets at December 31, 1992 and
1993 and O'Gara's consolidated statement of operations for the year ended
December 31, 1992 are derived from the unaudited consolidated financial
statements. The selected historical financial data set forth below with respect
to the consolidated statement of operations of Kroll for the period ended
December 31, 1996 and with respect to Kroll's consolidated balance sheet at
December 31, 1996 are derived from the audited consolidated financial statements
of Kroll which have been audited by Deloitte & Touche LLP, independent public
accountants, as indicated in their report included elsewhere in this Proxy
Statement/Prospectus. The selected historical financial data set forth below
with respect to the consolidated statements of operations of Kroll for each of
the two years in the period ended December 31, 1995 and with respect to Kroll's
consolidated balance sheet at December 31, 1995 are derived from the audited
consolidated financial statements of Kroll which have been audited by KPMG Peat
Marwick LLP, independent public accountants, as indicated in their report
included elsewhere in this Proxy Statement/Prospectus. The selected historical
financial data set forth below with respect to the consolidated statement of
operations of Kroll for the year ended December 31, 1993 and with respect to
Kroll's consolidated balance sheets at December 31, 1993 and 1994 are derived
from audited consolidated financial statements of Kroll not included herein. The
summary historical combined financial data presented for Kroll in 1992 is that
of KAI. Kroll Holdings, Inc. commenced operations in June 1993.
The selected historical financial data for O'Gara for the six months ended
June 30, 1996 and 1997 are derived from the unaudited consolidated financial
statements of O'Gara included elsewhere in this Proxy Statement/Prospectus. The
selected historical financial data for Kroll for the six months ended June 30,
1996 and 1997 are derived from the unaudited consolidated financial statements
of Kroll included elsewhere in this Proxy Statement/Prospectus. In each case,
the unaudited consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, that each company considers
necessary for a fair presentation of the financial position and results of
operations for the periods presented.
Operating results for O'Gara for the six months ended June 30, 1997 and for
Kroll for the six months ended June 30, 1997 are not necessarily indicative of
the results that may be expected for the entire year or future periods.
The data set forth below is qualified by reference to, and should be read
in conjunction with, the related consolidated financial statements and the notes
related thereto and "O'GARA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," and "KROLL MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
48
<PAGE> 52
O'GARA SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
TWELVE MONTHS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997(3)
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $16,860 $21,054 $33,912 $32,817 $82,778 $41,521 $51,853
Cost of sales........................ 11,511 14,640 24,505 25,237 61,523 31,383 37,484
------- ------- ------- ------- ------- ------- -------
Gross profit..................... 5,349 6,414 9,407 7,580 21,255 10,138 14,369
Selling and marketing expenses....... 2,432 1,933 2,736 3,628 4,810 2,159 3,794
General and administrative
expenses........................... 1,464 3,169 4,441 4,129 7,930 3,286 5,121
------- ------- ------- ------- ------- ------- -------
Operating income (loss).......... 1,453 1,312 2,230 (177) 8,515 4,693 5,454
Interest expense..................... (481) (269) (410) (842) (1,300) (613) (1,404)
Other income (expense), net.......... 92 (81) 60 (103) (38) (78) 329
------- ------- ------- ------- ------- ------- -------
Income (loss) before minority
interest, provision for income
taxes and extraordinary item..... 1,064 962 1,880 (1,122) 7,177 4,002 4,379
Minority interest.................... -- -- -- -- -- -- (74)
------- ------- ------- ------- ------- ------- -------
Income (loss) before provision for
income taxes and extraordinary
item............................. 1,064 962 1,880 (1,122) 7,177 4,002 4,305
Provision for income taxes(1)........ -- -- -- -- 518 -- 1,623
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary
item............................. 1,064 962 1,880 (1,122) 6,659 4,002 2,682
Extraordinary item, net of tax
benefit............................ -- -- -- -- -- -- 194
------- ------- ------- ------- ------- ------- -------
Net income (loss).................... $ 1,064 $ 962 $ 1,880 $(1,122) $ 6,659 $ 4,002 $ 2,488
======= ======= ======= ======= ======== ======= =======
Pro Forma earnings per share(1)...... $ 0.69
==========
Earnings per share................... $ 0.35
=======
Pro Forma weighted average shares
outstanding........................ 6,449,050
=========
Weighted Average shares
outstanding........................ 7,141,389
=========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $(4,468) $(2,238) $(1,999) $(4,094) $ 4,279 $ (616) $32,332
Net property, plant and equipment......... 2,236 2,622 2,945 3,171 4,925 3,669 9,083
Total assets.............................. 10,504 11,372 19,243 27,817 43,938 36,265 89,747
Total debt................................ 4,715 4,752 7,900 12,372 12,241 15,808 41,974
Shareholders' equity (deficit)............ (1,713) (1,023) 1,273 239 12,656 4,016 20,752
</TABLE>
- ---------------
(1) Prior to the Offering, O'Gara's business was conducted by the Related
Corporations, which were combined in the Reorganization on October 28, 1996.
The most significant of the Related Corporations had elected to be treated
as an S Corporation for federal and state income tax purposes, rather than
be taxed at the corporate level. Accordingly, the O'Gara Historical
Financial Data does not contain a provision for income taxes prior to 1996.
The provision for income taxes in 1996 reflects a tax provision for the
period subsequent to the Reorganization.
(2) The pro forma earnings per share present the pro forma effects on the
historical consolidated financial information reflecting certain
transactions as if they occurred on January 1, 1996. The pro forma
adjustments include amortization of intangible assets resulting from the
purchase of net assets of Palmer, the elimination of interest expense
relating to the retirement of bank debt and the application of corporate
income taxes to O'Gara's consolidated income before income taxes at an
effective rate of approximately 40%. See the Consolidated Statements of
Operations and Notes to O'Gara's Consolidated Financial Statements included
elsewhere in this Proxy Statement/Prospectus.
(3) O'Gara completed certain acquisitions in the first quarter of 1997
(including the acquisition of Labbe, which was effective for accounting
purposes on January 1, 1997) and the results of the acquired entities are
included from the effective dates of their respective acquisitions in the
consolidated statement of operations as well as in the consolidated balance
sheet data as of June 30, 1997.
49
<PAGE> 53
KROLL SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
TWELVE MONTHS ENDED DECEMBER 31, (UNAUDITED)
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $57,144 $56,161 $52,872 $53,024 $70,883 $33,374 $36,746
Cost of sales............................. 29,181 31,024 31,684 35,206 47,900 21,772 21,073
------- ------- ------- ------- ------- ------- -------
Gross profit.......................... 27,963 25,137 21,188 17,818 22,983 11,602 15,673
Selling and marketing expenses............ 3,784 4,084 4,700 5,490 4,632 2,097 2,581
General and administrative expenses....... 17,273 16,301 18,076 16,788 18,350 8,689 9,513
------- ------- ------- ------- ------- ------- -------
Operating income (loss)............... 6,906 4,752 (1,588) (4,460) 1 816 3,579
Interest expense.......................... (2,426) (2,423) (2,188) (1,970) (1,840) (950) (783)
Other income (expense), net............... 1,915 515 406 (282) 358 71 (135)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income tax provision
(benefit) and cumulative effect of
accounting
change................................ 6,395 2,844 (3,370) (6,712) (1,481) (63) 2,661
Provision (benefit) for income taxes(1)... 635 7,070 (1,751) (1,298) (679) (57) 1,326
------- ------- ------- ------- ------- ------- -------
Income (loss) before cumulative effect of
accounting change..................... 5,760 (4,226) (1,619) (5,414) (802) (6) 1,335
Cumulative effect of accounting
change(2)............................... -- (295) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ 5,760 $(4,521) $(1,619) $(5,414) $ (802) $ (6) $ 1,335
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
AS OF DECEMBER 31, (UNAUDITED)
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $15,630 $26,158 $16,510 $ 8,181 $ 6,321 $10,257 $ 3,838
Net property, plant and equipment......... 5,075 4,582 4,067 3,705 3,639 3,576 4,227
Total assets.............................. 39,639 48,179 44,659 38,950 37,296 38,703 37,414
Total debt................................ 21,643 20,622 19,666 18,543 15,173 18,124 14,597
Shareholders' equity...................... 5,126 11,362 9,803 4,418 4,212 4,376 3,019
</TABLE>
- ---------------
(1) Prior to 1993, Kroll had elected to be treated as an S Corporation for
federal and state income tax purposes and as such, income was allocable to
its shareholders for income tax purposes, rather than being taxed at the
corporate level. Income tax expense reflected in the consolidated statement
of operations for the year ended December 31, 1992 relates to those
jurisdictions which did not recognize Kroll's S Corporation status. During
1993, Kroll changed its tax filing status from an S to a C Corporation. The
deferred tax liability resulting from this tax status change has been
included in income tax expense for the year ended December 31, 1993.
(2) Effective January 1, 1993, Kroll adopted SFAS 109 and reported the
cumulative effect of a change in the method of accounting for income taxes
in the 1993 consolidated statement of operations.
(3) The summary historical combined financial data presented for Kroll in 1992
is that of KAI. Kroll Holdings, Inc. commenced operations in June 1993.
50
<PAGE> 54
O'GARA MANAGEMENT'S 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 O'Gara's Consolidated
Financial Statements and Notes thereto, the selected consolidated financial data
and other financial data appearing elsewhere in this Proxy Statement/Prospectus.
GENERAL.
O'Gara is a leading provider of ballistic and blast protected armoring
systems for commercial and military vehicles, aircraft and missile components.
These products are provided through O'Gara's principal subsidiary O'Gara-Hess &
Eisenhardt Armoring Company ("OHE") and certain other subsidiaries or divisions
which constitute its Security Hardware Products Group. Through O'Gara Satellite
Networks Limited ("OSN") and its other subsidiaries which constitute its
Security Systems Integration Group, O'Gara provides integrated satellite
communications systems to commercial and governmental clients and integrated
site protection security systems. In 1996, O'Gara began offering
security-related services, such as advanced driver training, background
clearances, business intelligence, country risk assessments, forensic auditing,
and force protection consulting through certain subsidiaries or divisions which
constitute its Security Services Group.
On November 15, 1996, O'Gara sold to the public 2,000,000 shares of O'Gara
Common Stock at $9.00 per share. On December 16, 1996, O'Gara sold an additional
48,000 shares under a partial exercise of the underwriters' over-allotment
option. The net proceeds from the Offering were used to finance certain
distributions to existing shareholders, to acquire O'Gara's leased Mexico City
manufacturing facility, and to pay initial installments for the acquisition of
Palmer. The balance of the proceeds was used to repay a portion of the
indebtedness of O'Gara.
On October 29, 1996, O'Gara acquired substantially all the assets of Palmer
of Mexico City, Mexico, for $1.2 million (including $0.2 million for a
non-competition agreement), most of which is payable over two years. Palmer is a
provider of security services such as advanced driver training, background
investigations, due diligence reports and forensic auditing, and reports its
revenue through O'Gara's Security Services Group. This acquisition provides an
entry into the security services industry and allows O'Gara's Mexico City based
subsidiary to offer an integrated line of security products.
On February 5, 1997, O'Gara completed the acquisition of all of the shares
of Next Destination of Salisbury, the United Kingdom, a distributor of high
technology products for the global positioning satellite and satellite
communication markets. The aggregate purchase price (including the value of
shares of O'Gara Common Stock) was approximately $3.5 million, consisting of
170,234 shares of O'Gara Common Stock (valued at approximately $1.9 million, or
$10.88 per share) and $1.6 million in seller-provided financing in the form of
secured three-year 6% promissory notes. Next Destination, which sells portable
satellite terminals offered by O'Gara, reports revenue through O'Gara's Security
Systems Integration Group.
On February 12, 1997, O'Gara completed the acquisition of all of the shares
of Labbe, a leading armorer of commercial and private vehicles headquartered in
Lamballe, France. The aggregate purchase price (including the value of shares of
O'Gara Common Stock) was approximately $14.2 million, consisting of $10.7
million in cash and 376,597 shares of O'Gara Common Stock (valued at
approximately $3.5 million, or $9.29 per share). For accounting purposes, the
acquisition was effective on January 1, 1997 and the results of operations of
Labbe are included in the consolidated results of operations of the Company from
that date forward. The acquisition of Labbe has increased substantially the
level of commercial revenue generated by the Security Hardware Products Group
and enhanced O'Gara's competitive position due to an expanded product line,
which includes cash-in-transit vehicles and commercial truck bodies, and
penetration into new markets, such as Europe and Africa.
On March 24, 1997, O'Gara completed the acquisition of all of the shares of
ITI, a provider of advanced security training headquartered near Washington,
D.C. The aggregate purchase price (including the value of shares of O'Gara
Common Stock) was approximately $2.5 million, consisting of $0.5 million in
cash, 68,086 shares of O'Gara Common Stock (valued at $0.8 million, or $11.89
per share) and $1.2 million in seller-provided financing in the form of
unsecured two-year 10% promissory notes. ITI, which reports revenue through
O'Gara's
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<PAGE> 55
Security Services Group, offers many new products, such as evasive and defensive
driver training, terrorist surveillance training, force protection consulting
and advanced weapons training not previously available from O'Gara.
IMPACT ON OPERATIONS
O'Gara's operations have been or will be affected by several factors,
including: (i) revenue recognition and (ii) provision for income taxes in
connection with the termination of OHE's S Corporation status.
Revenue recognition. O'Gara's net sales from government contracts and most
commercial contracts are recognized using the percentage-of-completion method
calculated utilizing the cost-to-cost approach. Under this method, estimated
contract revenues are accrued based generally on the percentage that costs to
date bear to total estimated costs. Estimated contract losses are recognized in
full when determined. Accordingly, contract revenues and total cost estimates
are reviewed and revised periodically as the work progresses and as change
orders are approved, and adjustments based upon the percentage of completion are
reflected in contract revenues in the period when such estimates are revised. To
the extent that these adjustments result in an increase, a reduction or an
elimination of previously reported contract revenues, O'Gara would recognize a
credit or a charge against current earnings, which could be material. Contract
costs include all direct material and labor costs, along with certain overhead
costs allocated to contract production.
Provisions for any estimated total contract losses on uncompleted contracts
are recorded in the period in which it is concluded that such losses will occur.
Changes in estimated total contract costs will result in revisions to contract
revenue. The 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.
Provision for income taxes. From 1988 until October 28, 1996, OHE was
treated as an S Corporation under Subchapter S of the Code and comparable
provisions of certain state tax laws. As a result, it paid no federal or state
income tax. O'Gara is a C Corporation and is responsible for federal and state
income taxes.
52
<PAGE> 56
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Security hardware products:
Military.................... 50.1% 45.6% 66.0% 72.4% 37.3%
Commercial.................. 48.6 48.2 22.1 18.4 45.6
Security systems
integration................. 1.3 6.2 11.8 9.2 15.1
Security services............. -- -- 0.1 -- 2.0
----- ----- ----- ----- -----
Total net sales..... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................. 72.3 76.9 74.3 75.6 72.3
----- ----- ----- ----- -----
Gross profit........ 27.7 23.1 25.7 24.4 27.7
Operating expenses:
Selling and marketing....... 8.1 11.0 5.8 5.2 7.3
General and
administrative........... 13.1 12.6 9.6 7.9 9.9
----- ----- ----- ----- -----
Operating income (loss)....... 6.5 (0.5) 10.3 11.3 10.5
Other income (expense):
Interest expense............ (1.2) (2.6) (1.6) (1.5) (2.6)
Other, net.................. 0.2 (0.3) -- (0.2) 0.5
----- ----- ----- ----- -----
Income (loss) before minority
interest, provision for
income taxes and
extraordinary item.......... 5.5 (3.4) 8.7 9.6 8.4
Minority interest............. -- -- -- -- 0.1
Provision for income taxes.... -- -- 0.6 -- 3.1
Extraordinary item, net of tax
benefit..................... -- -- -- -- 0.4
----- ----- ----- ----- -----
Net income (loss)............. 5.5% (3.4)% 8.0% 9.6% 4.8%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net sales. O'Gara's net sales in the first half of 1997 increased to $51.9
million, compared to $41.5 million for the first half of 1996, an increase of
25%. The increase in revenue, both in commercial armoring and overall, was due
primarily to the inclusion of operating results from acquisitions made by O'Gara
in the first quarter of 1997 (the "Acquisitions"), along with continued growth
in O'Gara's start-up operations, especially in Brazil and Mexico, partially
offset by a decrease in net sales of military products due to a return to more
normal levels of military production. The results of the entities acquired in
the Acquisitions are included from the effective dates of their respective
acquisition.
Net sales for the Security Hardware Products Group for the six months ended
June 30, 1997 were $43.0 million. This represented an increase of $5.3 million,
or 14%, over the six month period ended June 30, 1996. For the six months ended
June 30, 1997, net sales of commercial armoring products increased $16.1
million, or 210%, from $7.6 million to $23.7 million over the same period in
1996, and net sales of military products decreased $10.7 million, or 36%, from
$30.0 million to $19.3 million. The 1996 net sales of military products were
favorably affected by a request by the U.S. Government to accelerate the
armoring of HMMWVs and the manufacture of HMMWV armor kits. HMMWV armoring by
the Company returned to a non-accelerated level in 1997. In addition, the
acceleration of the HMMWV contract led to abnormally low levels of revenue in
commercial armoring in the second quarter of 1996 due to the diversion of the
workforce necessary to complete the military production schedule. Commercial
armoring at the affected subsidiaries returned to more normal levels in 1997.
For the six months ended June 30, 1997, net sales for the Security Systems
Integration Group were $7.8 million, an increase of $4.0 million or 104%, from
$3.8 million for the same period in 1996. This increase was
53
<PAGE> 57
due to the acquisition of Next Destination in the first quarter of 1997, along
with the continued development of security integration operations put in place
in 1996.
Net sales for the Security Services Group were $1.0 million for the six
months ended June 30, 1997. There were no net sales for the Security Services
Group in the first half of 1996. Revenue for 1997 is attributable to the
acquisition of Palmer in the fourth quarter of 1996 and ITI in the first quarter
of 1997.
Cost of sales. For the six months ended June 30, 1997, cost of sales
increased $6.1 million, or 19%, from $31.4 million in the six months ended June
30, 1996 to $37.5 million. The increase in cost of sales was due to increased
activity resulting from the Acquisitions.
Gross profit as a percentage of net sales was 27.7% for the six months
ended June 30, 1997, as compared to 24.4% for the same period in 1996. As
contracts are completed under percentage of completion accounting, actual cost
and gross profit may be revised from previously estimated amounts as a result of
O'Gara's performance in completing the requirements of each contract. Gross
profit was favorably affected in the six months ended June 30, 1997 by
adjustments resulting from contracts completed.
O'Gara continues to expect that future margin percentages will be higher
than experienced in 1995 and 1996 due to the effect of increased sales from
foreign subsidiaries and a more favorable mix of commercial revenue in
comparison with military revenue; however, it does not, in future periods,
expect to maintain the level of gross margin as a percentage of sales reached in
the first half of 1997.
Operating expenses. In the six months ended June 30, 1997, operating
expenses increased from $5.4 million in the six months ended June 30, 1996 to
$8.9 million, an increase of $3.5 million, or 64%. The dollar increase was
primarily attributable to an increased level of overhead expenses included in
O'Gara's operations resulting from the Acquisitions. Additionally, O'Gara
experienced an increase, from 13.1% in the first half of 1996 to 17.2% in the
first half of 1997, in the percentage of operating expenses compared to net
sales. This increase was primarily attributable to overhead put in place
throughout the organization to ensure the growth in commercial revenue seen in
1997, including investments made in its foreign subsidiaries. In addition,
corporate overhead requirements contributed to the increase. O'Gara currently
expects that total operating expenses will show an increase in 1997 in
comparison to 1996.
Interest expense. For the six months ended June 30, 1997, interest expense
increased $0.8 million, or 129%, to $1.4 million from $0.6 million for the same
period in 1996. The increase was a result of the financing to fund the
Acquisitions along with an increased amount of outstanding borrowings as result
of the sale of the Senior Notes (see "-- Liquidity and Capital Resources").
O'Gara expects interest expense will continue to be significantly higher in 1997
compared to 1996.
Other, net. Other, net income (expense) for the six months ended June 30,
1997 was $0.3 million of income, an increase of $0.4 million from the same
period in 1996. In the six months ended June 30, 1997, other, net income
(expense) includes the effect of an agreement reached by O'Gara with
International Electronics Engineering ("IEE") to sell O'Gara's exclusive rights
to distribute IEE's Passenger Presence Detection sensors in the North American
automotive market. These distribution rights, which sold for $0.4 million, gave
O'Gara the exclusive right to seek additional customers and receive commissions
based on sales of sensors designed to prevent automotive airbags from inflating
when an infant is in the front seat.
Income before provision for income taxes and extraordinary item. For the
six months ended June 30, 1997, income before provision for income taxes and
extraordinary item increased $0.3 million, or 8%, to $4.3 million from $4.0
million in the six months ended June 30, 1996. The increase in the net income is
the result of the inclusion of the operating results of the Acquisitions in
1997. The positive effect of the Acquisitions was partially offset by the
completion of the Up-Armored HMMWV acceleration contract in 1996 and subsequent
return to a more normal level of military production in 1997.
As a percent of net sales, income before provision for income taxes and an
extraordinary item decreased from 10% in the six months ended June 30, 1996 to
8% for the six months ended June 30, 1997. This decrease was a result of
operations put in place by O'Gara necessary to attain the growth in commercial
revenue which required the support of a more overhead intensive structure,
including requirements in personnel and facilities.
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<PAGE> 58
Provision for income taxes. The provision for income taxes was $1.6
million for the six months ended June 30, 1997. There was no provision for
income taxes recorded for the six month period ending June 30, 1996 due to OHE's
S Corporation status which was terminated on October 28, 1996 in conjunction
with the Reorganization.
Extraordinary item. As a result of new working capital arrangements put in
place by O'Gara (see "-- Liquidity and Capital Resources"), all prepaid fees
associated with the previous financing arrangements recorded by O'Gara were
charged against earnings as an extraordinary item in the second quarter of 1997.
The amount charged is shown net of applicable tax of $0.1 million.
1996 COMPARED TO 1995
Net sales. Net sales increased $50.0 million or 152.2% from $32.8 million
in 1995 to $82.8 million in 1996. Net sales of the Security Hardware Products
Group were $72.9 million for 1996, with military sales contributing $54.6
million and armored commercial vehicle net sales contributing $18.3 million. The
Security Systems Integration Group had net sales of $9.8 million in 1996
compared to $2.0 million in 1995. Net sales from O'Gara's satellite
communications business increased from $2.0 million in 1995 to $7.8 million in
1996, a change of 280.1%. Net sales of O'Gara's integrated site protection
services were $2.1 million in 1996. The Security Services Group, which commenced
offering services in late 1996, had net sales of $0.1 million for the year.
Although net sales in 1996 reflected the effect of the request to
accelerate Up-Armored HMMWV and HMMWV kit production, production levels and
military net sales figures returned to a non-accelerated level in 1997.
Cost of sales. Cost of sales in 1996 increased $36.3 million, or 143.8%,
from $25.2 million in 1995 to $61.5 million. The increase in cost of sales was
due to the increase in production levels. Gross profit as a percentage of net
sales was 25.7% for the year ended December 31, 1996 as compared to 23.1% for
the year ended December 31, 1995. Revenue recognized on new military contracts,
both U.S. and foreign, with a higher gross profit percentage than previously
experienced, contributed to the increase in gross profit percentage. O'Gara will
continue to pursue opportunities for sales of its military products. No
assurance can be given, however, that any new contract will contribute at the
gross profit level experienced in 1996. In general, the gross profit percentage
recognized on military contracts is lower than gross profit percentage
recognized on commercial contracts.
Gross profit percentage was favorably affected by an increase in net sales
from foreign subsidiaries, both in O'Gara's Security Hardware Products Group and
Security Systems Integration Group, where the gross profit percentages are
higher than have been experienced in other markets due to lower direct costs and
less developed competition. O'Gara expects the effect of net sales of foreign
subsidiaries to continue to have a positive effect on O'Gara's consolidated
gross margin percent until these markets become more competitive.
Operating expenses. Selling and marketing expenses for 1996 increased $1.2
million, or 32.6%, from $3.6 million in 1995 to $4.8 million. This increase was
primarily attributable to increases in personnel and advertising to implement
O'Gara's business strategy.
General and administrative expenses for 1996 increased $3.8 million, or
92.1%, from $4.1 million in 1995 to $7.9 million. This increase in
administrative expenses was due to the addition of professional employees and
associated infrastructure to support the increased level of business activity.
Both selling and general and administrative expenses will continue to
increase in total dollars as O'Gara acquires new businesses, expands into new
foreign markets and administers a more complex corporate environment.
Interest expense. Interest expense for 1996 was $1.3 million, an increase
of $0.5 million, or 54.4%, compared to $0.8 million for 1995. This was due to
increased borrowings necessary to finance increased production levels and new
operations. As a result of recent acquisitions and O'Gara's continued efforts to
expand into new foreign markets, interest expense will be significantly higher
than it has been in previous years.
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<PAGE> 59
Provision for income taxes. The provision for income taxes was $0.5
million in 1996. There was no provision for income taxes recorded in 1995 due to
OHE's S Corporation status.
1995 COMPARED TO 1994
Net sales. Net sales were $32.8 million for 1995, a decrease of $1.1
million, or 3.2%, compared to $33.9 million for 1994. The decrease in net sales
was primarily due to the late delivery of HMMWV chassis by a supplier which
resulted in a six-month delay in the armoring of HMMWVs for the U.S. Army Tank
and Automotive Armaments Command ("TACOM"). Such delay was principally
responsible for a decrease in net sales of military armoring products from $17.0
million in 1994 to $15.0 million for 1995, a decrease of $2.0 million or 12.0%.
Net sales of commercial armoring products decreased $0.7 million or 4.0% from
$16.5 million in 1994 to $15.8 million for 1995. Net sales of satellite
communications equipment and services increased $1.6 million or 358.3% from $0.4
million in 1994 to $2.0 million in 1995.
Cost of sales. Cost of sales was $25.2 million for 1995, an increase of
$0.7 million, or 3.0%, compared to $24.5 million for 1994. The increase in cost
of sales was primarily due to the absorption of manufacturing and material
overhead associated with the six-month delay in the armoring of the HMMWVs for
TACOM. Since production was expected to return to anticipated levels once the
delay period ended, O'Gara retained its trained manufacturing personnel and did
not temporarily reduce its head count. As a result of this delay and the
increased percentage of sales associated with military sales, which have a lower
gross profit margin than commercial sales, cost of sales as a percentage of net
sales increased to 76.9% for 1995 from 72.3% for 1994. In addition, engineering
expenses for OHE increased approximately $0.5 million to $1.1 million as a
result of the additional engineering requirements for the Up-Armored HMMWV
contract.
Selling and marketing. Selling and marketing expenses were $3.6 million
for 1995, an increase of $0.9 million, or 32.6%, compared to $2.7 million for
1994. This increase was primarily attributable to increased sales personnel and
travel expenses that were incurred to support OSN's growth.
General and administrative. General and administrative expenses were $4.1
million for 1995, a decrease of $0.3 million, or 7.0%, compared to $4.4 million
for 1994. Increases in personnel costs were offset by lower travel and insurance
costs.
Interest expense. Interest expense was $0.8 million for 1995, an increase
of $0.4 million, or 105.4%, compared to $0.4 million for 1994. This increase in
interest expense was due to additional borrowings to finance working capital
growth and the Up-Armored HMMWV contract.
LIQUIDITY AND CAPITAL RESOURCES
General. O'Gara historically has met its operating cash needs by utilizing
borrowings under its credit arrangements to supplement cash provided by net
income and depreciation and amortization.
Senior Notes. The Senior Notes, which were issued June 3, 1997 and mature
May 30, 2004, bear interest at a rate of 9.56%, subject to a step down of the
associated interest rate to a minimum of 8.56% if O'Gara meets certain defined
requirements. The Senior Notes also impose covenant restrictions on O'Gara's
operations, including limitations on dividends and priority debt, and
constraints on specific investments, as well as requirements relating to
O'Gara's reported net worth, fixed charges coverage and limitations on
outstanding debt. Of the $35.0 million in gross proceeds from the sale of the
Senior Notes, $26.2 million was used to pay off the term loan and revolver from
O'Gara's previous credit agreement. The payoff also resulted in the recognition
of an extraordinary charge against earnings for the bank fees associated with
the previous agreement.
Credit Facility. On May 30, 1997, O'Gara entered into a new credit
agreement with KeyBank. The new agreement provides for a revolving line of
credit of $4.5 million and a letter of credit facility of approximately $5.7
million. The revolving credit facility bears interest at the prime rate less
0.5%, or, at O'Gara's option, the LIBOR rate plus 2.0%. The credit agreement
also imposes requirements on O'Gara's reported fixed charge coverage ratio, net
worth and debt capitalization, along with certain restrictions on investments,
acquisitions and capital expenditures. To finance a portion of the costs of the
Merger, O'Gara expects to enter into an amended and
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<PAGE> 60
restated credit facility with KeyBank, which will provide for a $7.0 million
term loan, a $7.0 million revolving credit loan and a $6.0 million standby
letter of credit facility. See "THE MERGER -- Financing the Merger."
The new credit agreement replaced a previous arrangement O'Gara entered
into on February 11, 1997, with The Fifth Third Bank and LaSalle National Bank.
The previous arrangement provided for (i) a one-year revolving line of credit of
up to $12.0 million, (ii) a five-year term loan in the amount of $16.0 million,
and (iii) a $5.5 million letter of credit facility.
On September 8, 1997, there were no borrowings outstanding under the new
revolving credit agreement. O'Gara believes that proceeds from the sale of the
Senior Notes and borrowings under the new credit facility and the term loan
facility, along with cash provided by net income and depreciation and
amortization, will be sufficient to fund O'Gara's operating cash requirements
for the next 12 months. O'Gara continues to review strategic opportunities and
other sources of working capital.
Cash flows from operating activities. Net cash used in operating
activities was $6.3 million and $1.2 million for the six months ended June 30,
1997 and 1996, respectively. This change was primarily due to increases in
accounts receivable as a result of the growth in business activity and a
reduction in accrued liabilities resulting from the close-out of certain
contracts with the U.S. Government.
Capital expenditures. Historically, O'Gara has limited its capital
expenditure requirements by leasing certain facilities and equipment. Capital
expenditures totaled $1.1 million for the six months ended June 30, 1997, and
$0.8 million for the same period in 1996. The new credit agreement limits annual
capital expenditures.
In addition to capital expenditures, O'Gara also used $7.6 million in net
cash in connection with the acquisition of Labbe and ITI in the first quarter of
1997.
Cash flows from financing activities. Net cash provided by financing
activities was $24.4 million and $3.1 million for the six months ended June 30,
1997 and 1996, respectively. The increase in 1997 was due primarily to issuance
of the Senior Notes executed in the second quarter of 1997.
Foreign operations. O'Gara attempts to mitigate the risks of doing
business in foreign developing countries by separately incorporating its
operations in such countries; entering into contracts providing for payment in
U.S. dollars instead of the local currency in certain instances; maintaining
reserves for credit losses; and maintaining insurance on equipment to protect
against losses related to political risks and terrorism. In addition, O'Gara
will, from time to time, attempt to mitigate the risk of doing business in a
foreign currency by utilizing futures contracts and other derivative financial
instruments. O'Gara has not experienced a material impact on its results of
operations, liquidity or financial position as a result of its investment in
such contracts and instruments.
Quarterly fluctuations. O'Gara'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, such as
occurred with the HMMWV contract in 1996. O'Gara's liquidity may be affected by
the payment terms of its contracts, including those with TACOM and certain
foreign governments.
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<PAGE> 61
RECENT DEVELOPMENTS -- O'GARA
The following table sets forth certain selected financial data for O'Gara
for the three and nine month periods ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
O'GARA SELECTED HISTORICAL FINANCIAL DATA
(dollars in thousands except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997(2) 1997(2)
------- 1996 ------- 1996
---------- ----------
PRO PRO
FORMA(1) FORMA(1)
<S> <C> <C> <C> <C>
Net Sales............................. $30,713 $ 18,804 $82,567 $ 60,325
Gross Profit.......................... $ 8,254 $ 5,121 $22,623 $ 15,260
Net Income............................ $ 1,694(3) $ 1,147 $ 4,181(3) $ 3,600
Earnings per share.................... $ 0.23 $ 0.18 $ 0.58 $ 0.57
</TABLE>
- ---------------
(1) Prior to the Offering, O'Gara's business was conducted by the Related
Corporations, which were combined in the Reorganization on October 28, 1996.
The most significant of the Related Corporations had elected to be treated
as an S Corporation for federal and state income tax purposes, rather than
be taxed at the corporate level. The 1996 net income and earnings per share
present the pro forma effects on the historical consolidated financial
information reflecting certain transactions resulting from the Offering as
if they occurred on January 1, 1996. The pro forma adjustments include
amortization of intangible assets resulting from the purchase of net assets
of Palmer, the elimination of interest expense relating to the retirement of
bank debt and the application of corporate income taxes to O'Gara's
consolidated income before income taxes at an effective rate of
approximately 40%. See the Consolidated Statements of Operations and Notes
to O'Gara's Consolidated Financial Statements included elsewhere in this
Proxy Statement/Prospectus.
(2) O'Gara completed certain acquisitions in the first quarter of 1997
(including the acquisition of Labbe, which was effective for accounting
purposes on January 1, 1997) and the results of the acquired entities are
included from the effective dates of their respective acquisitions in the
consolidated statement of operations.
(3) Operating expenses for 1997 include a provision of $0.1 million ($0.01 per
share) in connection with the settlement of the litigation described in
"BUSINESS OF O'GARA -- Legal Proceedings."
Operating results for O'Gara for the three months and nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year or future periods.
On October 30, 1997, an O'Gara subsidiary entered into a letter of intent
to acquire all of the capital stock of Imea, a Russian corporation ("Imea"), and
substantially all of the assets of Acorn Communications Group, Inc., a
Massachusetts corporation ("Acorn"), for $3.1 million, consisting of $2.5
million in O'Gara Common Stock and $0.5 million cash at closing, and $0.1
million in cash payable over the six months commencing January 1, 1998. The
transactions, subject to completion of due diligence and execution of definitive
agreements, are expected to close early in December, 1997.
Imea and Acorn are engaged in the business of selling cash-in-transit
("CIT") vehicles and other commercial bank equipment such as safes, money
counters, and counterfeit detectors throughout Russia. Imea recently began
producing and armoring its own CIT vehicle based on a Russian patent which
allows the conversion of a Ford F-150 chassis into a CIT vehicle. Imea operates
from two locations in Moscow, including a manufacturing and service facility.
Acorn, with an office in Newton, Massachusetts, conducts most of its business
through its representative office in Moscow.
Michael Dubinsky, founder and controlling shareholder of both companies,
will enter into employment and non-competition contracts with a subsidiary of
O'Gara. O'Gara's objective in this acquisition included securing experienced
senior management for its Russian business. In the aggregate, Imea and Acorn had
sales of approximately $8.0 million in 1996 and are profitable.
58
<PAGE> 62
KROLL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of Kroll is based upon and should be read in conjunction with Kroll's
Consolidated Financial Statements and Notes thereto, the selected consolidated
financial data and other financial data appearing elsewhere in this Proxy
Statement/Prospectus.
GENERAL
Kroll believes that it is the largest company in the world providing a
broad array of corporate investigation, risk and crisis management and business
intelligence services on an international basis. See "BUSINESS OF KROLL."
Kroll's results of operations are based primarily on net sales generated
from fees it charges for corporate investigation services, risk and crisis
management services and business intelligence services. Kroll generally does not
have long term contracts with its clients and its ability to generate net sales
is dependent upon obtaining many new projects each year, most of which are of
relatively short duration. As a result, Kroll's net sales and net income from
year to year are not necessarily predictable and historically there has not been
a consistent year-to-year pattern of growth. See "RISK FACTORS -- Risk Factors
Relating to the Business of Kroll -- Fluctuations in Operating Results."
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, (UNAUDITED)
--------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net sales............................................... $33,374 $36,746
Cost of sales........................................... 21,772 21,073
Selling expenses........................................ 2,097 2,581
General and administrative expenses..................... 8,689 9,513
Interest expense........................................ 950 783
Other income (expense), net............................. 71 (135)
Income (loss) before provision (benefit) for taxes...... (63) 2,661
Provision (benefit) for taxes........................... (57) 1,326
Net income (loss)....................................... $ (6) $ 1,335
</TABLE>
Net sales. Net sales increased approximately $3.4 million, or 10%, from
$33.4 million for the six months ended June 30, 1996 to $36.7 million for the
six months ended June 30, 1997. This increase was primarily caused by increases
in net sales of Kroll's corporate investigation and business intelligence
services. Net sales increases for Kroll's services in Asia, Europe and Latin
America were partially offset by a decline in net sales of services in North
America.
Cost of sales. Cost of sales decreased approximately $0.7 million, or
3.2%, from $21.8 million for the six months ended June 30, 1996 to $21.1 million
for the six months ended June 30, 1997. This decrease was principally caused by
a write-off of approximately $2.5 million in uncollectible receivables in 1996
relating to services performed in earlier periods. Adjusted for this write-off,
cost of sales would have been 57.8% of net sales for the six months ended June
30, 1996 compared with 57.4% for the same period of 1997, resulting in a
comparable gross profit percentage of approximately 42.5% for both periods.
Kroll also added 34 professional staff members. In the short term, this increase
in staffing has resulted in certain training and orientation costs which have
caused a nominal increase in the cost of sales during the first six months of
1997.
Selling expenses. Selling expenses increased approximately $0.5 million,
or 23%, from $2.1 million for the six months ended June 30, 1996 to $2.6 million
for the six months ended June 30, 1997. This increase was primarily caused by an
increase in personnel, principally temporary employees utilized for special
selling activities, and advertising expenses during the first six months of
1997.
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<PAGE> 63
General and administrative expenses. General and administrative expenses
increased approximately $0.8 million, or 9.5%, from $8.7 million for the six
months ended June 30, 1996 to $9.5 million for the six months ended June 30,
1997. This increase was caused by personnel additions and an increase in other
expenses and equipment necessary to support increased business levels. Examples
of such additional expenses include an increase in rental expenses resulting
from the opening of offices in Singapore, Chicago, Illinois and Frankfurt,
Germany.
Interest expense. Interest expense decreased approximately $0.2 million or
17.6% from $1.0 million for the six months ended June 30, 1996 to $0.8 million
for the six months ended June 30, 1997. This was caused by a decrease in overall
debt to $14.6 million resulting from payment of the scheduled annual principal
debt service.
Other income (expense), net. Other income (expense), net, decreased $0.2
million from $0.1 million of income for the six months ended June 30, 1996 to
$0.1 million of expense for the six months ended June 30, 1997. This decrease
was caused by realized foreign currency transaction losses.
Income (loss) before provision (benefit) for taxes. Income (loss) before
provision (benefit) for taxes changed $2.8 million from a $0.1 million loss for
the six months ended June 30, 1996 to income of $2.7 million for the six months
ended June 30, 1997. This increase was primarily caused by increased net sales
and the approximate $2.5 million write-off of accounts receivable in the 1996
period which did not recur in the first six months of 1997.
Provision (benefit) for taxes. Provision (benefit) for taxes increased
approximately $1.4 million from a benefit of $0.1 million for the six months
ended June 30, 1996 to a provision of $1.3 million for the six months ended June
30, 1997. This increase was attributable to increased operating profits.
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
---------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net sales.............................................. $53,024 $70,883
Cost of sales.......................................... 35,206 47,900
Selling expenses....................................... 5,490 4,632
General and administrative expenses.................... 16,788 18,350
Interest expense....................................... 1,970 1,840
Other income (expense), net............................ (282) 358
(Loss) before provision (benefit) for taxes............ (6,712) (1,481)
Provision (benefit) for taxes.......................... (1,298) (679)
Net (loss)............................................. $(5,414) $ (802)
</TABLE>
Net sales. Net sales increased approximately $17.9 million, or 33.7%, from
$53.0 million for the year ended December 31, 1995 to $70.9 million for the year
ended December 31, 1996. This increase was primarily due to an increase in net
sales of all of Kroll's services, particularly sales of services in North
America and principally the corporate investigations and business intelligence
services, which increased $12.3 million and $4.0 million, respectively. Kroll's
recently introduced Vendor Integrity Program (VIP) accounted for approximately
$1.0 million of the increase in net sales in 1996.
Cost of sales. Cost of sales increased approximately $12.7 million, or
36.1%, from $35.2 million for the year ended December 31, 1995 to $47.9 million
for the year ended December 31, 1996. Contributing to this increase was a
write-off of approximately $5.0 million in uncollectible receivables in 1996
relating to services provided in earlier periods. During 1996, Kroll added 66
professional and administrative staff members. This increase in staff members
was necessary to handle: (i) increased business activity; (ii) Kroll's new VIP
program; and (iii) the opening of offices in Beijing, China, New Delhi, India
and Sao Paulo, Brazil.
Selling expenses. Selling expenses decreased approximately $0.9 million,
or 15.6%, from $5.5 million for the year ended December 31, 1995 to $4.6 million
for the year ended December 31, 1996. This decrease was
60
<PAGE> 64
primarily attributable to the use of lower cost information services for
pre-marketing purposes during 1996, as well as reduced costs of temporary
personnel who provided services to Kroll during extensive marketing campaigns in
1995.
General and administrative expenses. General and administrative expenses
increased approximately $1.6 million, or 9.3%, from $16.8 million for the year
ended December 31, 1995 to $18.4 million for the year ended December 31, 1996.
This increase was caused by $0.5 million of additional rental expenses resulting
from the opening of three offices in Asia and Latin America, increases of
approximately $0.2 million in the costs of certain consulting services used by
Kroll and $0.9 million of increases related to higher personnel cost and fees
paid to retain consultants under agreements related to security and crisis
management services.
Interest expense. Interest expense decreased approximately $0.2 million,
or 6.6%, from $2.0 million for the year ended December 31, 1995 to $1.8 million
for the year ended December 31, 1996. This was caused by a decrease in overall
debt to $15.2 million resulting from principal payments.
Other income (expense), net. Other income (expense), net, increased
approximately $0.7 million from $0.3 million of expense for the year ended
December 31, 1995 to $0.4 million of income for the year ended December 31,
1996. This increase was primarily caused by a gain on sale of marketable
securities of $0.1 million and realized foreign currency transaction gains of
$0.3 million and a $0.2 million loss associated with certain joint venture
arrangements.
Loss before provision (benefit) for taxes. Loss before provision (benefit)
for taxes increased $5.2 million from a $6.7 million loss for the year ended
December 31, 1995 to a $1.5 million loss for the year ended December 31, 1996.
This increase was primarily caused by the increase in net sales and an improved
gross profit margin in 1996, after adjustment for the write-off of approximately
$5.0 million in accounts receivable in 1996 relating to services performed in
earlier periods.
Provision (benefit) for taxes. Provision (benefit) for taxes decreased
approximately $0.6 million, or 47.7%, from a $1.3 million benefit for the year
ended December 31, 1995 to a $0.7 million benefit for the year ended December
31, 1996. This decrease was attributable to increased operating profits.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................................ $52,872 $53,024
Cost of sales............................................ 31,684 35,206
Selling expenses......................................... 4,700 5,490
General and administrative expenses...................... 18,076 16,788
Interest expense......................................... 2,188 1,970
Other income (expense), net.............................. 406 (282)
(Loss) before provision (benefit) for taxes.............. (3,370) (6,712)
Provision (benefit) for taxes............................ (1,751) (1,298)
Net (loss)............................................... $(1,619) $(5,414)
</TABLE>
Net sales. Net sales increased approximately $0.1 million, or 0.3%, from
$52.9 million for the year ended December 31, 1994 to $53.0 million for the year
ended December 31, 1995. This increase was primarily due to an increase in
Kroll's risk and crisis management services of $2.0 million offset by a decrease
in corporate investigations and business intelligence services of $1.9 million.
Cost of sales. Cost of sales increased approximately $3.5 million, or
11.1% from $31.7 million for the year ended December 31, 1994 to $35.2 million
for the year ended December 31, 1995. This increase was primarily caused by the
increase in the number of professional staff, causing an approximate $2.2
million increase in labor cost. In addition, a special allowance for doubtful
accounts was established for certain old international receivables.
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<PAGE> 65
Selling expenses. Selling expenses increased approximately $0.8 million or
16.8% from $4.7 million for the year ended December 31, 1994 to $5.5 million for
the year ended December 31, 1995. This increase was primarily attributable to
increased personnel costs. In addition, approximately $0.3 million of such
increase resulted from the expanded use of pre-marketing information gathering
in an effort to expand Kroll's corporate client database.
General and administrative expenses. General and administrative expenses
decreased approximately $1.3 million, or 7.1%, from $18.1 million for the year
ended December 31, 1994 to $16.8 million for the year ended December 31, 1995.
This decrease resulted principally from a cost reduction program which
contributed approximately $0.8 million of the decrease. Additionally, a
reduction in certain foreign office rents contributed $0.2 million of the total.
Interest expense. Interest expense decreased approximately $0.2 million,
or 10.0%, from $2.2 million for the year ended December 31, 1994 to $2.0 million
for the year ended December 31, 1995. This decrease resulted from payments of
debt carrying a higher interest rate with the proceeds of loans carrying a lower
interest rate. In addition, overall debt was reduced by $1.1 million.
Other income (expense), net. Other income (expense), net, decreased
approximately $0.7 million from income of $0.4 million for the year ended
December 31, 1994 to $0.3 million of expense for the year ended December 31,
1995. This decrease in other income was primarily caused by a loss from a joint
venture arrangement and the sale of certain accounts receivable at a discount.
Loss before provision (benefit) for taxes. Loss before provision (benefit)
for taxes for the year ended December 31, 1995 was a loss of $6.7 million or a
decrease of $3.3 million over the loss before provision (benefit) for taxes for
the year ended December 31, 1994. This increased loss resulted from the
increased operating and administrative cost incurred in 1995 while net sales
remained flat compared with the prior year.
Provision (benefit) for taxes. Provision (benefit) for taxes benefit
decreased approximately $0.5 million, or 25.9%, from a $1.8 million benefit for
the year ended December 31, 1994 to a $1.3 million benefit for the year ended
December 31, 1995. This decrease was attributable to the provision of certain
tax reserves to cover open tax years and the mix of domestic and foreign source
income.
LIQUIDITY AND CAPITAL RESOURCES
General. Kroll historically has met its operating cash needs by cash
provided from operations, loans from its shareholders and other borrowings.
Shareholder debt at June 30, 1997 consists of $2.0 million principal amount
of indebtedness to AIG which is due on demand and bears interest at an annual
rate 2% in excess of the base rate of Citibank N.A. and $4.4 million due to
Jules B. Kroll. Of the amounts due to Jules B. Kroll, $3.0 million bears
interest at an annual rate 1% in excess of the prime rate and the balance bears
interest at the broker loan rate, currently 7.625% per annum. In addition to its
borrowing from its principal shareholders, Kroll's borrowing consists of a term
debt facility entered into in 1989 in the aggregate principal amount of $20.0
million. See "CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS -- KROLL."
The outstanding balance on this term debt facility at June 30, 1997 was $8.1
million. The term debt facility bears interest at a fixed rate of 10.95% per
annum and provides for quarterly payments of interest and principal. The term
debt facility allows certain prepayments. The term debt facility contains
customary restrictive covenants which limit, among other items, Kroll's ability
to pay cash dividends, make cash distributions and incur additional
indebtedness. The term debt facility also requires that Kroll maintain certain
financial ratios. Compliance with certain of these covenants has been waived
through December 1, 1997. It is anticipated that this term debt facility will be
repaid upon the consummation of the Merger and that O'Gara will be required to
obtain sufficient alternative financing for Kroll.
Cash flows from operating activities. Kroll expects that it will be able
to meet its routine cash requirements from cash generated from operations. Net
cash provided by operating activities was $1.7 million, $8.1 million and $5.3
million for the years ended December 31, 1995 and 1996 and the six months ended
June 30, 1997, respectively.
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<PAGE> 66
Capital expenditures. Kroll has limited its capital expenditure
requirements by leasing its office facilities and computer equipment. Kroll
anticipates that it will be able to provide for any capital expenditures from
funds generated from operations. Capital expenditures totaled $0.5 million for
the year ended December 31, 1995, and $0.7 million for the year ended December
31, 1996.
Foreign operations. Kroll attempts to mitigate against the risks of doing
business in foreign countries by separately incorporating its operations in such
countries, transacting business in the local currency and maintaining, on a
global basis, insurance to cover professional liability and general liability,
in addition to local insurance coverage. Kroll has not used hedging instruments,
including, but not limited to, derivatives, to mitigate against the risk of
currency fluctuations arising from its business activities in foreign countries.
See "RISK FACTORS -- Risk Factors Relating to the Business of Kroll -- Political
and Economic Risks of Doing Business Outside of the United States."
Quarterly fluctuations. Kroll's operations are not seasonal, but may
fluctuate on a quarterly basis as a result of the transactional nature of a
significant portion of its business. See "RISK FACTORS -- Risk Factors Relating
to the Business of Kroll -- Fluctuations in Operating Results."
Inflation. Inflation has not been a significant factor to the results of
operations of Kroll. Kroll generally has been able to pass on the cost of
inflation to its clients.
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<PAGE> 67
BUSINESS OF O'GARA
GENERAL
O'Gara is a worldwide integrated security company with three business
lines: security hardware products, security services and security systems
integration services. The Security Hardware Products Group markets all of
O'Gara's armoring products, including ballistic and blast protected armoring
systems for commercial and military vehicles, aircraft and missile components
through O'Gara's various O'Gara Hess & Eisenhardt Armoring subsidiaries and
Labbe. The Security Services Group offers security-related products and services
such as, advanced driver training, background clearances, business intelligence,
country risk assessments, forensic auditing and force protection consulting
through its Palmer division and its subsidiaries, ITI and O'Gara Security
Associates, Inc. ("OSA"). The Security Systems Integration Group offers
planning, design and hardware and software integration services which are
customized to meet specific portable satellite communications or navigation
needs of customers, as well as customized turn-key site security systems to
international customers, through its O'Gara Security International, Inc.
("OSI"), OSN and Next Destination subsidiaries.
Originally founded in 1876 as Sayers & Scovil, a manufacturer of
horse-drawn carriages, O'Gara evolved into a producer of specialized motor
vehicles. By the early 1900s, O'Gara changed its ownership and name to Hess &
Eisenhardt and focused on the development and construction of a broad range of
specialized consumer and commercial vehicles such as ambulances and hearses. In
the 1940s, O'Gara was commissioned by the U.S. Secret Service to design and
assemble the first armored presidential limousine which was used by President
Harry S Truman. O'Gara's Labbe subsidiary has protected every French president
since 1981. Labbe is the first and only armoring company to serve the French
presidency.
O'Gara now provides armored commercial vehicles for heads of state,
business executives and VIPs worldwide. Since 1993, O'Gara also has been the
primary provider of armoring systems for HMMWVs used by the U.S. Military and
other armed forces. O'Gara began offering satellite communication products in
1994 and site protection products and services in 1996 and, also in 1996, began
its expansion into other security-related services.
O'Gara's business today is increasingly being driven by the needs of (i)
multinational corporations to protect executives, corporate assets and
information in high risk countries; (ii) wealthy individuals to secure
themselves and their families from the growing threat of kidnappings worldwide;
(iii) worldwide military organizations to field a more versatile armored
vehicle, such as the HMMWV; (iv) governments to protect heads of state and
diplomats from terrorist attacks; (v) individuals to insulate themselves and
their property from planned criminal activity and random acts of violence; and
(vi) individuals, corporations and governments to obtain secure, remote or
independent telecommunications services.
BUSINESS STRATEGY
The principal elements of O'Gara's operating and growth strategy are as
follows:
Expand armored commercial vehicle sales in foreign markets. O'Gara intends
to expand its foreign market position as a leading provider of armored
commercial vehicles by leveraging its well recognized name, high quality
reputation and global network of customer relationships. To support this effort,
O'Gara acquired Labbe and established manufacturing operations in Brazil,
Mexico, the Philippines and Russia, has increased its sales and marketing
professionals from four at October 1985 to 39 at present and increased its
annual marketing budget from $0.7 million in 1995 to $1.6 million in 1997.
O'Gara believes that these efforts, coupled with the strong global demand for
armored commercial vehicles, will enable it to penetrate effectively these and
other markets. In the future, O'Gara intends to establish manufacturing
operations in additional countries as it deems appropriate.
Grow non-armoring security-related businesses. O'Gara's Security Services
Group offers security-related products and services such as site protection
surveys, business intelligence and investigation services, country risk
assessments and briefings, and forensic auditing. In addition, O'Gara offers a
wide range of sophisticated state-of-the-art training services including
advanced driver and protective operations training, force protection training
and consulting, crisis management training and advanced counterintelligence and
information security training.
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<PAGE> 68
O'Gara, in 1997, acquired all of the shares of ITI, a leading domestic provider
of advanced driver training and other security services, and substantially all
of the assets of Palmer, a provider of driving training, business intelligence
and forensic auditing in Mexico.
O'Gara's Security Systems Integration Group is building on its rapidly
growing satellite communication and navigation business by offering a broader
array of products and services to existing hardware customers and to buyers in
new geographic markets. In order to expand the distribution channels for
O'Gara's telecommunication products, O'Gara acquired all of the shares of Next
Destination, a U.K. company headquartered in Salisbury, the United Kingdom,
which is one of the largest distributors of INMARSAT related portable satellite
telephone and communication hardware systems as well as global positioning
satellite systems in Europe. Additionally, the Security Systems Integration
Group offers a wide range of site protection products.
Expand foreign military sales. As the nature of armed conflicts changes
and worldwide military budgets are cut, O'Gara believes that expensive heavily
armored tracked vehicles will continue to be replaced by more versatile and less
expensive tactical wheeled vehicles ("TWVs"), such as the HMMWV. O'Gara markets
both Up-Armored HMMWVs and armor kits which may be added in the field to certain
existing HMMWVs. There currently exists an installed base of 130,000 HMMWVs,
including 18,400 owned by 31 foreign countries. O'Gara estimates that
approximately 12,000 of the HMMWVs in use worldwide are suitable for its armor
kits and believes a significant opportunity exists to market aggressively these
kits, internationally as well as domestically. O'Gara also believes that those
countries currently utilizing HMMWVs are candidates for future sales of the Up-
Armored HMMWV. For example, in 1996 O'Gara entered into contracts to provide
Up-Armored HMMWVs to two foreign countries, Luxembourg and Qatar.
Standardize production to improve efficiencies and reduce throughput
time. Since 1994, O'Gara has committed in excess of $4.0 million to
engineering, tooling, and training to standardize its product design, armoring
components, and assembly line operations. O'Gara has developed a standard
armored Chevrolet or GMC Suburban (the "Standard Suburban"), which has been
available since 1995, as well as a standard armored Mercedes Benz E-420, which
has been available since July 1997. O'Gara's efforts in this area have reduced
the number of employee work hours needed to produce the Up-Armored HMMWV from
465 to 265, and the number of components involved from 800 to 550, and have
reduced the number of employee work hours required to armor the Standard
Suburban from 1,200 to 500, and the number of components involved from 350 to
200. As a result of these efficiencies, O'Gara is able to provide rapid, and
sometimes immediate, delivery of these armored commercial vehicles, which O'Gara
believes increases substantially their attractiveness and marketability.
Pursue strategic acquisition opportunities. The fragmented nature of the
global security industry provides ample opportunities for strategic
acquisitions. O'Gara believes it is positioned to consolidate companies in the
armoring, security systems integration, security services, engineering and
secured satellite communications business. Since October 1996, O'Gara has made
four strategic acquisitions: one in vehicle armoring, one in satellite
communications and two in security services. O'Gara believes the Merger will
further this strategy. O'Gara continues to review additional acquisition
opportunities in each of these businesses. Consummation of future acquisitions
by O'Gara will require the approval of KeyBank under O'Gara's amended and
restated loan agreement.
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<PAGE> 69
PRODUCTS AND SERVICES
The following table presents the net sales of O'Gara's principal products
and services for the periods indicated:
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Security hardware products
group.......................... $33,466 $30,773 $72,900 $37,682 $42,979
Security systems integration
group.......................... 466 2,044 9,823 3,839 7,830
Security services group.......... -- -- 55 -- 1,044
------- ------- -------- -------- -------
Total.................. $33,912 $32,817 $82,778 $41,521 $51,853
======= ======= ======== ======== =======
</TABLE>
O'Gara's products and services are focused on three primary areas of global
security. The Security Hardware Products Group markets all of O'Gara's armoring
services, including ballistic and blast protected armoring systems for
commercial and military vehicles, aircraft and missile components. The Security
Services Group offers security-related products and services such as site
protection services, advanced driver training, background clearances, business
intelligence, country risk assessments, forensic auditing, force protection
consulting and private security guards. The Security Systems Integration Group
offers planning, design and hardware and software integration services which are
customized to meet specific satellite communications or navigation needs of
customers. The Security Systems Integration Group also distributes global
positioning satellite equipment.
SECURITY HARDWARE PRODUCTS GROUP
The following table provides net sales information about the products and
services of O'Gara's Security Hardware Products Group:
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
COMMERCIAL PRODUCTS:
Fully armored vehicles......... $11,265 $11,024 $13,424 $ 4,842 $15,568
Light armored vehicles......... 2,953 2,213 3,889 2,253 2,143
Commercial truck bodies........ -- -- -- -- 5,184
------- ------- ------- ------- -------
Other.......................... 2,254 2,581 991 539 760
------- ------- ------- ------- -------
16,472 15,818 18,304 7,634 23,655
------- ------- ------- ------- -------
MILITARY PRODUCTS:
Up-Armored HMMWVs.............. 15,222 13,275 43,780 23,544 17,246
HMMWV armored kits............. -- -- 6,938 5,599 325
Other armor systems............ 1,772 1,680 3,878 905 1,753
------- ------- ------- ------- -------
16,994 14,955 54,596 30,048 19,324
------- ------- ------- ------- -------
Total.................. $33,466 $30,773 $72,900 $37,682 $42,979
======= ======= ======= ======= =======
</TABLE>
COMMERCIAL PRODUCTS
Fully armored vehicles (FAVs). The base vehicle that is converted into a
FAV may be a limousine, a large size sedan (such as a Cadillac, Mercedes Benz
S600 or Volvo S90) or a sport utility vehicle (such as the GMC/Chevrolet
Suburban) which is purchased new from a dealership or directly from the factory.
The armoring process begins with disassembly of the new vehicle at O'Gara's
production facilities. This disassembly typically involves the removal of the
interior trim, the seats, the doors and all windows. The passenger compartment
then is armored with both opaque armor (metallic, fibrous and ceramic materials)
and transparent armor (glass/plastic
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laminate) and other features, such as run flat tires, are added. Finally, the
vehicle is reassembled as close to its original appearance as possible. The
designation of FAV normally connotes the ability of the completed vehicle to
protect against attacks from military assault rifles such as AK-47s and M16s and
from certain underbody explosives. Certain FAVs also are blast protected. A
blast protected vehicle normally incorporates the ballistic and underbody
protection of an FAV but with proprietary materials and installation methods
that enable the vehicle occupants to survive a defined blast threat. Typical
types of protection defend against pipe bombs attached to the exterior of the
vehicle and non-directional charges of 20 kg of TNT detonated approximately five
meters from the vehicle. FAV armoring normally sells for $50,000 to $200,000
exclusive of the cost of the base vehicle.
The FAV class of vehicle includes the Parade Car, a formal limousine used
predominantly for high level, official functions by a president or other head of
state. This vehicle is usually of customized design based upon a commercially
available chassis which O'Gara essentially rebuilds from the ground up. Since
the threat of organized assassination attempts is greater for heads of state,
these vehicles normally incorporate more advanced armor and sophisticated
protection systems. In addition to the more protective opaque and transparent
armor systems, special features may include supplemental oxygen systems, air
purification systems to protect against chemical or biological contamination,
underbody fire suppressant systems, tear gas launchers, anti-explosive self-
sealing fuel tanks, electric deadbolt door locks, gun ports and remote-starters
with bomb scanning capability. Parade Cars normally sell for $300,000 to in
excess of $1.0 million which includes the cost of the base vehicle.
Light armored vehicles (LAVs). The armoring process for an LAV is similar
in all respects to that for an FAV except that substantially less total weight
of armoring is added. Typical base vehicles include the Volkswagon Jetta, the
General Motors Omega, the Mercedes Benz S600 and the Jeep Cherokee. The
designation of LAV connotes the ability of the completed vehicle to protect
against attacks from handguns, such as a 9 mm or .357 Magnum. The price of LAV
armoring ranges from $5,000 to $60,000 exclusive of the cost of the base
vehicle.
Commercial truck bodies. O'Gara's Labbe subsidiary builds commercial truck
bodies in its facilities in Lamballe, France. The bodies are primarily
manufactured for 3.5 ton trucks and are installed on chassis produced by a
variety of manufacturers. The bodies are manufactured under contracts with the
chassis manufacturers. The prices of the commercial truck bodies generally range
from approximately $2,000 to $25,000.
Specialty vehicles. Other commercial products include specialty vehicles
which are custom built for a specific mission. Vehicle types that fall into this
category are Escort Cars (usually a convertible) and Chase Cars (usually a
closed-top vehicle) in which security personnel ride while in a head of state
motorcade. Also included in this business line are armor kits, normally designed
for a specific vehicle to be installed at a location outside of O'Gara's main
production facilities in Fairfield, Ohio or Torino, Italy. These armor kits
usually provide LAV levels of protection. O'Gara also provides technical
support, training and spare parts for all of its manufactured products. O'Gara
can service a customer's vehicle in any of O'Gara's facilities. In certain
instances, O'Gara will fly its technicians to the customer's location.
Armored money transport vehicles. Cash-in-Transit ("CIT") money transport
vehicles are built in O'Gara's facilities in Lamballe, France. CIT vehicles
normally are used by banks or other businesses that transport large amounts of
hard currency. After starting with a van or small truck, the base vehicle is
modified to provide protection for the cargo and individuals attending the
vehicle from ballistic and blast threats. O'Gara believes that conditions in
many emerging growth countries, including Russia and China, will promote high
demand for these vehicles.
MILITARY PRODUCTS
Up-Armored HMMWVs. O'Gara is the prime contractor to the U.S. Military for
the supply of Up-Armored HMMWVs. The basic four door HMMWV chassis are produced
by AM General and shipped directly to O'Gara's facility where perimeter armor
and blast protection components are added. These Up-Armored HMMWVs provide
perimeter protection against 7.62 mm armor-piercing ammunition (such as that
fired by the AK-47 military assault rifle), overhead airburst protection against
a 155 mm shell, front underbody blast protection against a 12 lb. anti-tank mine
and rear underbody blast protection against a 4 lb. anti-personnel mine. In
addition, O'Gara installs other features designed to enhance crew safety,
comfort and performance, such as air conditioning, weapon turrets and mounts,
door locks and shock-absorbing seats. The customers for this product
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<PAGE> 71
are TACOM, as well as defense and peacekeeping forces around the world. O'Gara
charges its customers $70,000 to $100,000 for these ballistic and blast
protective systems, which is in addition to the cost of the vehicle. In addition
to the products described above, O'Gara supplies engineering design and
prototype services to TACOM primarily in support of the Up-Armored HMMWV
Program. O'Gara also supplies spare parts and logistics support for all of its
military programs.
HMMWV armor kits. O'Gara supplies field-installable armoring kits to
TACOM. These kits are installable on HMMWVs which are currently in TACOM's
inventory as well as new HMMWV chassis that are delivered to O'Gara's
manufacturing facilities. Two kits are available. The two door armor kit
provides perimeter protection against 7.62 mm ball ammunition and underbody
blast protection against a 12 lb. anti-tank mine. The four door armor kit
provides the same perimeter and front underbody protection but adds rear
underbody blast protection against a 4 lb. antipersonnel mine. Customers for
this product are current owners of non-armored HMMWVs, which include TACOM, as
well as defense and peacekeeping forces around the world. At present, over
130,000 HMMWVs have been sold worldwide, and O'Gara estimates that approximately
12,000 of these HMMWVs may be suitable for kit installation. These kits sell for
$18,000 to $30,000, without installation.
Other armor systems. O'Gara markets armor sub-systems for other TWVs such
as 2.5 ton and 5.0 ton trucks, for which the defined threat is from small arms
rounds, typically defined as 12.7 mm and less. O'Gara also produces various
armor systems as a subcontractor to larger defense contractors, such as Lockheed
Martin Corporation ("Lockheed Martin") and The Boeing Company. These products
include armor for containers for fuels and missile launchers, and for pilot
protection, and typically involve the use of materials or methods which are
unique to O'Gara.
SECURITY SERVICES GROUP
O'Gara is leveraging its reputation in the armored vehicle industry and its
customer base to market an expanded range of security products and services such
as advanced driver training, background clearances, business intelligence,
country risk assessments, forensic auditing and force protection consulting. The
acquisitions of Palmer and ITI have increased the revenues generated from
O'Gara's Security Services Group from $0.1 million in 1996 to $1.0 million in
the first six months of 1997.
Driver training. O'Gara now offers comprehensive driver training programs
through its ITI subsidiary at its various facilities around the world.
Additionally, in June 1997, ITI acquired property near San Antonio, Texas to
open a new Force Protection Institute. In addition to a full range of driver and
protection operations training, this new facility specializes in force
protection training and related issues. O'Gara believes that its driver training
courses offer excellent cross selling opportunities for its other products and
services such as armored vehicles and its communication/navigation products and
are an essential element of a comprehensive security plan.
Firearms training. O'Gara maintains a progressive and realistic 360
degree, .223 caliber ballistic shooting house, encompassing 6,800 square feet of
training space. O'Gara teaches a wide spectrum of combat marksmanship skills.
O'Gara's training program focuses on realistic situations, which involves
exposing students to stress while under difficult firing situations.
Counterintelligence training. O'Gara offers security and
counterintelligence training courses for both United States Government agencies
as well as for clients in the private sector. These courses provide a history of
United States' counterintelligence efforts and current issues in the field, such
as force protection, protection of intellectual property rights and information
security. The training offers instruction on methods to recognize and deter
political and business intelligence risks.
Surveillance detection training. O'Gara provides training in the detection
of, and responses to, surveillance. Instruction is provided both in classrooms
as well as in live exercises. Students learn methodologies utilized by
terrorists, what information is needed by terrorists in order to plan an attack
and how to block or manipulate this flow of intelligence. Students also are
taught to identify and exploit weaknesses in terrorist attack plans.
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<PAGE> 72
SECURITY SYSTEMS INTEGRATION GROUP
Site protection systems integration. O'Gara is now offering comprehensive
planning, design and hardware and software integration services customized to
meet the requirements of customers for physical site protection. Primarily
intended for perimeter security around business facilities and plant operations,
O'Gara also offers its services to embassies, VIPs' homes and public facilities.
Generally, such a systems integration project begins with a site survey, which
identifies areas of vulnerability and recommends methods for securing the entire
area surveyed. Specific pieces of hardware are ordered and installed, processes
and procedures are outlined, engineering documentation is provided and control
centers are established. Although each job is unique, the methodology used to
develop the system is similar in most cases.
Satellite communication integration. O'Gara offers comprehensive design
and hardware and software integration services customized to meet specific
satellite communication requirements of its customers. This involves the
integration of portable satellite terminals, mobile antennas and software-based
air time. Usually these systems are designed for remote or security intensive
operations. The portable satellite terminals, which are manufactured by third
party suppliers to O'Gara's specifications, allow the user to make voice and
data transmissions via satellite link anywhere in the world.
Navigation systems. O'Gara sells Magellan Global Positioning Satellite
Systems ("GPS") through distributors in the United Kingdom and Europe. The GPS
products are sold predominantly for the marine and aircraft markets and enable
the users to identify their exact location throughout the world.
CUSTOMERS
SECURITY HARDWARE PRODUCTS GROUP
Commercial. O'Gara's armored commercial vehicle customers include
governmental and private buyers. U.S. and foreign governmental buyers purchase
both FAVs and LAVs. Governmental buyers also comprise the market for Parade
Cars. Typically, governmental buyers consist of ministries of foreign affairs,
defense and internal affairs and offices of presidential security. Such
customers are not constrained in their purchasing decisions by considerations
such as import duties and taxes. They are, therefore, free to search globally
for the best product. The procurement cycles of governmental buyers can range
from relatively rapid, when the vehicles are for the use of the head of state or
in a crisis mode, to prolonged bureaucratic bids and evaluations where the
procurement is for normally budgeted items. O'Gara's private customers for
armored commercial vehicles include corporations and individuals. Private buyers
are much more sensitive to cost (of which import duties and taxes may be a
substantial part) and, therefore, often will buy a locally produced product if
one exists. Local servicing of the vehicle is also a critical concern to private
buyers. The 1996 sales of O'Gara's commercial armored vehicles (including Labbe)
as a percentage of the total annual sales are distributed as follows:
1996 COMMERCIAL SALES
BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
PERCENTAGE OF
AREA COMMERCIAL SALES
------------------------------------------------------------- ----------------
<S> <C>
Europe....................................................... 41.5%
Africa....................................................... 13.9%
Middle East.................................................. 12.5%
North America................................................ 12.4%
Central and South America.................................... 11.0%
Russian Republics............................................ 5.0%
Far East..................................................... 3.7%
</TABLE>
Military. O'Gara's market for military hardware products is worldwide in
scope, including the U.S. Military and foreign defense forces. O'Gara's major
contracts for delivery of Up-Armored HMMWVs and armoring kits are with TACOM.
Additionally, O'Gara provides protected container systems, typically used to
protect missile systems from small arms fire, to the U.S. Missile Command
("MICOM") under a subcontract
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with Lockheed Martin. The ability to obtain future U.S. military business will
be affected by future levels of defense spending and TACOM's budget. O'Gara has
sold Up-Armored HMMWVs to Qatar and Luxembourg, either directly or through the
Foreign Military Sales ("FMS") Program. O'Gara is attempting to leverage the
reputation earned by its Up-Armored HMMWVs in Bosnia, Somalia and Haiti to
expand its sales to foreign defense forces. See "-- U.S. Government Contracts."
SECURITY SERVICES GROUP
O'Gara provides training in security awareness and executive protection.
Additionally, O'Gara provides business intelligence and investigation services.
O'Gara markets these services to both businesses and governments. Corporate or
governmental buyers of security services usually contract for such services
through their security officers. Corporate security officers, who are normally
former members of a government agency themselves, tend to purchase services
based upon industry reputation for quality and expertise, trust in the firm or
individual they are buying the services from, price and availability. Security
services are charged out by the hour, day or week or are based upon a retainer
schedule. In some cases, a project may be bid in its entirety.
Driver training. O'Gara began offering driver training courses after its
acquisition of ITI. ITI has an established customer base of U.S. and foreign
governmental agencies and corporate customers. Many private sector clients are
drawn to O'Gara's driver training courses due to its reputation of providing
such services to various governmental agencies. O'Gara has been able to augment
ITI's existing customers through selling driver training courses along with
armored vehicles.
SECURITY SYSTEMS INTEGRATION GROUP
Site protection systems integration. Since the inception of the Security
Systems Integration Group in early 1996, O'Gara has obtained numerous contracts
with both Russian and multinational companies to provide integrated site
protection systems. Currently, O'Gara is marketing these products primarily in
Russia. Corporate and governmental buyers of integrated security systems
normally purchase through their corporate security officer, a governmental
department responsible for the particular facility's security, a facility
manager or a construction project manager. Purchases generally are made on
project-specific proposals and include the cost of the hardware, transportation
costs to the site, engineering integration and documentation.
Satellite communication integration. Principal customers for satellite
communications services include private corporations and individuals,
governmental agencies, peacekeeping forces and disaster relief organizations
which operate in lesser-developed countries that lack a telecommunications
infrastructure, in rural areas of developed countries or in disaster scenarios
in which the traditional forms of telecommunications are rendered inoperable. To
date, most of O'Gara's systems integration services customers have not been
purchasers of O'Gara's security hardware products. However, O'Gara is actively
marketing these services to security hardware purchasers and security services
customers. Increasingly, customers are demanding that the satellite
communication channels provided be secure. Depending on the level of security
desired, satellite communication systems can be implemented using a variety of
encryption methods up to and including fully secure U.S. Government STU-III
telephones. Most of O'Gara's satellite communication customers are located
outside of the United States because the U.S. Federal Communications Commission
does not permit private corporations or individuals to use terminals in the
United States which do not utilize the American Mobile Satellite Corp. ("AMSC")
satellite network. The terminals marketed by O'Gara access the INMARSAT network
rather than the AMSC network.
Navigation systems. O'Gara sells GPS equipment through approximately 1,270
distributors in the United Kingdom and France. Marine GPS units are sold through
approximately 700 retailers, some of which specialize in marine electronics and
others that sell general boat equipment. Outdoor (general recreational) GPS
units are sold through approximately 500 sporting goods retailers, camping and
outdoor stores and general electronics stores. Aviation GPS equipment is sold
through approximately 70 aviation equipment retailers.
MARKETING AND SALES
Commercial marketing. O'Gara believes that, as a result of its long
history of successfully armoring vehicles, it enjoys excellent name recognition
and a strong reputation in its sector of the security industry. The
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central element of O'Gara's commercial marketing strategy is to leverage its
name recognition and reputation by positioning O'Gara as a global provider of
one-stop security services and products. O'Gara believes that by positioning
itself in this manner it can capitalize on its existing customer base, maximize
the benefits of its long history of supplying security-related products around
the world and leverage its leadership niche in the armored commercial vehicle
market. When entering a foreign market, O'Gara normally seeks to penetrate the
market with its strongest product offering, which in most cases is armored
vehicles. O'Gara tailors its marketing strategy to each geographic area of the
world and will often tailor its product offering by country. There is strong
cross-marketing of military and commercial products which O'Gara believes
strengthens the image of each product group. This goal is accomplished through
consistency of product literature, image and style; the featuring of both
product groups in advertising and exhibitions; and full briefings to customers
and potential customers that encompass O'Gara's entire product line.
Commercial sales. On a worldwide basis, O'Gara employs 39 sales
professionals who operate out of Los Angeles, California; Washington, D.C.; Deer
Park, New York; Fairfield, Ohio; Sao Paulo, Brazil; Lamballe, France; Paris,
France; Nairobi, Kenya; Mexico City, Mexico; Subic Bay, the Philippines; Moscow,
Russia; Geneva, Switzerland and Salisbury, the United Kingdom. All sales
personnel have a geographic and/or product-specific responsibility. In most
cases, sales personnel also maintain and recruit sales agents or distributors
for O'Gara's principal product groups. The agents or distributors have
geographic and product-specific agreements, and compensation in most cases is
based upon a commission arrangement. In some instances, particularly when
commercial products are sold to governments, O'Gara's salespersons will handle
sales directly with the ultimate customer without any involvement from an agent
or distributor. Sales personnel use a consultative approach when offering
solutions to the customer's security problems. Sales cycles for commercial
products can range from several months to a matter of days, depending upon the
product and the urgency associated with the security problem being addressed.
Security products which are readily available, such as the fully armored
Standard Suburban, allow O'Gara to assist customers who have, or believe they
have, developed an immediate threat.
Military marketing. O'Gara continues to position itself in the marketplace
as a commercial company with a military production capability and to emphasize
its ability to develop new products, or product adaptations, quickly and more
cost-effectively than traditional defense contractors. In marketing its products
to the military, O'Gara also places strong emphasis on its superior anti-tank
and anti-personnel mine protection for the occupants of TWVs. O'Gara markets its
military products through a combination of trade show exhibitions, print
advertising in military-related periodicals and direct customer visits. O'Gara
emphasizes the cross-marketing of military and commercial products, which it
believes strengthens the image of each product group. O'Gara also has entered
into exclusive teaming and joint marketing agreements with AM General, the
manufacturer of the basic HMMWV, for sales in the military and commercial
arenas. These agreements provide that O'Gara is the exclusive armorer to AM
General for HMMWVs and allow O'Gara to benefit from the AM General distribution
network and save on certain costs, such as exhibitions where AM General and
O'Gara otherwise would both show products.
Military sales. O'Gara's military sales activities are directed toward
identifying contract bid opportunities with various U.S. Government agencies,
private enterprises acting as prime contractors on government contracts, sales
through the FMS Program, and military sales directly to foreign military
organizations. O'Gara has two full-time business development managers who are
responsible for this activity and also has contractual arrangements with several
outside consultants who assist the business development managers in their
activities. Proposal preparation and presentation for government projects is
done by a proposal team which normally consists of program managers who have
specific project responsibilities, a contracting officer, a cost accountant and
various manufacturing and engineering personnel.
Foreign operations. See Note 14 to O'Gara's Consolidated Financial
Statements included elsewhere in this Proxy Statement/Prospectus for information
concerning foreign and domestic operations and export sales.
ENGINEERING AND DEVELOPMENT
O'Gara emphasizes engineering excellence and has an extensive engineering
staff. Design engineers use state-of-the-art two-dimensional and
three-dimensional computer aided design and engineering (CAD/CAE)
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systems in conjunction with coordinate measuring machines to develop electronic
models which are generally converted to solid models or prototypes.
Manufacturing engineers concentrate on the ability of O'Gara to manufacture a
product design, on improvements in the production process and overall cost
reductions from better methods, fewer components and less expensive materials
with equal or superior quality and on materials handling issues. Applying these
techniques, in the last several years O'Gara has been able to produce savings in
both the time and cost necessary to produce its armored vehicles.
Quality engineering is responsible for assuring that manufacturing and
design plans are consistent with a reliable, quality product that meets the
specifications of the customer. Quality engineers are also responsible for
identifying in-process quality inspection points in the work orders. O'Gara's
ballistic engineer, in conjunction with its design and manufacturing engineers,
develops new ballistic and blast protection systems that meet ever-changing
threats. Ballistic engineers are also responsible for the ballistic testing
required by customers, the assignment of ballistic specifications to final
products and the issuance of ballistic specifications for internal quality
control. Advanced engineering is responsible for new product development in
conjunction with design engineering, manufacturing engineering and ballistic
engineering.
In January 1997, O'Gara signed a Systems Technical Support Contract ("STS
Contract") with TACOM to support continued research and development on the
Up-Armored HMMWV program. See "-- U.S. Government Contracts." O'Gara believes
that the knowledge gained from this contract can be applied to O'Gara's
commercial manufacturing programs. O'Gara estimates that it expended
approximately $2.8, $2.0 and $0.7 million in 1996, 1995 and 1994, respectively,
on engineering and development efforts related to its armored vehicles and
satellite communications products.
U.S. GOVERNMENT CONTRACTS
O'Gara serves as the U.S. Military's primary contractor for armoring for
its HMMWV fleet. Under the initial contract in August 1993, TACOM engaged O'Gara
to armor fully 59 HMMWVs. A contract to armor an additional 100 vehicles was
executed in May 1994. All of these 159 Up-Armored HMMWVs were shipped prior to
April 1995.
In 1995, the HMMWV was redesigned to include a more powerful engine and
greater cargo space. In March 1995, TACOM engaged O'Gara to armor 309 of the
redesigned HMMWVs. This agreement included options for the armoring of up to an
additional 155 vehicles. In February 1996, TACOM requested an acceleration of
the production of Up-Armored HMMWVs previously ordered and subsequently
exercised options for the armoring by O'Gara of all 155 vehicles under option.
Of these vehicles, 16 were sold to Luxembourg under the FMS Program. The FMS
Program is part of the U.S. Government's security assistance program which
provides equipment and services to more than 100 nations and international
organizations. The U.S. Government markets, procures and delivers military
equipment and services to such foreign entities. Funding is provided either
directly by the purchaser or with U.S.-granted foreign aid credits or loans. As
of March 15, 1997, O'Gara had shipped all 464 of these Up-Armored HMMWVs.
Under a July 1996 contract, TACOM engaged O'Gara to armor 72 additional
HMMWVs. As of December 31, 1996, all of these vehicles had been shipped. On
September 27, 1996, O'Gara was awarded a contract by TACOM for an additional 133
Up-Armored HMMWVs. The contract includes options for the armoring of up to 67
additional vehicles. All of these vehicles have been shipped.
On March 31, 1997, O'Gara was awarded a contract by TACOM for 360
Up-Armored HMMWVs. The contract includes options for the armoring of up to 360
additional vehicles.
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In the aggregate, O'Gara has shipped 884 Up-Armored HMMWVs under various
TACOM contracts as follows:
<TABLE>
<CAPTION>
NUMBER OF
HMMWVs
YEAR SHIPPED
---------------------------------------- ----------
<S> <C>
1993.................................... 0
1994.................................... 139
1995.................................... 26
1996.................................... 507
1997 (through September 30)............. 212
</TABLE>
O'Gara also manufactures armoring kits that can be shipped to customers and
installed in HMMWVs on location. O'Gara installed 166 of such kits for TACOM in
its Fairfield, Ohio facility during the first seven months of 1996 and has
shipped 14 kits to the U.S. Army in Germany for purposes of providing
instruction to U.S. Army personnel concerning the installation process.
In January 1997, O'Gara signed an STS Contract with TACOM to support
continued research and development on the Up-Armored HMMWV program. The four
year contract, three of which are option years, is budgeted for $2.5 million in
1997, with $2.5 million options in each of 1998 and 1999 and a $2.0 million
option in 2000. The STS Contract, in part, will allow O'Gara to make new design
improvements, to conduct additional testing of materials, components and
vehicles and to explore alternate and more advanced armor configurations. The
contract requires O'Gara to provide 25,000 hours per year of engineering and
development time to TACOM. O'Gara believes that the knowledge gained from STS
Contract work can be applied to O'Gara's commercial manufacturing programs.
As a subcontractor to Lockheed Martin, O'Gara has provided armoring for
certain missile weapons systems. O'Gara was first engaged in September 1993 by
Lockheed Martin to armor fuel systems of missiles. O'Gara was most recently
engaged by Lockheed Martin in March 1997 to provide such armoring and believes
that it is well positioned for future engagements.
COMPETITION
The markets for O'Gara's present and contemplated products and services are
highly competitive. However, in the vehicle armoring business, O'Gara believes
that its design, engineering and production expertise in providing fully
integrated ballistic and blast protected vehicles gives it a competitive
advantage over those competitors who provide protection against only selected
ballistic threats. In the market for military armoring systems there are a large
number of companies, such as Simula, Inc., that provide specific armoring
packages for TWVs, helicopters and selected other military applications. O'Gara
believes that, as the size of the Up-Armored HMMWV requirement continues to
grow, competition from major defense contractors may increase.
The principal competitive factors are price, quality of engineering and
design, production capability and capacity, ability to meet delivery schedules
and reputation in the industry.
The largest competitor on a worldwide basis in the production of armored
commercial vehicles is Mercedes-Benz Aktiengesellschaft ("MBZ") of Germany. MBZ
produces its own armored passenger vehicles based upon the S600 chassis, the new
Pullman Limousine and the S300 chassis. MBZ sells its product through its
worldwide dealer distribution system. In addition to MBZ, there are a number of
other vehicle armorers focused on their local markets in Europe, the Middle East
and Latin America, armoring primarily locally manufactured automobiles. U.S.
based protected passenger automobile armorers include the Pittston Company
(owner of Brinks armored vehicles), Moloney Coachbuilders, Inc., Safe Car, Inc.,
Rausch Enterprises, Inc. and Armet Armored Vehicles, Inc. These and other
companies compete for U.S. Department of State and Treasury Department Secret
Service contracts. Currently, the U.S. Department of State FAV and LAV contracts
are split among three companies, of which O'Gara is one. The principal
competitive factors are price, quality of engineering and design, production
capability and capacity, ability to deliver and reputation in the industry.
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In the security services businesses, O'Gara competes primarily with
numerous local integrators and small consultant-type businesses and also large
suppliers of security-related equipment such as Westinghouse Electric
Corporation, Pinkerton's, Inc., The Wackenhut Corporation, Borg-Warner Security
Corporation, Pittway Corporation, Kroll, Armor Holdings, Inc., ICTS
International, N.V. and ADT Inc. The principal competitive factors are the best
approach to solving the security problem, expertise, price, trust, availability
and the company or individual reputation.
In the area of communication/navigation systems integration services,
O'Gara competes with many companies, including STN, Atlas Elektronik, GmbH, and
Nera AS, in the sale of both the portable terminals and air time. O'Gara
believes that the competitive factors in this portion of its business include
product reliability, the incorporation of advanced technological features,
price, ease of installation, availability and service. With respect to secure
custom communications systems integration services, O'Gara competes with small
and large communications systems integrators.
SEASONALITY, BACKLOG AND RELATED MATTERS
O'Gara's backlog at June 30, 1996 and 1997 was approximately $39.0 million
and $35.1 million, respectively. Backlog consists of net sales value for firm
orders not previously included in net sales on the basis of percentage of
completion accounting. Because many factors affect the conclusion of definitive
agreements for contracts awarded and the production and delivery of O'Gara's
products, no assurance can be given as to when or whether net sales will be
recognized from O'Gara's backlog. Year-to-year comparisons of backlog are not
necessarily indicative of future operating results.
Approximately 66.0% of O'Gara's net sales during 1996 were derived from
military contracts and an additional 11.6% were derived from commercial
contracts with U.S. governmental agencies or foreign governments. For the first
six months of 1997, these percentages were 37.3% and 5.0%, respectively,
reflecting the shift toward more commercial sales. Military and governmental
contracts generally are awarded on a periodic or sporadic basis. O'Gara
frequently receives substantial orders, and begins to incur related expenses, in
one quarter, the revenues from which will not be received until one or more
subsequent quarters. As a result, O'Gara generally has significant fluctuations
from time to time in its business. Historically, these fluctuations have not
been seasonal. Period-to-period comparisons within a given year or between years
may not be meaningful or indicative of operating results over a full fiscal
year. See "O'GARA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
O'Gara's net sales from government contracts and most commercial contracts
are recognized using the percentage-of-completion method. Under this method,
estimated contract revenues are accrued based generally on the percentage that
costs to date bear to total estimated costs. Estimated contract losses are
recognized in full when determined. Accordingly, contract revenues and total
cost estimates are reviewed and revised periodically as the work progresses and
as change orders are approved, and adjustments based upon the percentage of
completion are reflected in contract revenues in the period when such estimates
are revised. See "O'GARA MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
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PROPERTIES AND FACILITIES
O'Gara's principal properties and facilities as of September 1, 1997 were
as follows:
<TABLE>
<CAPTION>
BUILDING
INDUSTRY SQUARE
LOCATION SEGMENT FOOTAGE STATUS
-------------------------- --------------------- ------- -------------
<S> <C> <C> <C>
Fairfield, Ohio Hardware 130,000 owned
Lamballe, France Hardware 125,000 leased
St. Brieue, France Hardware 19,000 owned
Auxerre, France Hardware 21,500 leased
Caen, France Hardware 15,000 leased
Deer Park, New York Integration 4,000 leased
Washington, D.C. area Services N/A leased
Salisbury, UK Integration 3,750 leased
Mexico City, Mexico Hardware, Integration 20,000 owned
and Services
Sao Paulo, Brazil Hardware 50,000 leased
San Antonio, Texas Services N/A owned
Moscow, Russia Hardware and 2,700 leased
Integration
Subic Bay, the Philippines Hardware 85,000 subcontractor
Torino, Italy Hardware 15,000 subcontractor
</TABLE>
The following is a description of O'Gara's major production facilities:
Fairfield, Ohio. This facility houses O'Gara's executive offices and
contains full production and assembly facilities for O'Gara's armored commercial
vehicles and the manufacturing and distribution of Up-Armored HMMWVs and HMMWV
armoring kits. The facility is financed through tax-exempt debt and is pledged
to secure the repayment of such debt. The facility includes a complete
fabrication and machine shop equipped with a computer controlled plasma cutter,
a computer controlled press break, mills, automated grinders, a robotic welder
and two coordinate measuring machines, paint booths and ancillary equipment for
both military and commercial painting.
Lamballe, France. This facility houses the management, sales and
accounting functions of Labbe. The site contains facilities for production of
armored commercial and cash-in-transit vehicles, plus design studios for
development of prototypes and integrated computer systems, plus parts,
fabrication, painting and quality control. This facility also contains a
ballistics range. Labbe has occupied the site since 1948. It is leased for a
term expiring in September 2000. For accounting purposes, this is treated as an
operating lease.
Mexico City, Mexico. This facility is used for manufacturing and sales of
armored commercial vehicles. The facilities in Mexico City, Mexico and Sao
Paulo, Brazil are currently installing armoring kits which have been engineered
in the Fairfield, Ohio facility. O'Gara expects these facilities to have the
capability to build a complete product line once they have fully trained their
production work forces.
San Antonio, Texas. This facility, which was acquired in 1997, consists of
165 acres of land used for driver training and force protection training.
Sao Paulo, Brazil. This facility, which was expanded to include a second
facility on an adjacent location in December 1996, is used for manufacturing and
sales of armored commercial vehicles and is currently leased for a term expiring
in March 2000. For accounting purposes, this lease is treated as an operating
lease.
Subic Bay, the Philippines. This facility is owned by a subcontractor, but
is supervised by O'Gara's personnel and performs installation of armoring kits
engineered in the Fairfield, Ohio facility.
Torino, Italy. This facility is owned by a subcontractor, but is
supervised by O'Gara's personnel and performs all aspects of manufacturing
specialty armored and unarmored commercial vehicles, from component fabrication
through final assembly. On occasion, the Torino subcontractor will act as a
vendor to O'Gara.
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O'Gara's manufacturing capabilities include fully integrated manufacturing
programs which link production control, materials control, quality control and
accounting, thus allowing O'Gara to issue work orders, update and track
inventories, implement quality assurance procedures, schedule and track
production and report, on a daily basis, costs accumulated to a job. O'Gara
believes that its facilities are adequate for its present needs and that its
properties, including machinery and equipment, are generally in good condition,
well maintained and suitable for their intended current and foreseeable uses.
EMPLOYEES
As of June 30, 1997, O'Gara had 619 employees (including 32 temporary
employees), comprised of 59 (including 5 temporary employees) in marketing and
sales, 413 (including 22 temporary employees) in manufacturing, 23 (including 2
temporary employees) in professional services, 48 in engineering and 76
(including 3 temporary employees) in general and administrative. O'Gara's U.S.
employees are not represented by any union and are not covered by any collective
bargaining agreements. Approximately 25 employees of Labbe are employed under
agreements with the Confederation Francarse Democatique du Travail (FTDT). Wage
increase parameters are set twice a year by O'Gara's local management in
consultation with the union. O'Gara has not experienced any work stoppages or
employee related slowdowns and believes that its relationship with its employees
is good.
GOVERNMENT REGULATION
As a contractor with agencies of the U.S. Government, O'Gara is obligated
to comply with a variety of regulations governing certain aspects of its
operations and the workplace. Additionally, O'Gara's contracts give the
contracting agency the right to conduct audits of O'Gara's facilities and
operations, and such audits occur routinely. An audit involves a governmental
agency's review of O'Gara's compliance with the prescribed procedures
established in connection with the government contract. O'Gara also may be
subject to investigations as a result of an audit or other causes. Adverse
findings in an audit or other investigation, including a violation of
environmental or labor laws, could result in fines or other penalties, up to and
including disqualification as a government contractor. In addition, government
contracts generally contain cost or performance incentives based on stated
targets or other criteria. Failure to meet these stated targets or criteria
could result in penalties or lost profits to O'Gara.
O'Gara is subject to federal licensing requirements with respect to the
sale in foreign countries of certain of its hardware products. Regulations
promulgated by the U.S. Commerce Department require O'Gara to obtain a general
destination license in connection with the sale of certain commercial products
in foreign countries, and certain U.S. State Department regulations require
O'Gara to file an export license in connection with sales of military equipment
in foreign countries. Furthermore, the U.S. State Department prohibits all sales
of military equipment to certain countries, including China, Cuba, Iran, Iraq
and Libya. There can be no assurance that such regulations will not become more
restrictive in the future, which could limit O'Gara's ability to market its
products internationally. See "RISK FACTORS -- Risk Factors Relating to the
Business of O'Gara -- Political and Economic Risks of Doing Business Outside the
United States."
O'Gara's foreign operations are subject to the laws and regulations of the
various countries in which they are conducted, including licensing, labor,
environmental and currency control restrictions.
ENVIRONMENTAL MATTERS
O'Gara and its operations are subject to a number of environmental laws,
regulations and ordinances, both in the U.S. and various foreign countries, that
govern activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling, storage and disposal
practices regarding solid and hazardous materials, and impose liability for the
cost of remediating, and certain damages resulting from, sites of past releases
of hazardous materials. Environmental laws continue to change rapidly, and it is
likely that O'Gara will be subject to increasingly stringent environmental
standards in the future. O'Gara believes that it currently conducts its
activities and operations in substantial compliance with applicable
environmental laws. O'Gara is implementing recommendations of an environmental
consulting company designed to address certain air pollution, hazardous waste,
underground storage tank and hazard communication matters at its Fairfield, Ohio
facility. No notices of violation have been issued to O'Gara by any regulatory
agency with respect to
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environmental matters which remain uncorrected. O'Gara believes that its
potential liability under the environmental laws, if any, would not have a
material adverse effect, individually or in the aggregate, on its results of
operations, financial condition or cash flows. There can be no assurance in this
regard, however, nor can there be any assurance that environmental laws will not
become more stringent in the future or that O'Gara will not incur significant
costs in the future to comply with such environmental laws.
LEGAL PROCEEDINGS
Certain of the services provided by O'Gara's Security Services Group are
similar to activities carried on by O'Gara Protective Services, Inc. ("OPS"),
which is controlled by Edward F. O'Gara, the brother of Thomas M. O'Gara and
Wilfred T. O'Gara. On October 9, 1996, OPS and Edward F. O'Gara filed a
complaint against O'Gara, OHE and Thomas M. O'Gara in the Federal District Court
for the Southern District of Ohio (O'Gara Protective Services, Inc., et al. v.
The O'Gara Company, et al., No. C-1-96-979). The complaint alleged: that Thomas
M. O'Gara and OHE agreed not to compete with OPS and that O'Gara's plan to enter
the security services market constituted a breach of the agreement; that Thomas
M. O'Gara (a former director and shareholder of OPS) breached unspecified
fiduciary duties which he owed to OPS by virtue of his status as a director and
significant shareholder of OPS; and that O'Gara's plan to enter the security
services market constituted 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 sought 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 attorneys' fees. On August
1, 1997, this lawsuit was settled. Pursuant to the settlement, O'Gara paid
$75,000 to OPS and agreed not to compete against OPS with respect to certain
specified persons and entities.
O'Gara is not involved in any litigation or legal proceedings on the date
of this Proxy Statement/Prospectus and is not aware of any material litigation
or proceeding threatened against it.
PATENTS, TRADEMARKS AND COPYRIGHTS
O'Gara currently has four issued U.S. patents relating to its armoring
business. O'Gara currently has no federally registered trademarks or copyrights.
Although O'Gara does not believe that its ability to compete in any of its
product markets is dependent on its patents, O'Gara does believe that the
protection afforded by its "Armoring Assembly" and "Vehicle Mine Protection
Structure" patents, both of which relate to vehicle underbody blast protection,
provides O'Gara with important technological advantages over its competitors.
Although O'Gara has protected its technologies to the extent that it believes
appropriate, there can be no assurance that O'Gara's measures to protect its
proprietary rights will deter or prevent unauthorized use of O'Gara's
technologies. In other countries, O'Gara's proprietary rights may not be
protected to the same extent as in the United States.
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BUSINESS OF KROLL
BACKGROUND
Kroll provides a broad array of corporate investigation, risk and crisis
management and business intelligence services on a global basis to multinational
and other large companies, including law firms, investment banks and other
financial institutions, government agencies and other clients. Kroll believes
that it is one of the largest companies in the world providing this broad array
of services and that it enjoys strong name recognition within its customer base.
Founded in 1972, Kroll originally provided services exclusively in
connection with the detection of internal fraud. Since the late 1970's Kroll has
expanded the scope of its services, first to include business intelligence
services, such as due diligence in connection with potential borrowings and
investments and intelligence gathering in connection with hostile takeovers, and
more recently to include a variety of risk and crisis management services. Kroll
has sought to broaden its client base, which initially focused on intermediaries
such as law and accounting firms and investment banks, to deal directly with the
companies and others that utilize information provided by Kroll. Kroll has also
attempted to shift its focus from a relatively few large transaction-oriented
matters to a broader array of smaller but more frequent matters and from
providing information in response to crisis situations to providing a steady
flow of information to help clients avert crises.
In the 1990's, Kroll has also expanded significantly the geographic scope
of its activities. It has opened offices in a number of locations in Europe,
Asia and Latin America and has expanded its international client base to include
foreign enterprises as well as foreign offices and subsidiaries of U.S.
entities.
SERVICES
Kroll offers a broad array of corporate investigation, risk and crisis
management and business intelligence services in the United States, Europe, Asia
and Latin America.
Corporate Investigation Services. Kroll's corporate investigation services
include a variety of services in connection with (i) investigating financial
fraud, theft of trade secrets, infringement of trademarks and other intellectual
property rights and sexual harassment and other employee misconduct; (ii)
preparing for litigation or arbitration proceedings; (iii) tracing and locating
assets and developing financial profiles in connection with such matters as
bankruptcy cases and loan defaults; (iv) performing monitoring and special
inquiry assignments to discover and assess the extent of legal and ethical
misconduct by corporate employees and developing and installing appropriate
systems to assist in ensuring future compliance with relevant legal and ethical
standards; and (v) strategic consulting with businesses facing potential
environmental liabilities and investigating and conducting due diligence reviews
with respect to environmental issues.
Kroll's financial fraud investigation services involve Kroll investigators,
including forensic accountants and computer specialists, who work with Kroll's
clients to detect and curtail such fraudulent and illegal activities as theft of
corporate assets, manipulation of financial records and statements and business,
insolvency and bankruptcy fraud. Kroll's litigation support services involve
employee professionals providing assistance to counsel in connection with
preparing for litigation or arbitration proceedings, designing settlement
strategies or resisting unwanted takeover attempts. These services include
developing evidence to support a claim or a defense, identifying and locating
material witnesses, investigating adverse witnesses, locating and evaluating
recoverable or relevant assets of adverse parties and helping to assess whether
an adequate recovery can be obtained if a lawsuit is successful. Kroll's other
asset tracing services consist of tracing and locating assets anywhere in the
world and developing financial profiles and life style assessments in connection
with bankruptcy cases, loan defaults, internal investigations and other due
diligence requests by clients.
Kroll's monitoring and special inquiry services consist of investigations
by a team of Kroll's lawyers, forensic accountants, investigators, analysts and
industry experts to identify violations of federal or state regulatory
requirements or corporate policies and consultations with clients with respect
to establishing systems to audit and ensure compliance with such regulatory
requirements or policies. Kroll's environmental investigation
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services involve conducting due diligence investigations, establishing audit and
compliance verification programs, providing litigation support and reporting to
insurance companies in connection with underwriting analysis.
In the years ended December 31, 1995 and 1996 and in the six months ended
June 30, 1997, Kroll's corporate investigation services accounted for
approximately 56%, 60% and 50% of Kroll's net sales, respectively.
Kroll has also recently developed a vendor integrity program that provides
clients a profile of a client's vendors using information provided by the
vendors and obtained from independent sources. Clients utilize this profile to
insure that vendors adhere to the client's standards for ethical business
practices. The fees for this service are paid either through nominal fees
charged to each participating vendor or are directly charged to the client.
Risk and Crisis Management Services. Kroll's risk and crisis management
services consist of a variety of consulting services to assist businesses in
managing diverse risks to their personnel and assets and in meeting and managing
unexpected crises. Risk management services are used in connection with
corporate security programs and systems, programs to protect the safety of key
executives, systems to preserve assets and protect the integrity of computer and
telecommunications systems, and data and planning for disaster recovery. Kroll's
crisis management services are provided in a variety of contexts, including the
kidnapping of a company's executive, the safety of consumers, contamination of a
consumer product or the environment or the potential damage to the reputation of
a corporate client as a result of disclosure of adverse events. Kroll maintains
a crisis management center in Vienna, Virginia where personnel are on duty 24
hours a day, 365 days a year, to handle requests for information and provide
initial advice and immediate contact with members of Kroll's professional staff
specializing in the particular crisis presented.
As part of its risk and crisis management services, Kroll provides periodic
information services that include reports providing city-specific advisories to
business travellers on conditions and other relevant information with respect to
almost 300 cities around the world; a comprehensive country security risk
assessment service that includes daily intelligence briefings containing early
warnings of events and up-to-date information about political unrest, terrorist
activities, product contaminations, health emergencies and other similar events;
a monthly bulletin that reviews and analyzes safety and security issues relating
to air travel around the world; a monthly intelligence review that provides a
global survey of political risk developments in countries around the world; and
special reports on relevant topics, such as kidnappings or specific regions or
countries that are relevant to business travelers.
In the years ended December 31, 1995 and 1996 and in the six months ended
June 30, 1997, Kroll's risk and crisis management services accounted for
approximately 27%, 22% and 24% of Kroll's net sales, respectively.
Business Intelligence Services. Kroll's business intelligence services
include the provision of due diligence and background information and analysis
that is intended to be useful for clients considering significant operating or
strategic decisions, such as proposed acquisitions or unsolicited offers to
acquire corporate control, possible business arrangements with particular
partners, and proposed entries into new markets. Such services provide
sophisticated business intelligence with respect to the financial and managerial
background and reputation of companies and their management, as well as their
market position, technical capabilities and strategic direction. These services
are utilized by lenders, underwriters, potential acquirers and businesses
concerned with assessing and attempting to minimize the risks related to major
financial and other business decisions.
In the years ended December 31, 1995 and 1996 and in the six months ended
June 30, 1997, Kroll's business intelligence services accounted for
approximately 17%, 18% and 26% of Kroll's net sales, respectively.
Prices for Services. Generally, Kroll charges for its services on an
hourly basis at varying rates, depending upon the type of service being provided
and the competition that exists in providing the service. Kroll also provides
services, particularly outside the United States, on a negotiated project, or
fixed fee, basis. While providing services on a fixed fee basis enhances the
potential for higher profit margins, such arrangements can also result in
unexpected losses on a particular project. However, Kroll believes that the
large number of its fixed fee arrangements limits the risk to Kroll of incurring
a cost overrun on any one or a significant number of projects, which overrun
could have a material adverse effect on Kroll's results of operation.
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Potential Expansion. Kroll does not presently contemplate expanding the
variety of services it offers; however, it does intend to seek opportunities to
expand in locations in which it does not presently provide services. Any such
expansion requires Kroll to hire competent professional and administrative
staff, rent office space, provide furniture, fixtures and other necessary
equipment and incur start-up marketing costs. These costs are necessarily
incurred prior to the time Kroll is able to generate net sales and, thus, will
have a short-term adverse effect on Kroll's results of operations. There can be
no assurance that Kroll will successfully identify any locations for expansion
or that any such expansion, if undertaken, will increase Kroll's net sales or
net income.
Geographic Distribution of Net Sales. Kroll classifies its sales by where
the services are delivered; international sales are services delivered outside
the United States. In the years ended December 31, 1995 and 1996, and the six
months ended June 30, 1996 and 1997, 71%, 73%, 77%, and 68%, respectively, of
Kroll's net sales were attributable to services delivered in the United States.
The balance of Kroll's net sales in each period were attributable to services
delivered outside the United States.
Kroll believes that at present the services it delivers in the United
States provide significantly higher profit margins than the services it delivers
outside the United States. However, Kroll believes that its margins will change
due to trends in the marketplace. Overseas, demand for higher margin services,
such as corporate investigation services and business intelligence services,
including due diligence, is increasing. In addition, Kroll expects to be able to
leverage the fixed costs of its overseas operations more efficiently. Kroll
believes that profit margins with respect to services delivered by Kroll in the
United States will generally decrease over time due to increasing competition,
offsetting the increase in profit margins resulting from increased overseas
demand for higher margin services (see "-- Competition").
CLIENTS
From 1994 through 1996, Kroll provided services to approximately 2,250
clients located in the United States and approximately 850 clients located in
other parts of the world. Kroll's clients consist of multinational corporations,
leading law firms, financial institutions, government agencies and individuals
in a wide range of business sectors. The financial institutions to which Kroll
provides services include many of the largest international investment banks,
numerous commercial banks, insurance companies and other significant credit
institutions. Kroll's governmental clients include agencies of the United States
Government, state and local governments in the United States and a number of
foreign governments and ministries.
In the year ended December 31, 1995, AIG accounted for approximately 7.3%
of Kroll's net sales. No other client accounted for more than 3.4% of Kroll's
net sales in that year, although Kroll's 30 largest clients in that year,
including AIG, accounted for approximately 37.6% of Kroll's 1995 net sales. In
the year ended December 31, 1996, AIG accounted for approximately 7.5% of
Kroll's net sales. No other client accounted for more than 3.6% of Kroll's net
sales in that year, although Kroll's 30 largest clients, including AIG,
accounted for approximately 41.2% of Kroll's 1996 net sales. In the six months
ended June 30, 1997, AIG accounted for approximately 9.3% of Kroll's net sales
and Kroll's 30 largest clients, including AIG, accounted for approximately 41.4%
of its net sales. While many of Kroll's clients utilize Kroll's services on a
periodic basis, relatively few of Kroll's clients utilize Kroll's services each
year and the clients that account for a material percentage of Kroll's net sales
in any year may vary widely. Kroll does not believe that the loss of any one
client (other than AIG) would have a material adverse effect upon its business
or financial condition.
Kroll generally does not have long-term contracts with its clients and its
ability to generate net sales is dependent upon obtaining many new projects each
year, most of which are of relatively short duration. As a result, Kroll's net
sales and net income from year to year are not necessarily predictable and
historically there has not been a consistent year-to-year pattern of growth.
The demand for Kroll's services is affected by general economic conditions
and the level of corporate acquisitions and other financial transactions, and
clients may reduce their reliance on Kroll's services during periods when there
is a decline in such activities.
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MARKETING AND SALES
Kroll's professionals are principally responsible for the marketing of
services and for establishing relationships with clients. Kroll obtains
engagements from a client's board of directors, chief executive and chief
financial officers, general counsel and a variety of other corporate officials,
including business development officers, security managers, risk managers and
human resource personnel. Kroll's senior professionals act as relationship
managers for Kroll's major clients, and a significant amount of Kroll's
marketing consists of maintaining and developing these personal relationships.
In addition, Kroll has a professional marketing and sales staff in New York
City and in each of its regional headquarters that includes marketing, sales and
public relations professionals who support and coordinate Kroll's marketing
efforts on a worldwide basis. These marketing efforts include seminars,
briefings, receptions, breakfast and lunch meetings, direct mail and selected
advertising in trade and other journals. Kroll's services and marketing events
are promoted through its internet website and a publication mailed periodically
to approximately 20,000 clients and prospective clients.
Kroll's marketing efforts attempt to increase business with existing
clients by expanding clients' awareness of the range of services offered by
Kroll and by broadening the decision makers within a client's organization that
are aware of the range of services offered by Kroll.
Kroll's business development staff periodically conducts surveys of Kroll's
clients to assess their perception of the range and quality of Kroll's services
and, after the completion of an assignment, clients are often asked to complete
a quality control questionnaire.
COMPETITION
Kroll believes that it is one of the largest companies in the world
providing a broad array of corporate investigation, risk and crisis management
and business intelligence services on a global basis and enjoys strong name
recognition in its industry. Nevertheless, Kroll faces significant, and
increasing, competition in the United States and elsewhere in the world from a
variety of companies that provide some of the services offered by Kroll. These
competitors consist of local, regional, national and international firms,
including investigative and security firms, guard companies and specialized
consultants in specific areas such as kidnapping. In most service areas in which
Kroll operates, there is at least one competitor that is significantly larger or
more established than Kroll. Many of the national and international accounting
firms provide consulting services similar to some of the services provided by
Kroll. Some of these firms have indicated an interest in providing corporate
investigation and business intelligence services on a broader scale. These
accounting firms have significantly larger financial and other resources than
Kroll and have long-established relationships with their clients, which are also
likely to be clients or prospective clients of Kroll. In addition, large
multinational security product and service providers have indicated an interest
in expanding their services to include value-added services such as certain of
the investigation and consulting services provided by Kroll. The accounting
firms and other service providers could prove to be formidable competitors if
they elect to devote the necessary resources. In that event, there can be no
assurance that Kroll will be able to continue to provide its services on
existing financial terms and conditions, which would have material and adverse
effects on Kroll's business and financial condition. See "RISK FACTORS -- Risk
Factors Relating to Business of Kroll -- Competition."
EMPLOYEES
As of August 1, 1997, Kroll employed approximately 340 persons in its 23
offices around the world, of whom approximately 250 worked in the United States.
Approximately 60% of Kroll's employees are professionals whose time Kroll bills
to clients and who have backgrounds in, among other things, law, forensic
accounting and financial analysis, federal, state and local law enforcement,
domestic and foreign intelligence, business management and consulting, corporate
security, computer and information technology and security and environmental
sciences. Kroll bills its clients for the time spent by these professionals in
providing services. Kroll's remaining employees perform administrative,
marketing and clerical functions.
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In addition to its own full-time personnel, Kroll utilizes a network of
hundreds of field associates around the world, thus providing Kroll with
additional industry expertise and technical and specialized skills when needed.
Kroll believes that its professional employees are highly trained and
skilled and that its ability to continue to provide services to its existing
clients and to expand its business is highly dependent upon retaining its
existing professionals and attracting additional professionals with the
requisite credentials. The competition for these types of employees is intense
and the loss of any significant number of its professional staff, or the loss of
Jules B. Kroll, could have a material adverse effect on the business and
financial condition of Kroll (see "RISK FACTORS -- Risks Relating to the
Business of Kroll -- Dependence on Key Employees").
GOVERNMENT REGULATION
Kroll's services are subject to various federal, state, local and foreign
laws, including laws designed to protect the privacy of persons. A wholly owned
subsidiary of Kroll holds private investigative licenses from, and its
investigative activities are subject to regulation by, the following state and
local authorities: California (Department of Consumer Affairs, Division of
Licensing, Bureau of Security and Investigative Services); Connecticut
(Department of Public Safety, Division of State Police); Florida (Department of
State, Secretary of State, Division of Licensing); Illinois (Department of
Professional Regulations); Maryland (Department of State Police); Massachusetts
(Department of State Police, Special Licensing Unit) Michigan (Department of
State Police); New Jersey (Department of Law and Public Safety, Division of
State Police); New York (Department of State, Division of Licensing Services);
Pennsylvania (County of Allegheny); and District of Columbia (Metropolitan
Police, Investigative Services Division, Security Officers Management Branch).
In addition, an application to obtain a private detective license on behalf of
such subsidiary is pending with the Georgia Board of Private Detective. Kroll
does not believe that the Merger will have an adverse effect upon its licenses
in the foregoing states. Kroll utilizes certain data from outside sources,
including data from third party vendors and various government and public record
services, in performing its services. To the present time, laws and regulations
of the foregoing jurisdictions have not interfered materially with the conduct
of the business or operations of Kroll, including Kroll's access to data used in
its business. However, there can be no assurance that new regulations, such as
changes in governmental regulations relating to the protection of privacy, will
not be enacted that could materially interfere with the manner in which Kroll
obtains information, conducts its operations and provides its services, with a
resulting material adverse effect on Kroll's financial condition, results of
operations and cash flows. See "RISK FACTORS -- Risk Factors Relating to the
Business of Kroll -- Government Regulation."
PROPERTIES
Kroll leases all of the real properties it uses in connection with its
business. Kroll's principal executive offices are located in New York, New York,
where it leases approximately 36,900 square feet of office space under a lease
expiring in December 2007. This lease currently requires annual base rent of
approximately $1.3 million, plus its proportionate share of real estate taxes,
common area charges and other expenses, which base rate escalates to
approximately $1.6 million by December 2007.
Kroll also maintains domestic offices in each of Los Angeles, San Francisco
and Santa Clara, California; Washington, D.C.; Miami, Florida; Atlanta, Georgia;
Chicago, Illinois; Parsippany, New Jersey; Pittsburgh, Pennsylvania; and Vienna,
Virginia. These offices range from approximately 600 square feet to
approximately 8,800 square feet and are under leases expiring between December
1997 and October 2001 that provide for annual base rents ranging from
approximately $9,000 to approximately $242,000 plus, in each case, its
proportionate share of real estate taxes, common area charges and certain other
expenses.
Kroll also maintains foreign offices in Sydney, Australia; Sao Paulo,
Brazil; Hong Kong and Beijing, China; Paris, France; Frankfurt Am Main, Germany;
New Delhi, India; Tokyo, Japan; Manilla, the Philippines; Moscow, Russia;
Singapore; and London, the United Kingdom. These foreign offices range from
approximately 320 square feet to approximately 7,200 square feet and are under
leases expiring between January 1998 and May 2002 that provide for annual base
rents ranging from approximately $15,000 to approximately $400,000 plus, in each
case, its proportionate share of real estate taxes and certain other charges.
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Kroll management believes that all its leased properties are adequate for
its current and reasonably foreseeable future requirements, and that additional
or replacement space should be available as required.
LITIGATION
Kroll is involved in litigation from time to time in the ordinary course of
its business; however, Kroll does not believe that there is any pending
litigation, individually or in the aggregate, that is reasonably likely to have
a material adverse effect on its business or financial condition. Kroll is a
defendant in an action titled De Fillipis v. American Ref-Fuel et al pending in
the Supreme Court of the State of New York, Queens County. In this litigation,
which was commenced in May 1997 by Daniel De Fillipis and his wife against
American Ref-Fuel, American Ref-Fuel Co. of Hempstead, Kroll and Chad Barker,
plaintiffs allege various tortious conduct on the part of Kroll and its former
employee (Mr. Barker) in connection with an investigation of Mr. De Fillipis and
seek compensatory and punitive damages of $5.0 million. On September 30, 1997,
Kroll filed a notice of motion notifying plaintiffs that, on October 28, 1997,
Kroll will request an order from the court dismissing plaintiffs' complaint for
failure to state a cause of action, or, in the alternative, striking the
complaint and requiring a more definite statement. Based on preliminary
information presently available to Kroll, Kroll believes that it is unlikely
that the plaintiffs suffered damages in the amount of the claims. Kroll intends
vigorously to defend these claims, but there can be no assurance that a
favorable outcome will be obtained. Mr. De Fillipis also has filed a complaint
related to this matter with the New York Department of State, Division of
Licensing Services.
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MANAGEMENT OF O'GARA
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of October 15, 1997
concerning each of O'Gara's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- --------------------------------------------------
<S> <C> <C>
Thomas M. O'Gara........... 47 Chairman of the Board
Wilfred T. O'Gara.......... 40 President, Chief Executive Officer and Director
Gary W. Allen.............. 43 Vice President -- Operations, O'Gara-Hess &
Eisenhardt Armoring Company
Nicholas P. Carpinello..... 47 Executive Vice President, Chief Financial Officer
and Treasurer
Richard L. Curotto......... 59 Vice President -- Worldwide Product Development,
O'Gara-Hess & Eisenhardt Armoring Company
Daniel Gautier............. 54 Director
Abram S. Gordon............ 34 Vice President, General Counsel and Secretary
Michael J. Lennon.......... 41 President and Chief Operating Officer, O'Gara-Hess
& Eisenhardt Armoring Company
Raymond E. Mabus........... 49 Director
Hugh E. Price.............. 60 President, O'Gara Security Associates, and
Director
Jerry E. Ritter............ 62 Director
William S. Sessions........ 67 Director
</TABLE>
Thomas M. O'Gara is Chairman of the Board of O'Gara. Mr. O'Gara has been
Chairman of the Board of OHE since 1990 and was OHE's Chief Executive Officer
from 1990 until 1995. He has been a director of O'Gara since August 1996 and a
director of OHE since 1988. Mr. O'Gara has been an executive of O'Gara and its
predecessors since 1975. From 1984 until 1986, Mr. O'Gara also was Honorary
Consul General for the Sultanate of Oman. Thomas M. O'Gara and Wilfred T. O'Gara
are brothers.
Wilfred T. O'Gara is President and Chief Executive Officer of O'Gara. He
has been associated with O'Gara and its predecessors since 1983. He has been
Chief Executive Officer of OHE since January 1996, was President and Chief
Operating Officer of OHE from 1991 through 1995 and was Vice President -- Sales
and Marketing from 1988 until 1991. He also has been Vice Chairman of O'Gara
Satellite Networks, Inc. ("OSN, Inc."), a Delaware corporation which is now a
wholly owned subsidiary of O'Gara, since October 1995, having served as
President of OSN, Inc. from January 1995 through September 1995. Mr. O'Gara has
been a director of O'Gara since August 1996, a director of OHE since 1991 and a
director of OSN, Inc. since 1995.
Gary W. Allen is Vice President -- Operations of OHE, a position in which
he has served since 1994. From 1989 until 1994, Mr. Allen was Manager of Shop
Operations for the G.E. Aircraft Engines business of General Electric Company.
Nicholas P. Carpinello is Executive Vice President, Chief Financial Officer
and Treasurer of O'Gara. He has held these same positions with OHE since 1993
and also has been Treasurer of OSN, Inc. since 1995. Mr. Carpinello has been
associated with O'Gara and its predecessors since 1984. From 1975 until 1984, he
was employed by Arthur Andersen LLP where he served as a manager in the audit
and small business consulting divisions.
Richard L. Curotto is Vice President -- Worldwide Product Development of
OHE, a position which he has held since 1992. Mr. Curotto joined OHE in
September 1990 as Vice President -- Engineering. Prior to joining OHE, Mr.
Curotto was an engineer, manager and executive with Stutz Motor Cars of America,
Inc., a company he co-founded in 1968.
Daniel Gautier is Chairman of the Board of Labbe, an armorer of commercial
and private vehicles based in Lamballe, France, which was acquired by O'Gara in
February 1997. He had been Labbe's principal shareholder since 1988 and became
its Chairman in 1992. Previously, Mr. Gautier had served for sixteen years as
President
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<PAGE> 88
and Senior Partner of Gautier et Associe's, a large, regional accounting firm,
and as a consultant to various businesses. Mr. Gautier has been a director of
O'Gara since May 1997.
Abram S. Gordon is Vice President, General Counsel and Secretary of O'Gara.
Prior to joining O'Gara in January 1997, he was with the law firm of Taft,
Stettinius & Hollister, Cincinnati, Ohio, from October 1987 until December 1996.
Michael J. Lennon is President and Chief Operating Officer of OHE,
positions he has held since January 1996. Mr. Lennon joined OHE in February 1994
as Manager of Commercial and Military Programs; he became Vice President for
Sales, Marketing and Program Management in October 1994 and served OHE in that
capacity through 1995. Prior to joining OHE, Mr. Lennon had 15 years' experience
in manufacturing, quality control and marketing with General Electric Company,
which he joined in 1979. From 1990 to 1994, he was Manager of Advanced
Technology Marketing for their G.E. Aircraft Engines business.
Raymond E. Mabus is currently of counsel to the law firm of Baker,
Donaldson, Bearman and Caldwell and also manages a family timber business. He
served as the United States Ambassador to the Kingdom of Saudi Arabia from 1994
until 1996, as a consultant to Mobil Telecommunications Technology from 1992
until 1994 and as Governor of the State of Mississippi from 1988 until 1992. Mr.
Mabus has been a director of O'Gara since November 1996.
Hugh E. Price is President of OSA. During 1995 and 1996, prior to joining
O'Gara, he was a consultant to various businesses and organizations. Until his
retirement in 1995, Mr. Price had been employed by the Central
Intelligence Agency since 1964. His positions with the Agency included Deputy
and Associate Deputy Director for Operations (1991-1995), Chief and Deputy Chief
for Counterintelligence (1988-1990) and Director of Personnel (1986-1988). Mr.
Price became a director of O'Gara in October 1996.
Jerry E. Ritter is currently a consultant to Anheuser-Busch Companies,
Inc., a company engaged in the brewing and family entertainment businesses. He
also is Chairman of the Board of Clark Enterprises, Inc., the general partner of
the Kiel Center and the St. Louis Blues Hockey Club. From 1990 until 1996, Mr.
Ritter served as Executive Vice President and Chief Financial and Administrative
Officer for Anheuser-Busch Companies, Inc. Prior to that time, he served
Anheuser-Busch in various other managerial and executive capacities. Mr. Ritter
also is a director of The Earthgrains Company, Brown Group, Inc. and OmniQuip
International, Inc. He became a director of O'Gara in January 1997.
William S. Sessions is a partner in the law firm of Sessions & Sessions,
L.C. and is a consultant to various public and private businesses. From 1987
until 1993, Mr. Sessions was Director of the Federal Bureau of Investigation. He
served as a United States District Judge for the Western District of Texas from
1974 until 1987. Mr. Sessions is a director of Zenith National Insurance
Company. He has been a director of O'Gara since November 1996.
Directors of O'Gara are elected annually. Officers of O'Gara are elected
annually and serve at the discretion of the Board of Directors.
See "THE MERGER -- Management of O'Gara after the Merger" for information
relating to the effects of the Merger on the directors and executive officers of
O'Gara.
MEETINGS; COMMITTEES OF THE O'GARA BOARD
The O'Gara Board held two meetings in 1996. The O'Gara Board has an Audit
Committee and a Compensation Committee, both of which are composed of Messrs.
Ritter (Chairman), Mabus and Sessions. The Audit Committee recommends the
appointment of independent accountants and reviews and discusses with the
independent accountants the scope of their examination, their proposed fee and
the overall approach to the audit. The Audit Committee also reviews with the
independent accountants and O'Gara's financial management the annual financial
statements and discusses the effectiveness of internal accounting controls. The
Audit Committee did not meet in 1996. The Compensation Committee has
responsibility for establishing executive officers' compensation and other
benefits. The Compensation Committee did not meet in 1996 but met in March 1997
to determine bonus payments for 1996 and to establish compensation criteria for
1997. See "-- Report of the
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Compensation Committee on Executive Compensation." The O'Gara Board does not
have a Nominating Committee. During 1996, each incumbent director except Mr.
Mabus attended more than 75% of the aggregate of all meetings of the O'Gara
Board and all committees on which he served which he was eligible to attend.
DIRECTORS' COMPENSATION
Directors who are not employees of O'Gara receive annually a $10,000 fee,
plus options to purchase 1,000 shares of O'Gara Common Stock, for serving as
directors and members of committees. These directors also are paid $500 for each
O'Gara Board meeting attended, including O'Gara Board meetings held by
telephone. Committee members receive $500 per committee meeting attended, unless
the committee meeting occurs on the same day as an O'Gara Board meeting, in
which case no separate fee is paid. Employee directors are not separately
compensated for their services as directors.
From time to time, Mr. Sessions has provided consulting services to O'Gara
or OHE. During 1996 and the first six months of 1997, he received fees of $5,000
and $7,500, respectively, plus reimbursement of expenses, for sales development
assistance relating to OHE's commercial armored products.
EXECUTIVE COMPENSATION
Summary Information. The following table sets forth, for the fiscal years
indicated, amounts of cash and certain other compensation paid by O'Gara and its
subsidiaries, for services in all capacities, to (i) Wilfred T. O'Gara and (ii)
each of O'Gara's four other most highly compensated executive officers during
1996. Mr. O'Gara and these other executive officers are sometimes referred to as
the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------ ------------
OTHER SECURITIES
ANNUAL UNDERLYING
COMPEN- STOCK OPTION ALL OTHER
NAME AND PRINCIPAL SALARY BONUS SATION GRANTS COMPENSATION
POSITION YEAR ($)(1) ($) ($) (#) ($)(2)
- -------------------------- ----- --------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas M. O'Gara.......... 1996 $379,081 $7,000 -- -- $1,218
Chairman of the Board 1995 410,631 -- -- -- 1,218
Wilfred T. O'Gara......... 1996 $200,231 $45,000 -- 17,000 $ 462
President and Chief 1995 140,550 -- -- -- 462
Executive Officer
Gary W. Allen............. 1996 $100,666 $47,784 -- 15,000 $ 512
Vice President, OHE 1995 88,239 -- -- -- 414
Richard L. Curotto........ 1996 $100,833 $47,392 -- 15,000 $2,248
Vice President, OHE 1995 98,433 17,000 -- -- 2,223
Michael J. Lennon......... 1996 $128,334 $60,317 -- 17,000 $ 667
President, OHE 1995 89,977 20,000 -- -- 277
</TABLE>
- ---------------
(1) Effective November 1, 1996, Messrs. Thomas M. O'Gara, Wilfred T. O'Gara,
Allen, Curotto and Lennon receive base annual salaries of $250,000,
$230,000, $115,000, $110,000 and $145,000, respectively (see "-- Employment
Agreements").
(2) Represents profit-sharing contributions to O'Gara's 401(k) Plan.
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<PAGE> 90
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The policy of the Compensation Committee of the O'Gara Board is to provide
compensation that attracts, motivates and retains a highly qualified management
team meeting the special management requirements of O'Gara. The compensation
program is central to the successful operation and growth of O'Gara and is
intended to align closely the interests of management with those of O'Gara's
shareholders.
Statement of Purpose. The Committee believes that a compensation program
must enable O'Gara to attract a limited number of executives with critical
experience for key positions and to retain and motivate strong, capable
management. At the same time, the cost of management compensation must bear a
reasonable relationship to the performance of O'Gara and the total return to
shareholders on their investment in O'Gara. The purposes of the program approved
and actions taken by the Compensation Committee are as follows:
- Encourage and reward an entrepreneurial spirit and business success each
year in the operating divisions of O'Gara and, at the same time, build
the structure and teamwork necessary for profitable long-term growth in
O'Gara's business.
- Provide executives who succeed within O'Gara the opportunity to build
capital value through stock options and stock, as long as shareholders
build corresponding value.
Cash Compensation. To achieve these purposes, the Committee has set total
cash compensation at levels that it believes are reasonable in light of O'Gara's
size and financial results. Salaries are reviewed annually and are determined
based on specific executive responsibilities, the changing nature of these
responsibilities and performance. Total cash compensation each year can be
increased or decreased substantially from the prior year depending on the size
of the annual incentive payment awarded.
The base annual salary of each named executive officer, including the Chief
Executive Officer, is set in his employment agreement with O'Gara (see
"Employment Agreements") and is subject to increase from time to time. Because
the employment agreements did not take effect until November 1, 1996, the full
year salary shown on the Summary Compensation Table for each executive officer
does not necessarily reflect that established in his employment agreement. Also,
because the base salaries were so recently set, the Committee determined that
they should not be increased for 1997. All salaries will be reviewed at the end
of 1997 and, depending on O'Gara's financial results and the executive officers'
performances, may be increased.
The annual incentive payment portion of total cash compensation each year
is tied directly to the level of achievement of O'Gara relative to the financial
objectives established at the beginning of the year. Currently, these objectives
relate to O'Gara's overall operating revenue or the operating revenue of the
particular Company subsidiary or division for which the executive officer has
responsibility. For 1996, three executive officers of O'Gara, the Chairman of
the Board, the Chief Executive Officer and the Chief Financial Officer, did not
receive the total incentive compensation to which they were entitled because
such individuals had received certain distributions in connection with the
initial public offering of O'Gara Common Stock in November 1996. All other
eligible executive officers received the full awards for which they were
eligible. Annual incentive awards to senior executives generally are paid, net
of applicable withholdings, one-half in cash and one-half in restricted shares
of O'Gara Common Stock. For 1996, however, those executive officers receiving
smaller awards, the Chairman of the Board, the Chief Executive Officer and the
Chief Financial Officer, received their full awards in cash.
Long-Term Stock Incentives. The Committee also is responsible for grants
to O'Gara's executive officers under O'Gara's 1996 Stock Option Plan. The
purpose of the Plan is to provide long-term compensation which, because it is
based upon stock price appreciation, directly aligns the interest of management
with that of shareholders. During 1996, options for 17,000 shares were granted
to the Chief Executive Officer and options for an aggregate of 47,000 shares
were granted to O'Gara's other named executive officers. All of these grants
were approved by the Board of Directors prior to O'Gara's initial public
offering and became effective at the time of the Offering.
Section 162(m) of the Internal Revenue Code and its related regulations
(together "Section 162(m)") limit the deductibility of non- "performance based"
compensation received by each of O'Gara's named executive officers to $1.0
million per year. Compensation meeting certain criteria specified in Section
162(m) is considered
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<PAGE> 91
"performance based" and is excluded from the limitation on deductibility.
O'Gara's 1996 Stock Option Plan and all options granted to O'Gara's named
executive officers under the Plan are designed to meet the Section 162(m)
criteria for performance based compensation. In 1996, no named executive officer
received non-performance based compensation in excess of $400,000, and the
Committee currently does not expect the Section 162(m) limitation to be an issue
in its compensation decisions during 1997. As previously noted, the policy of
the Committee is to maintain a compensation program that maximizes the creation
of long-term shareholder value. As appropriate in the future, the Committee will
consider qualifying the deductibility of compensation to the extent consistent
with the objectives of O'Gara's executive compensation program and with
maintaining competitive compensation.
Jerry E. Ritter, Chairman
Raymond E. Mabus
William S. Sessions
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<PAGE> 92
PERFORMANCE GRAPH
The following graph compares the performance of O'Gara Common Stock with
the performance of companies included in the Russell 2000 Index of Small
Capitalization Companies and in a self-constructed peer group index. The graph
assumes that $100 was invested on November 13, 1996, the first day of trading of
O'Gara Common Stock, and that any dividends were reinvested.
Because O'Gara operates in three business segments, no published peer group
accurately mirrors O'Gara's business. Accordingly, O'Gara has created a special
peer group composed of Armor Holdings, Inc., Pinkerton's, Inc., Simula, Inc. and
Spartan Motors, Inc. The returns of each company are weighted according to its
respective stock market capitalization. The peer group was selected based upon
criteria including business activities, industries served, size of company and
market capitalization.
COMPARISON OF CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
MEASUREMENT PERIOD THE O'GARA
(FISCAL YEAR COVERED) COMPANY RUSSELL 2000 PEER GROUP
<S> <C> <C> <C>
11/13/96 100 100 100
12/31/96 108 107 98
</TABLE>
Employment Agreements. O'Gara (or OHE) entered into employment agreements,
which commenced on November 1, 1996 and expire on August 31, 1998, with Messrs.
Thomas M. O'Gara, Wilfred T. O'Gara, Allen, Curotto and Lennon, providing for
annual base salaries of $250,000, $230,000, $115,000, $110,000 and $145,000,
respectively. Each named executive officer also is entitled to participate in an
annual bonus plan established by the Compensation Committee and to receive up to
50% of such bonus in shares of O'Gara Common Stock. Employment may be terminated
by O'Gara at any time with or without cause, except that, in a case of
termination without cause, the employee is entitled to receive compensation for
the balance of the term of the agreement. Each employment agreement restricts
the executive officer from competing with O'Gara during the term of the
agreement and for two years thereafter if termination of employment is for cause
or at the volition of the employee. For information relating to changes in
certain of these agreements in connection with the Merger, see "THE
MERGER -- Management of O'Gara after the Merger."
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<PAGE> 93
THE O'GARA OPTION PROPOSAL
Introduction. The Plan, which was adopted prior to the Offering, currently
provides for the issuance of up to 400,000 shares of O'Gara Common Stock
pursuant to options granted under the Plan. Options to acquire 274,050 shares of
O'Gara Common Stock are currently outstanding.
The Plan was adopted to further the growth and success of O'Gara by
providing an incentive to employees which increases their direct involvement in
the future success of O'Gara.
The O'Gara Board is proposing that the Plan be amended to provide for an
increase in the maximum number of shares of O'Gara Common Stock which may be
issued under the Plan from 400,000 to 836,000 and to make other changes as
described below. In proposing these amendments, the O'Gara Board took into
consideration the number of shares of O'Gara Common Stock subject to outstanding
options, the expansion of the O'Gara employee base since the Offering as a
result of the Acquisitions and the substantially larger employee base that would
result from the consummation of the Merger.
Approval of the O'Gara Option Proposal is not contingent upon approval or
effectiveness of the Merger.
THE O'GARA BOARD RECOMMENDS A VOTE "FOR" APPROVAL OF THE O'GARA OPTION
PROPOSAL.
The Plan. Any employee on the regular payroll of O'Gara may be selected to
participate in the Plan. Additionally, options are granted under the Plan to
O'Gara's non-employee directors in accordance with O'Gara's policy for the
compensation of directors. See "MANAGEMENT OF O'GARA -- Directors'
Compensation." Up to 400,000 (to be increased to 836,000 if the O'Gara Option
Proposal is adopted) shares of O'Gara Common Stock may be issued pursuant to the
Plan. The Plan currently provides that options for no more than 50,000 shares
may be granted to any eligible employee during any period of 12 consecutive
months; the O'Gara Option Proposal would increase this maximum number to
125,000. Appropriate adjustments in the number of shares issuable and in the
number and prices of shares covered by outstanding options will be made to give
effect to any changes in O'Gara's capitalization (stock splits, stock dividends,
etc.).
Currently, the Plan is administered by the O'Gara Board. In addition to
administering and interpreting the Plan, the O'Gara Board has authority to
select optionees, determine the number of shares for which an option is granted,
set the option's price and term, select the type of option and establish all
other terms and conditions of the option.
The O'Gara Board may waive or amend the terms and conditions of, or
accelerate the vesting of, an option. The O'Gara Board may appoint a committee
to carry out all of its functions with respect to the Plan, except for
amendments to or termination of the Plan. For the purpose of option grants to
and approval of other transactions with persons who are subject to Section 16 of
the Securities Exchange Act of 1934 (the "Exchange Act") with respect to O'Gara,
each committee member must be a "Non-Employee Director" as defined in Rule 16b-3
under the Exchange Act. The Board has delegated to the Compensation Committee
the responsibility for option grants to O'Gara's executive officers.
Both incentive stock options and nonqualified options may be granted to
employee-participants in the Plan. Non-employee directors may only receive
nonqualified option grants. The per share exercise price of a nonqualified
option must be at least 85% of the fair market value of a share of the O'Gara
Common Stock on the date the option is granted. The per share exercise price of
an incentive stock option may not be less than 100% of the O'Gara Common Stock's
fair market value on the date of grant, and no incentive stock option may be
exercised after ten years from the date of grant. Incentive stock options
granted to an optionee holding more than 10% of outstanding O'Gara Common Stock
must have a price of at least 110% of fair market value on the date of grant and
may be for a term no longer than five years.
An option's exercise price may be paid in cash or by the tender of shares
of O'Gara Common Stock or by a combination of these methods. Shares of O'Gara
Common Stock which are tendered or withheld are valued at their fair market
value on the date of tender and may be counted as available for issuance under
the Plan. For purposes of the Plan, fair market value means the last sale price
for the O'Gara Common Stock reported on the Nasdaq National Market on a given
date.
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Generally, an unexercisable option terminates when an optionee terminates
employment with or service as a director of O'Gara. An exercisable option
terminates on the earlier of (i) its full exercise, (ii) its expiration date or
(iii) the end of the three-month period following the date of termination of
employment or service as a director. If, however, an optionee becomes disabled
or dies while employed by or serving as a director of O'Gara or within three
months thereafter, a then-exercisable option may be exercised for one year after
the date of death or commencement of disability. The Plan allows the O'Gara
Board to extend these option exercise periods.
A nonqualified option may be transferred pursuant to a domestic relations
order or under other circumstances, terms and conditions established by the
O'Gara Board. Otherwise, an option is not transferrable except by the optionee's
will or the laws of descent and distribution and, during an optionee's lifetime,
may only be exercised by the optionee or the optionee's legal representative or
guardian.
The O'Gara Board may amend or terminate the Plan at any time; however,
shareholder approval is required for an amendment if such approval is necessary
under the Code or the Exchange Act. No Plan amendment may alter or impair an
outstanding option without the optionee's consent. No option may be granted
under the Plan subsequent to October 22, 2006.
If O'Gara enters into an agreement of reorganization, merger or
consolidation in which O'Gara is not to be the surviving corporation or enters
into an agreement for the sale or transfer of all or substantially all of its
assets, all outstanding options will become immediately exercisable. If the
successor or transferee corporation does not agree to continue the Plan, both
the Plan and all outstanding options will terminate as of the effective date of
any such transaction. An optionee who is subject to Section 16 of the Exchange
Act may, immediately prior to the consummation of the transaction and in lieu of
the consideration receivable by other optionees in the transaction, tender any
unexercised options to O'Gara and receive a cash payment equal to the difference
between the aggregate "fair value" of the shares of O'Gara Common Stock subject
to the holder's unexercised options and the aggregate option price of those
shares.
Accounting Effects. The proceeds of the sale of O'Gara Common Stock under
the Plan constitute general funds of O'Gara and may be used by it for any
purpose. Under present accounting practices followed by O'Gara, neither the
grant at fair market value nor the exercise of an option generally results in
any charge against O'Gara's earnings. The grant of options at a price less than
100% of fair market value results in compensation expense to O'Gara. To date,
O'Gara has granted all options under the Plan at an exercise price equal to at
least 100% of the fair market value of O'Gara Common Stock for accounting
purposes.
Certain Federal Income Tax Considerations. The Plan provides that, if
payments to an optionee by O'Gara would constitute "excess parachute payments"
under the Code, amounts payable in accordance with the Plan's change of control
provisions will be reduced so that the employee is not subject to the 20% excise
tax on the payment and O'Gara is able to deduct the entire payment.
Generally, an optionee recognizes no income upon the grant or exercise of
an incentive stock option and, if the stock purchased on option exercise is not
disposed of within two years from the date of grant nor within one year after
exercise, the amount realized on sale or taxable exchange in excess of the
option price is treated as a long term capital gain and O'Gara is not entitled
to a federal income tax deduction. If stock acquired on exercise of an incentive
stock option is disposed of before the expiration of either of the prescribed
holding periods, the lesser of (i) the difference between the option price and
the fair market value at the time of exercise, or (ii) the difference between
the option price and the amount realized upon disposition is treated as ordinary
income to the optionee at the time of disposition and is allowed as a deduction
to O'Gara; any excess of the amount realized upon sale over the fair market
value at the time of exercise generally is treated as capital gain to the
optionee. In general, an optionee who exercises a nonqualified option recognizes
taxable ordinary income, and O'Gara is entitled to a deduction, at the time of
exercise of the option in an amount equal to the excess of the fair market value
of the shares purchased over the option price.
Grants. Currently, options have been granted to approximately 200
individuals under the Plan. The Plan contains no limitation as to the maximum
number of participants. As of October 15, 1997, options granted under the Plan
were outstanding in the following amounts: Thomas M. O'Gara, 23,150 shares;
Wilfred T. O'Gara, 40,150 shares; Gary W. Allen, 19,000 shares; Richard L.
Curotto, 18,000 shares; Michael J. Lennon, 22,000 shares; Hugh E.
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<PAGE> 95
Price, 22,500 shares; all current executive officers as a group, 168,800 shares;
Raymond E. Mabus, 2,000 shares; Jerry E. Ritter, 1,000 shares; William S.
Sessions, 2,000 shares; and all employees as a group, 274,050 shares. For
information relating to options to be granted at the Effective Time, see "THE
MERGER -- Management of O'Gara after the Merger."
The following table presents information on option grants to the named
executive officers during 1996 pursuant to the Plan. The Plan does not provide
for the grant of stock appreciation rights ("SARs").
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
--------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS EXERCISE FOR
OPTIONS GRANTED TO OR BASE OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION --------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- -------------------------- ---------- ------------ -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Thomas M. O'Gara.......... -- -- -- -- -- --
Wilfred T. O'Gara......... 17,000 9.6% $ 9.00 11/11/06 $96,050 $244,120
Gary W. Allen............. 15,000 8.5% $ 9.00 11/11/06 $84,750 $215,400
Richard L. Curotto........ 15,000 8.5% $ 9.00 11/11/06 $84,750 $215,400
Michael J. Lennon......... 17,000 9.6% $ 9.00 11/11/06 $96,050 $244,120
</TABLE>
- ---------------
(1) All options vest on November 12, 1997. The exercise price of all options may
be paid in cash or by the transfer of shares of O'Gara Common Stock valued
at their fair market value on the date of exercise. Each option becomes
exercisable in full in the event of the execution of an agreement of merger,
consolidation or reorganization pursuant to which O'Gara is not to be the
surviving corporation or the execution of an agreement of sale or transfer
of all or substantially all of the assets of O'Gara.
With respect to each named executive officer, the following table sets
forth information concerning unexercised stock options held at December 31,
1996. No options were exercised during 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
VALUE REALIZED ($) UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
(MARKET PRICE ON FY-END (#) AT FY-END ($)
SHARES ACQUIRED ON EXERCISE LESS EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) EXERCISE PRICE) UNEXERCISABLE UNEXERCISABLE
- --------------------- ------------------ ------------------ ---------------------- ----------------------------
<S> <C> <C> <C> <C>
Thomas M. O'Gara..... -- -- -- --
Wilfred T. O'Gara.... -- -- --/17,000 --/$12,750
Gary W. Allen........ -- -- --/15,000 --/$11,250
Richard L. Curotto... -- -- --/15,000 --/$11,250
Michael J. Lennon.... -- -- --/17,000 --/$12,750
</TABLE>
Kroll Options. Pursuant to the Merger Agreement, any option to acquire
Kroll Stock which is not exercised prior to the Effective Time will be converted
into an option to purchase the number of shares of O'Gara Common Stock which
would have been received had such option been exercised immediately prior to the
Effective Time. See "THE MERGER AGREEMENT -- Conversion of Kroll Stock." Such
options will continue to be governed by the terms of the Kroll Management Stock
Option Plan or the Stock Option and Stockholder Agreements and will not be
subject to the terms of the Plan or reduce the number of shares of O'Gara Common
Stock with respect to which options may be issued under the Plan. See
"MANAGEMENT OF KROLL" and "CERTAIN RELATIONSHIPS AND RELATED PARTY
TRANSACTIONS -- KROLL" for information relating to the Kroll Management Stock
Option Plan and the Stock Option and Stockholder Agreements and the options
outstanding thereunder.
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<PAGE> 96
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS -- O'GARA
In connection with the Offering, the O'Gara Board adopted a policy
requiring that any future transactions, including loans, between O'Gara and its
officers, directors, principal shareholders and their affiliates be on terms no
less favorable to O'Gara than could be obtained from unrelated third parties and
that any such transactions be approved by a majority of the disinterested
members of the O'Gara Board.
Described below are certain transactions and relationships between O'Gara
and certain of its officers, directors and shareholders which have occurred
during the last three fiscal years. Except with respect to interest rates
charged on certain of the intercompany notes and accounts payable/receivable,
O'Gara believes that the material terms of the various transactions were as
favorable as could have been obtained from unrelated third parties.
LONGLINE LEASING/EXCEL ARMOR
General. Longline Leasing, Inc. ("Longline") and Excel Armor Products,
Inc. ("Excel Armor" and, together with Longline, "Longline/Excel") are Delaware
corporations, which merged as of December 31, 1996; Messrs. Thomas M. O'Gara,
Wilfred T. O'Gara and Carpinello owned approximately 92%, 1% and 1%,
respectively, of the outstanding capital stock of each.
Lease agreements. OHE has a Master Equipment Lease with Longline, entered
into in July 1995, pursuant to which OHE leases various items of equipment from
Longline. As of June 30, 1997, OHE had approximately $1,250,000 of equipment
under lease for 12 and 36-month terms, beginning on various dates between July
1995 and April 1996. Rental expenses were $17,000, $381,446 and $222,598 for the
years ended December 31, 1995 and 1996 and for the six months ended June 30,
1997, respectively.
Supplier arrangements. During 1995 and 1996, OHE purchased the dual-hard
steel required for certain aspects of its vehicle armoring from Excel Armor,
which distributed the steel for an unrelated third party. Purchases by OHE from
Excel Armor were $520,700 and $960,231 during 1995 and 1996, respectively, and
accounted for 90% and 99% of Excel Armor's sales revenues for the same periods.
In connection with these purchases, OHE advanced $160,390 to Excel Armor during
1995 to fund Excel Armor's initial purchase commitments and guaranteed a
$150,000 letter of credit furnished by Excel Armor to the third party. OHE now
purchases its dual-hard steel directly from the third party. At December 31,
1996 and June 30, 1997, OHE had receivables of $210,659 and $282,346,
respectively, from Excel Armor in connection with the prior arrangement. All
other aspects of the arrangement have been terminated. Also, in August 1995,
Excel Armor and OHE entered into an agreement under which OHE manufactured
certain parts needed by Excel Armor in connection with a contract with a third
party. Total revenue recognized in association with this contract was $124,000.
Corporate aircraft. Effective January 1, 1994, OHE entered into a five
year lease for a Hawker jet owned by Longline. Financing for the jet had been
provided to Longline by means of a $1,100,000 loan from Cessna Finance
Corporation to Thomas M. O'Gara. OHE's agreement with Longline provided for
deposit and rental payments aggregating $1,634,000 over the term of the lease.
This lease was cancelled effective January 30, 1995.
In February 1995, OHE entered into a lease for a Gulfstream G-II aircraft
owned by Longline and Excel Armor as tenants in common. The Gulfstream aircraft
was purchased by Longline/Excel for a price of $4,060,000 (represented by an
exchange of the Hawker jet and new financing). In connection with the
cancellation of the Hawker lease, $400,493, representing the unamortized portion
of OHE's $504,000 deposit on that lease, was transferred as the deposit on the
Gulfstream lease. The Gulfstream lease had a non-cancelable ten year term and
initially provided for rental payments of $53,000 per month. Nonetheless O'Gara
paid rentals based on actual usage. In August 1996, the Gulfstream lease was
amended to provide for minimum lease payments of $35,200 per month.
In February 1995, OHE also entered into a supplemental agreement with
Longline/Excel pursuant to which Longline/Excel agreed to provide all aircraft
management (including insurance) for the Gulfstream aircraft and to charter it
to others when not in use by OHE. Pursuant to this arrangement, and in lieu of
the $53,000 per month rental payments then required by the lease, OHE paid
Longline/Excel $30,000 per month, plus $1,800 per hour of monthly use in excess
of 16.7 hours, and Longline/Excel was entitled to retain all revenues from the
charter
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<PAGE> 97
operations. In connection with the August 1996 amendment to the Gulfstream
lease, this agreement was amended to allow OHE 23 hours of usage per month and
to provide for charges of $1,500 per hour thereafter. Longline/Excel continues
to retain all revenues from charter operations. Rental expense related to the
Gulfstream lease (including amortization of the deposit) was $414,160, $422,349
and $249,833 for 1995, 1996 and the first six months of 1997, respectively.
Additionally, O'Gara paid Longline/Excel $327,000 relating to usage of the
aircraft during O'Gara's initial public offering in 1996. O'Gara believes that
the rate paid was equivalent to that charged by Longline/Excel to other
unrelated companies for similar services during 1996 and compared favorably to
rates charged by another unrelated charter service for similar aircraft.
OHE and Longline/Excel have begun negotiations regarding changes to these
lease arrangements. Because of unanticipatedly high usage of the Gulfstream
aircraft by OHE during the past year due to travel undertaken during the
Offering and the transaction with Kroll, Longline/Excel has been limited in its
ability to charter the aircraft. Longline/Excel has requested that OHE amend the
lease arrangements in order that OHE commence paying market rates for its use of
the aircraft.
INTERCOMPANY NOTES AND ACCOUNTS PAYABLE/RECEIVABLE
OHE held promissory notes, for money borrowed, in the principal amounts of
$100,000 and $130,000 from Thomas M. O'Gara. Each note bore interest at the rate
of 8.75% per annum and was due on December 31, 1996. In December 1996, Thomas M.
O'Gara repaid in full the $251,834 of principal and accrued interest outstanding
under these notes. Thomas M. O'Gara also was indebted, for money borrowed, to
OHE in amounts up to $288,725, not represented by a promissory note; this
indebtedness has been fully repaid.
OSN held a promissory note, for money borrowed, from Excel Metal Products,
Inc. ("Excel Metal"), a corporation wholly owned by Thomas M. O'Gara, in the
principal amount of $310,000, which bore interest at the rate of 8.5% and was
due on February 11, 1997. All principal and accrued interest outstanding
pursuant to this note, totalling $331,224, was repaid in December 1996.
During 1994, 1995 and 1996, OHE paid Silver Springs Land and Cattle
Company, a Nevada corporation of which Thomas M. O'Gara is the President and
sole shareholder, $55,203, $11,082 and $3,177, respectively, for the use of its
facilities for corporate meetings. The use of these facilities by O'Gara has
been discontinued.
Until the Reorganization, OHE held a 49% beneficial interest in O'Gara
Overseas Services, S.A., a Swiss corporation ("OOS"), with the remaining 51%
held by Limited. As part of the Reorganization, OHE's interest in OOS was
exchanged for certain assets and liabilities of Limited, with the result being
that OOS is no longer affiliated with O'Gara. In addition, OHE fulfilled a
demand note, bearing interest at 3.0% per annum, that had been outstanding with
OOS in the amount of $90,930, which represented $88,685 in principle and $2,245
in interest. Also, subsequent to the Reorganization, Thomas M. O'Gara made full
payment on a 3.0% promissory note, which totalled $302,803 including interest,
held by OOS. OOS also had provided sales and marketing services for OHE and OSN.
During 1994, 1995 and 1996, $362,761, $377,144 and $363,583, respectively, were
paid to OOS for these services. All arrangements with OOS were terminated in
connection with the Reorganization.
Prior to August 1994, OHE was indebted to Letter International Limited
Irrevocable Trust in the amount of $1,260,000. Letter International Limited
Irrevocable Trust was a trust of which OHE was the sole beneficiary. At the same
time, the Trust was indebted in an equal amount to Thomas M. O'Gara. Thomas M.
O'Gara received from the Trust an assignment of the OHE's obligation in
satisfaction of the Trust's indebtedness to him. Thomas M. O'Gara then agreed to
the cancellation of this indebtedness of OHE in exchange for shares of common
stock of OHE equal to 21.5% of the shares of OHE outstanding, giving effect to
such transaction.
Since its incorporation in 1988, OPS was provided certain medical and
general liability insurance coverage under OHE's insurance policies. These
insurance programs were paid for by OPS through monthly and annual premiums
established by OHE's insurance provider. These arrangements were terminated upon
the consummation of the Offering.
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<PAGE> 98
BUILDING LEASE
OLG, Limited, an Ohio limited liability company of which Messrs. Thomas M.
O'Gara, Wilfred T. O'Gara, Allen, Carpinello, Curotto and Lennon own
approximately 91%, 5%, 1%, 1%, 1% and 1% of the outstanding capital stock,
respectively, was formed in March 1996 for the purpose of acquiring and leasing
to OHE O'Gara's facility located at 4175 Mulhauser Road, Fairfield, Ohio. The
building was purchased for approximately $1.8 million and was leased to OHE for
one year, ending March 31, 1997, for $468,000 (plus taxes, insurance and
maintenance costs). OHE exercised an option to renew the lease, at a base rent
of $21,000 per month, through July 1997. Since August 1997, OHE has continued to
utilize the facility on a month to month basis. Previously used for
manufacturing, the facility is currently used for storage. OHE also has an
option to purchase the building for its fair market value.
CONSULTING AGREEMENTS
Excel Metal. OSN, Inc. had a consulting agreement with Excel Metal
pursuant to which Excel Metal provided management consulting services to OSN,
Inc. during calendar year 1996 for a fee of $6,000 per month plus reimbursement
of expenses. The arrangement terminated upon consummation of the Offering.
William S. Sessions. From time to time, Mr. Sessions has provided
consulting services to O'Gara or OHE. During 1994, 1995, 1996 and for the first
six months of 1997, he received $55,000, $25,000, $5,000, and $7,500,
respectively, for sales development assistance related to OHE's commercial
armored products.
Neil P. Saldin. Mr. Saldin was an executive officer of O'Gara until June
30, 1997. Prior to becoming an executive officer of O'Gara, Mr. Saldin was a
consultant to OSN from October 1994 through September 1995. The consulting
services, which were managerial and related to the start up of OSN's operations,
were provided through a company controlled by Mr. Saldin, which was paid
$180,000.
Edward F. O'Gara. In 1994, 1995 and 1996, OHE guaranteed certain
consulting agreements between Longline or Excel Armor and Cirrus Systems, Inc.,
a Delaware corporation owned by Edward F. O'Gara, the brother of Thomas M.
O'Gara and Wilfred T. O'Gara. Such agreements were for one year terms for a
total of $120,000 per year and expired December 31, 1996. Thomas M. O'Gara has
agreed to indemnify OHE for any claims made under such guarantees.
EXERCISE OF STOCK OPTIONS AND SALE OF SHARES
On August 23, 1996, Messrs. Thomas M. O'Gara, Wilfred T. O'Gara, Carpinello
and Curotto exercised options previously granted on December 31, 1993 to
purchase 138, 131, 91 and 85 shares of the Common Stock of OHE, respectively, at
a price of $1.00 per share. Giving effect to the Reorganization, the
corresponding numbers of shares of O'Gara Common Stock were 37,667, 35,756,
24,838 and 23,201, respectively, at a price of $0.0037 per share.
On August 23, 1996, Thomas M. O'Gara sold 10 shares of the Common Stock of
OHE to Mr. Carpinello for a price of $468.00 per share (equivalent to 2,730
shares of O'Gara Common Stock for a price of $1.71 per share). O'Gara incurred a
nonrecurring, non-cash expense of approximately $19,890 in the fourth quarter of
1996 in connection with this sale. This expense resulted in a corresponding
increase in additional paid-in capital, and no change in total shareholders'
equity. This expense was not tax deductible and represented the difference
between the net offering price and the net sales price of these shares as if
issued directly by O'Gara.
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<PAGE> 99
PRINCIPAL SHAREHOLDERS OF O'GARA
The following table sets forth certain information regarding the beneficial
ownership of O'Gara Common Stock on October 15, 1997 (on an actual basis and as
adjusted to reflect the consummation of the Merger) by (i) each beneficial owner
of more than 5% of the O'Gara Common Stock immediately prior to or after the
Merger, (ii) each director, nominee for director and named executive officer
individually, (iii) all directors, nominees for director and executive officers
of O'Gara as a group, (iv) all shareholders of O'Gara prior to the Merger and
(v) all shareholders of Kroll prior to the Merger. Unless otherwise indicated,
all shares are owned directly and the indicated owner has sole voting and
dispositive power with respect thereto.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR SHARES BENEFICIALLY
TO MERGER(1)(4) OWNED AFTER MERGER(1)(5)
--------------------- --------------------------
NAME NUMBER PERCENT NUMBER PERCENT
- -------------------------------------------- --------- ------- ---------- --
<S> <C> <C> <C> <C>
Thomas M. O'Gara(2)(3)...................... 4,041,838 55.5 4,041,838 29.0
Wilfred T. O'Gara........................... 277,266 3.8 277,266 2.0
Gary W. Allen............................... 16,397 * n/a(6) *
Richard L. Curotto.......................... 40,087 * n/a(6) *
Daniel Gautier(2)........................... 376,597 5.2 376,597 2.7
Michael J. Lennon........................... 18,864 * 18,864 *
Raymond E. Mabus............................ 1,000 * 1,000 *
Hugh E. Price............................... 15,000 * 15,000 *
Jerry E. Ritter............................. 1,000 * 1,000 *
William S. Sessions......................... 1,000 * 1,000 *
Jules B. Kroll(2)........................... -- * 3,684,991(7) 26.5
Michael G. Cherkasky........................ -- -- 200,939 1.4
American International Group, Inc.(2)....... -- -- 1,444,197 10.4
Howard I. Smith............................. -- -- 1,444,197(8) 10.4
Marshall S. Cogan........................... -- -- -- *
All directors, nominees for director and
executive officers as a group (13 persons
prior to the Merger, 12 persons
thereafter)............................... 4,861,016 65.6 10,238,685(7)(9) 72.2
All shareholders of O'Gara prior to the
Merger.................................... 7,279,310 100.0 7,279,310 52.3
All shareholders of Kroll prior to the
Merger.................................... -- -- 6,650,000 47.7
</TABLE>
- ---------------
* Less than 1% of the outstanding Common Stock.
(1) Pursuant to the regulations of the Commission, shares are deemed to be
"beneficially owned" by a person if such person directly or indirectly has
or shares the power to vote or dispose of such shares, whether or not such
person has any pecuniary interest in such shares, or has or shares the right
to acquire the power to vote or dispose of such shares within 60 days,
including through the exercise of any option, warrant or right.
(2) Mr. O'Gara's address is 9113 LeSaint Drive, Fairfield, Ohio 45014. Mr.
Gautier's address is Z.I., rue d'Armor B.P. 414, 22404 Lambelle Cedex,
France. Mr. Kroll's address is 900 Third Avenue, New York, New York 10022.
AIG's address is 70 Pine Street, New York, New York 10270.
(3) Includes 793,095 shares held by MeesPierson Management (Guernsey) Ltd. and
373,524 shares held by Union Federal Corporation over which Thomas M. O'Gara
has indirect voting control and 2,864,219 shares held by a family trust.
(4) Includes 101,000 shares of O'Gara Common Stock which all directors, nominees
for director and executive officers as a group have the right to acquire
upon the exercise of stock options which are exercisable prior to December
15, 1997, including 17,000 shares subject to options held by Wilfred T.
O'Gara, 15,000 shares subject to options held by Gary W. Allen, 15,000
shares subject to options held by Richard L. Currotto, 17,000 shares subject
to options held by Michael J. Lennon, 1,000 shares subject to options held
by Raymond E. Mabus, 15,000 shares subject to options held by Hugh E. Price,
and 1,000 shares subject to options held by William S. Sessions.
(5) Includes 161,529 shares of O'Gara Common Stock which all directors, nominees
for director and executive officers as a group have the right to acquire
which are exercisable prior to December 15, 1997, including 17,000 shares
subject to options held by Wilfred T. O'Gara, 17,000 shares subject to
options held by Michael J. Lennon, 1,000 shares subject to options held by
Raymond E. Mabus, 15,000 shares subject to options held by Hugh E. Price,
1,000 shares subject to options held by William S. Sessions, and 90,529
shares subject to options to be held by Michael G. Cherkasky originally
issued by Kroll.
(6) Mr. Allen and Mr. Curotto will cease to be executive officers of O'Gara upon
consummation of the Merger.
(7) Does not include an aggregate of 192,561 shares of O'Gara Common Stock to be
held by trusts for the benefit of Mr. Kroll's adult children, in which
shares Mr. Kroll disclaims any beneficial interest.
(8) Consists of shares of O'Gara Common Stock to be held by AIG. Mr. Smith
disclaims any beneficial interest in these shares.
(9) Includes 90,529 shares of O'Gara Common Stock which a former director and
executive officer of Kroll will have the right to acquire upon the exercise
of stock options originally issued by Kroll and 1,444,197 shares of O'Gara
Common Stock to be held by AIG which are deemed to be owned by Mr. Smith and
in which he disclaims any beneficial interest.
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<PAGE> 100
MANAGEMENT OF KROLL
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information, as of September 1,
1997, with respect to the executive officers and directors of Kroll who will
become executive officers and directors of O'Gara at the Effective Time:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH KROLL SINCE
- -------------------------- ----- -------------------------------------------------------- -----
<S> <C> <C> <C>
Jules B. Kroll............ 56 Chairman, Director 1972
Michael G. Cherkasky...... 47 President, Director 1997
Nazzareno E. Paciotti..... 51 Chief Financial Officer, Vice President, Treasurer 1992
Howard I. Smith........... 52 Director 1993
</TABLE>
Jules B. Kroll founded Kroll in 1972 and has been the Chairman of the Board
and Chief Executive Officer of Kroll since then. Mr. Kroll is also a director of
United Auto Group, Inc.
Michael G. Cherkasky has been an Executive Managing Director of Kroll since
April 1997 and Chief Operating Officer of Kroll since January 1997. From
November 1995 to January 1997, he was the head of Kroll's North American Region
and from February 1994 to November 1995 he was the head of Kroll's Monitoring
Group. From June 1993 to November 1993, Mr. Cherkasky was a candidate for public
office. From 1978 to June, 1993, Mr. Cherkasky was with the District Attorney's
office for New York County, his last position being Chief of the Investigations
Division.
Nazzareno E. Paciotti has been the Chief Financial Officer of Kroll since
June 1992. From January 1990 to June 1992, he was a Managing Director and the
Controller of the Henley Group, (the parent of PneumoAbex Inc. and Fisher
Scientific (a laboratory supply company)) and from August 1988 to January 1990,
he was a Vice President and the Controller of PneumoAbex Inc. (an aerospace
contractor specializing in the manufacture of landing gear and flight actuating
systems).
Howard I. Smith has been Executive Vice President, Chief Financial Officer
and Comptroller of AIG since 1996. From 1984 until 1996, Mr. Smith was Senior
Vice President and Comptroller of AIG. From 1975 until 1984 Mr. Smith was a
partner in the independent public accounting firm of Coopers & Lybrand. Mr.
Smith is also a director of 20th Century Industries, International Lease Finance
Corporation, and Transatlantic Holdings, Inc. Mr. Smith was elected a director
of AIG in 1997.
97
<PAGE> 101
EXECUTIVE COMPENSATION
The following table shows the compensation awarded or paid by Kroll for
services rendered for the years ended December 31, 1994, 1995 and 1996 to Jules
B. Kroll, Chairman of the Board and Chief Executive Officer of Kroll, and
Messrs. Cherkasky and Paciotti, the executive officers of Kroll who will become
executive officers of O'Gara at the Effective Time:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
-----------------------
ANNUAL COMPENSATION OTHER RESTRICTED SECURITIES
NAME AND -------------------------- ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION AWARD OPTIONS COMPENSATION
AT 1996 FISCAL YEAR-END YEAR ($) $ $ $ (#) $(1)(2)
- -------------------------------- ---- --------- -------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jules B. Kroll.................. 1996 $500,000 $75,000 -- $ -- -- $ 31,715
Chairman and Chief 1995 500,000 -- -- -- -- 30,395
Executive Officer 1994 500,000 -- -- -- -- 29,076
Michael G. Cherkasky............ 1996 300,000 75,000 898 -- 1,098 26,767
Head of North 1995 260,000 -- 898 -- 350 25,971
American Region 1994 170,513 16,201 -- 20,700 -- --
Nazzareno E. Paciotti........... 1996 225,520 50,000 -- -- 1,098 24,984
Chief Financial Officer 1995 225,520 -- -- -- 350 22,797
1994 205,520 20,000 -- -- -- 22,111
</TABLE>
- ---------------
(1) Represents contributions to the Kroll Associates, Inc. Money Purchase
Pension Plan and 401(k) Savings Plan (collectively the "Savings Plans"). In
1996, Kroll contributed a total of $19,250 to the Savings Plans on behalf of
each of Messrs. Kroll and Cherkasky and contributed a total of $18,500 to
the Savings Plans on behalf of Mr. Paciotti.
(2) Includes annual cost of a supplemental disability benefit. In 1996, the cost
to Kroll of this benefit was $12,465 for Mr. Kroll, $7,517 for Mr. Cherkasky
and $6,484 for Mr. Paciotti.
RESTRICTED STOCK
Restricted Stock Plan. Kroll adopted the Kroll Restricted Stock Plan on
June 15, 1993, and subsequently amended the Kroll Restricted Stock Plan on
November 10, 1993. The Kroll Restricted Stock Plan is administrated by a
committee elected by the Kroll Board of Directors (the "Kroll Restricted Stock
Committee"). The Kroll Restricted Stock Committee has broad discretion in
determining which employees of Kroll (excluding Jules B. Kroll who is not
eligible to participate in the Kroll Restricted Stock Plan) are eligible to
receive awards of restricted Kroll Common Stock. The Kroll Restricted Stock Plan
Committee also has the power to set the vesting schedule of any shares of
restricted stock granted pursuant to the Kroll Restricted Stock Plan. The Kroll
Restricted Stock Plan contains, among other transfer restrictions, certain put
rights, certain rights of first refusal in favor of Kroll, certain tag-along
rights and certain call rights in favor of Kroll with respect to any sale or
transfer of any Kroll Common Stock which was granted pursuant to the Kroll
Restricted Stock Plan. All of these restrictions will terminate at the Effective
Time. Subject to applicable law and the discretion of the Kroll Restricted Stock
Committee, awards of Kroll Common Stock made pursuant to the Kroll Restricted
Stock Plan are typically granted at no purchase price to the recipient. Subject
to the provisions of the Kroll Restricted Stock Plan, shares of Kroll Common
Stock issued pursuant to a restricted stock award may not be sold or transferred
until the ownership in the restricted shares vests. Upon the consummation of the
Merger, all shares of Kroll Common Stock issued pursuant to the Kroll Restricted
Stock Plan will immediately vest and will be converted into shares of O'Gara
Common Stock.
A maximum of 9,240 shares of Kroll Common Stock were available for awards
under the Kroll Restricted Stock Plan. All of such shares have been awarded. As
of the date hereof, 8,443 shares of Kroll Common Stock remain outstanding under
the Kroll Restricted Stock Plan, including 150 shares held by Michael G.
Cherkasky and 213 shares held by Nazzareno E. Paciotti.
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<PAGE> 102
Other Restricted Stock Grants. In January, 1997, Kroll awarded 1,616
shares of restricted Kroll Common Stock to Mr. Cherkasky, in connection with his
appointment as President of Kroll, on terms substantially similar to the terms
set forth in the Kroll Restricted Stock Plan.
Outstanding Restricted Stock Grants. As of the date hereof, Messrs.
Cherkasky and Paciotti own 1,766 and 213 shares, respectively, of restricted
Kroll Common Stock. Assuming the conversion of each share of restricted Kroll
Common Stock into 62.52 shares of O'Gara Common Stock and assuming an $18.00 per
share value of O'Gara Common Stock, based on the price of O'Gara Common Stock on
November 5, 1997, the value of the restricted Kroll Stock to each of Messrs.
Cherkasky and Paciotti would be $1,987,386 and $239,702, respectively.
STOCK OPTIONS
Management Stock Option Plan. The Kroll Management Stock Option Plan is
managed by a committee appointed by the Kroll Board of Directors (the "Kroll
Management Stock Option Plan Committee"). The Kroll Management Stock Option Plan
Committee has the power to grant options, determine eligible employees,
determine the number of shares of Kroll Common Stock subject to options,
prescribe the form of the option grant, and determine the vesting of the
options. Any option issued pursuant to the Kroll Management Stock Option Plan
shall expire on the tenth anniversary of the grant date. An option enables the
option holder to purchase shares of Kroll Common Stock at the option exercise
price. The per share exercise price of any option granted under the Kroll
Management Stock Option Plan is determined by a formula set forth in the Kroll
Management Stock Option Plan based on an appraisal of Kroll. The Kroll
Management Stock Option Plan provides that Kroll has the option to pay the
option holder either in cash or Kroll Common Stock upon the exercise of an
option granted thereunder. The Kroll Management Stock Option Plan contains
certain restrictions on the transfer of Kroll Common Stock issued pursuant to
such plan, including certain put rights, certain rights of first refusal in
favor of Kroll, certain tag-along rights and certain call rights in favor of
Kroll. All of these restrictions will terminate upon the consummation of the
Merger. Upon the consummation of the Merger, all options under the Kroll
Management Stock Option Plan will vest and be converted into options to purchase
shares of O'Gara Common Stock.
As of the date hereof, there were options relating to 6,625 shares of Kroll
Common Stock outstanding pursuant to the Kroll Management Stock Option Plan,
including options to purchase 350 shares of Kroll Common Stock at a price of
$400 per share granted to each of Messrs. Cherkasky and Paciotti. Assuming such
options are exercised and all such shares of Kroll Common Stock are converted to
O'Gara Common Stock at the exchange ratio of 62.52 shares of O'Gara Common Stock
for each share of Kroll Common Stock, the value of these options to each of
Messrs. Cherkasky and Paciotti would be $253,876 and $253,876, respectively
(based on the price of O'Gara Common Stock on November 5, 1997).
Stock Option and Stockholder Agreements. On January 29, 1996, Mr.
Cherkasky and Mr. Paciotti each entered into a Stock Option and Stockholder
Agreement with Jules B. Kroll and Kroll. Pursuant to each such agreement,
Messrs. Cherkasky and Paciotti were each granted on the date of the agreement
the option to purchase 1,098 shares of Kroll Common Stock at an exercise price
of $150 per share. As of the date hereof, all of such options have vested. If
the Merger is consummated, all such options granted pursuant to the Stock Option
and Stockholder Agreements expire on the tenth anniversary of the date of the
grant of the options. The Kroll Common Stock issued pursuant to the Stock Option
and Stockholder Agreements is subject to certain transfer restrictions,
including, but not limited to, certain put rights, certain rights of first
refusal in favor of Kroll, certain tag-along rights and certain call rights in
favor of Kroll. All of these restrictions will terminate upon the consummation
of the Merger. Assuming such options are exercised and all such shares of Kroll
Common Stock are converted to O'Gara Common Stock at the exchange ratio of 62.52
shares of O'Gara Common Stock for each share of Kroll Common Stock, the value of
these options to each of Messrs. Cherkasky and Paciotti would be $1,070,945 and
$1,070,945, respectively (based on the price of O'Gara Common Stock on November
5, 1997).
99
<PAGE> 103
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS -- KROLL
CERTAIN LOAN AND OTHER TRANSACTIONS
Jules B. Kroll has borrowed an aggregate of $1,345,499 from Kroll. Of this
amount, $748,000 is represented by a promissory note that bears interest at an
annual rate equal to the Prime Rate plus 1% and $597,499 is represented by a
promissory note that bears interest at an annual rate of 7% (equal to the Prime
Rate at the date of the loan plus 1%). As of June 30, 1997, principal and
accrued interest in the aggregate amount of $1,373,720 was outstanding under
these notes. These loans will be repaid in full prior to the consummation of the
Merger and are expected to be repaid in connection with the payment by Kroll to
Jules B. Kroll of the amounts it owes to him as described in the next paragraph.
Since 1989 Jules B. Kroll has loaned an aggregate of $1,806,999 to Kroll,
of which $152,000 has been repaid and an aggregate of $1,654,999 was outstanding
as of June 30, 1997. Of the outstanding amount, $1,057,500 is represented by
promissory notes that bear interest at an annual rate equal to the Prime Rate
from time to time in effect plus 1% and $597,499 is represented by promissory
notes that bear interest at an annual rate of 7% (equal to the Prime Rate at the
date of the loan plus 1%). As of June 30, 1997, principal and accrued interest
in the aggregate amount of $1,690,571 was outstanding under these notes. Prior
to the Merger, these loans will be repaid to the extent of the amounts owed to
Kroll by Jules B. Kroll under the loans described in the preceding paragraph.
The remaining amount will be reflected by a new promissory note issued by a
subsidiary of Kroll in the principal amount of $309,500, which will bear
interest at an annual rate 1/2% below the Prime Rate from time to time in
effect. The accrued interest described in the preceding paragraph and the
accrued interest described in this paragraph will be repaid in full prior to
consummation of the Merger.
In addition, since 1989, Jules B. Kroll has made open account advances to
Kroll from time to time in the aggregate principal amount of $9,695,136, of
which $5,532,678 has been repaid and $4,162,458 was outstanding as of June 30,
1997. These advances were utilized by Kroll for working capital purposes. Of the
outstanding amount, $3,033,349 bears interest at an annual rate equal to the
Prime Rate, from time to time, plus 1% and $1,129,109 bears interest at an
annual rate equal to the brokers' loan rate (7.625% at June 30, 1997) from time
to time in effect. As of June 30, 1997, principal and accrued interest in the
aggregate amount of $4,244,649 was owed by Kroll to Jules B. Kroll under these
advances, all of which amounts will be repaid upon the consummation of the
Merger (see "THE MERGER -- Financing the Merger"). The Merger Agreement also
contemplates that Jules B. Kroll may make further advances to Kroll of up to
$1,000,000 prior to the Effective Time. Any such additional advances, together
with accrued interest thereon at an annual rate equal to the Prime Rate plus 1%,
will be repaid in full upon the consummation of the Merger.
On each of July 28, 1995 and July 29, 1995 AIG loaned to Kroll $1,000,000.
Such loans are evidenced by demand promissory notes in the aggregate principal
amount of $2,000,000 and bear interest at an annual rate equal to the Citibank
N.A. base rate from time to time in effect plus 2%. As of June 30, 1997,
principal and accrued interest in the aggregate amount of $2,053,083 was
outstanding under these notes. These notes will be repaid in full upon the
consummation of the Merger (see "THE MERGER -- Financing the Merger").
During 1994, 1995 and 1996, Kroll rendered services to AIG and its
subsidiaries. Such services consisted of risk management services, including
marketing support, and claims investigations. Kroll billed AIG and its
subsidiaries for such services $3,158,113, $3,868,967 and $5,325,559 in 1994,
1995 and 1996, respectively. Since 1995, Kroll has purchased certain of its
liability insurance, including Professional Errors and Omissions and Directors
and Officers liability insurance, from AIG's subsidiaries. AIG's subsidiaries
billed Kroll $485,807 and $824,348 for this insurance during 1995 and 1996,
respectively. Kroll obtained the coverage through an independent insurance
broker that had obtained competitive proposals from unrelated third parties.
Effective April 1, 1996, Kroll and American Insurance Underwriters ("AIU"), a
marketing unit comprised of wholly owned subsidiaries of AIG, entered into an
agreement pursuant to which Kroll agreed to provide AIU with certain crisis
management and marketing services through November 30, 1998. The agreement
provides for an annual retainer ($2,288,640 for 1997), subject to certain
adjustments, and is payable quarterly in advance.
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<PAGE> 104
PRINCIPAL SHAREHOLDERS OF KROLL
The following table sets forth certain information as of June 30, 1997 with
respect to the beneficial ownership of shares of Kroll Stock by (i) each person
that beneficially owns more than 5% of the outstanding shares of Kroll Stock,
(ii) each director of Kroll who will become a director of O'Gara upon the
Effective Time, (iii) each executive officer of Kroll who will become an
executive officer of O'Gara upon the Effective Time, and (iv) all such executive
officers and directors as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF KROLL STOCK PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS BENEFICIALLY OWNED(1) KROLL STOCK(1)
- ------------------------------------------ ------------------------------- -------------------------
<S> <C> <C>
Jules B. Kroll
900 Third Avenue
New York, New York 10022.................. 58,941(2)(3) 60.4
American International Group, Inc.
70 Pine Street
New York, New York 10270.................. 23,100(4) 23.7
Michael G. Cherkasky
900 Third Avenue
New York, New York 10022.................. 3,214(3)(5)(6) 3.2
Nazzareno E. Paciotti
900 Third Avenue
New York, New York 10022.................. 1,661(3)(6)(7) 1.7
Howard I. Smith
70 Pine Street
New York, New York 10270.................. 23,100(4)(8) 23.7
All executive officers and directors, as a
group (4 people)........................ 86,916(2)(3)(5)(7)(9) 87.2
</TABLE>
- ---------------
(1) Unless otherwise indicated each person listed above has sole voting and
investment power with respect to all shares of Kroll Stock owned by such
person. The percentage of outstanding Kroll Stock owned by each such person
is determined by assuming that all options held by such person have been
exercised and that the restrictions with respect to all shares of restricted
stock held by such person have lapsed. See "MANAGEMENT OF KROLL -- Stock
Options" and "MANAGEMENT OF KROLL -- Restricted Stock."
(2) Does not include an aggregate of 3,080 shares of Kroll Common Stock held by
trusts for the benefit of Mr. Kroll's adult children, in which shares Mr.
Kroll disclaims any beneficial interest.
(3) Consists of Kroll Common Stock.
(4) Consists of Kroll Class A Common Stock.
(5) Includes 1,766 shares of Kroll Common Stock issued under the Kroll
Restricted Stock Plan and under a restricted stock agreement. See
"MANAGEMENT OF KROLL -- Restricted Stock."
(6) Includes, for each of Mr. Cherkasky and Mr. Paciotti, (a) 1,098 shares of
Kroll Common Stock issuable upon the exercise of options expiring in 2006,
granted under a stock option and stockholder agreement, at $150 per share,
and (b) 350 shares of Kroll Common Stock issuable upon the exercise of
options, expiring in 2005, granted under the Kroll Management Stock Option
Plan at $400 per share. See "MANAGEMENT OF KROLL -- Stock Options."
(7) Includes 213 shares of shares of Kroll Common Stock issued under the Kroll
Restricted Stock Plan. See "MANAGEMENT OF KROLL -- Restricted Stock."
(8) Consists of shares of Kroll Class A Stock owned by AIG. Mr. Smith disclaims
any beneficial interest in these shares.
(9) Includes an aggregate of 2,896 shares of Kroll Stock issuable upon the
exercise of the options described in note 6 above and 23,100 shares of Kroll
Class A Stock owned by AIG which are deemed to be owned by Mr. Smith and in
which he disclaims any beneficial interest. See "MANAGEMENT OF
KROLL -- Stock Options."
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<PAGE> 105
THE O'GARA CAPITALIZATION PROPOSAL
The O'Gara Board is proposing an amendment to the O'Gara Articles to
increase the number of authorized shares of O'Gara Preferred Stock and O'Gara
Common Stock to 1,000,000 and 50,000,000, respectively.
The proposed increase in the number of authorized shares has been deemed
advisable by the O'Gara Board in order to provide additional authorized but
unissued shares for issuance from time to time for such proper corporate
purposes as may be determined by the O'Gara Board, without further action or
authorization by the shareholders. Such corporate purposes might include the
raising of additional capital through the issuance of stock, the acquisition of
other companies, or the declaration of stock splits and/or stock dividends.
Although O'Gara from time to time considers possible acquisitions involving the
issuance of stock other than the Merger, it is not presently engaged in
negotiations concerning any transaction involving the issuance of additional
shares.
On October 15, 1997, there were issued and outstanding 7,279,310 shares of
O'Gara Common Stock, of which 614,917 were issued in 1997 in connection with the
Acquisitions. In addition, a total of 274,050 shares were reserved for issuance
pursuant to the Plan and an additional 6,650,000 shares will be issued or
reserved for issuance if the Merger is consummated.
The proposed increase in the number of authorized shares of O'Gara
Preferred Stock or O'Gara Common Stock will not change the rights of holders of
currently outstanding shares of O'Gara Common Stock. The newly authorized shares
will have the same rights as currently outstanding shares. Current shareholders
of O'Gara would not have any preemptive rights to purchase a portion of the
newly authorized shares.
The increase in authorized but unissued shares may have an incidental
anti-takeover effect in that additional shares could be used to dilute the stock
ownership of persons seeking to obtain control of O'Gara. The resulting effect
may be to render more difficult or to discourage the possibility of certain
mergers, tender offers or proxy contests. For a description of other existing
possible anti-takeover provisions, see "RISK FACTORS -- Risk Factors Associated
with the Merger -- Potential Anti-Takeover Effect and Potential Adverse Impact
on Market Price of Certain Charter and Code of Regulations Provisions and the
OGCL," "DESCRIPTION OF O'GARA CAPITAL STOCK" and "COMPARISON OF SHAREHOLDERS'
RIGHTS."
If the proposed amendment is approved, all or any part of the authorized
but unissued shares may thereafter be issued without further approval from the
shareholders, except as required by the OGCL or the policies of the Nasdaq
National Market, for such purposes and on such terms as the O'Gara Board may
determine. O'Gara is not presently subject to any law or stock exchange policy
which would require further shareholder approval prior to the issuance of O'Gara
Common Stock, except in limited situations involving the issuance of a
substantial block of stock.
THE O'GARA BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE O'GARA
CAPITALIZATION PROPOSAL.
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<PAGE> 106
DESCRIPTION OF O'GARA CAPITAL STOCK
O'Gara's authorized capital stock consists of 25,000,000 (to be increased
to 50,000,000 if the O'Gara Capitalization Proposal is approved) shares of
Common Stock, $0.01 par value per share, of which 7,279,310 shares are
outstanding as of the date of this Proxy Statement/Prospectus, and 100,000 (to
be increased to 1,000,000 if the O'Gara Capitalization Proposal is approved)
shares of undesignated preferred stock, $0.01 par value per share, none of which
is issued or outstanding. See "THE O'GARA CAPITALIZATION PROPOSAL." The
following description of the material terms of the capital stock of O'Gara is
qualified in its entirety by the provisions of the O'Gara Articles and the
O'Gara Code and by the provisions of the OGCL.
COMMON STOCK
Holders of O'Gara Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of shareholders. Shareholders do
not have the right to cumulate their votes in the election of directors.
Subject to preferences which may be granted to holders of O'Gara Preferred
Stock, holders of O'Gara Common Stock are entitled to share in such dividends as
the Board of Directors, in its discretion, may validly declare from funds
legally available. In the event of liquidation, each outstanding share of O'Gara
Common Stock entitles its holder to participate ratably in the assets remaining
after payment of liabilities and any preferred stock liquidation preferences.
Shareholders have no preemptive or other rights to subscribe for or
purchase additional shares of any class of stock or any other securities of
O'Gara. There are no redemption or sinking fund provisions with regard to the
O'Gara Common Stock. All outstanding shares of O'Gara Common Stock are fully
paid, validly issued and nonassessable.
The vote of holders of a majority of all outstanding shares of O'Gara
Common Stock is required to amend the O'Gara Articles and to approve mergers,
reorganizations, and similar transactions.
PREFERRED STOCK
Up to 100,000 (to be increased to 1,000,000 if the O'Gara Capitalization
Proposal is approved) authorized shares of O'Gara Preferred Stock may be issued
from time to time in series having such designations, preferences and rights,
qualifications and limitations as the O'Gara Board may determine without any
approval of shareholders. O'Gara Preferred Stock could be given rights which
would adversely affect holders of O'Gara Common Stock and could have preference
to O'Gara Common Stock with respect to dividend and liquidation rights. Issuance
of O'Gara Preferred Stock could have the effect of acting as an anti-takeover
device to prevent a change of control of O'Gara.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Ohio law, which governs the rights of shareholders of O'Gara, contains
several provisions which may be viewed as having an anti-takeover effect. See
"COMPARISON OF SHAREHOLDERS' RIGHTS -- Anti-takeover Statutes." While O'Gara
believes that these provisions are in its best interests, potential shareholders
should be aware that such provisions could be disadvantageous to them because
the overall effect of these statutes may be to render more difficult or
discourage the removal of incumbent management or the assumption of effective
control by other persons.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for the O'Gara Common Stock is The Fifth
Third Bank, Cincinnati, Ohio.
103
<PAGE> 107
SHARES OF O'GARA COMMON STOCK ELIGIBLE FOR FUTURE SALE
Upon completion of the Merger, there will be outstanding 13,929,310 shares
of O'Gara Common Stock (assuming the exercise of all Kroll stock options and no
exercise of outstanding O'Gara stock options). O'Gara may issue up to 6,650,000
shares of O'Gara Common Stock in the Merger (depending on the number of shares
of O'Gara Common Stock subject to Kroll Issuance Agreements exercised prior to
the Effective Time and not converted into options to acquire O'Gara Common
Stock). All shares of O'Gara Common Stock issued in the Merger will be freely
tradeable by persons other than any "affiliate" of O'Gara and Kroll, as that
term is defined in Rule 144 under the Act, without restriction or registration
under the Act. See "THE MERGER -- Federal Securities Law Consequences." In
addition, all of the shares of O'Gara Common Stock sold in the Offering are
freely tradeable. The remaining approximately 5.2 million shares (the
"Restricted Shares") have been beneficially owned primarily by certain of
O'Gara's executive officers or directors since prior to the Offering or were
issued in the Acquisitions or as stock bonuses to certain executive officers of
O'Gara paid in the first quarter of 1997. The Restricted Shares may not be sold
unless they are registered under the Act or sold pursuant to an applicable
exemption from registration, including an exemption pursuant to Rule 144.
Rule 144 governs the public sale in ordinary trading transactions of
"restricted securities" and of securities owned by "affiliates." Restricted
securities are securities acquired directly or indirectly from an issuer in a
transaction not involving a public offering. In general, under Rule 144, if a
holding period of at least one year has elapsed since the date the restricted
securities were acquired from O'Gara, then the holder of such restricted
securities (including an affiliate of O'Gara) is entitled, subject to certain
conditions, to sell within any three-month period a number of shares which does
not exceed the greater of (i) 1% of O'Gara's then outstanding shares of Common
Stock or (ii) the shares' average weekly trading volume during the four calendar
weeks preceding such sale. If a holding period of at least two years has elapsed
since the date the restricted securities were acquired from O'Gara, then sales
by holders of such restricted securities who are not affiliates of O'Gara are
not subject to such volume limitations. Sales under Rule 144 are also subject to
certain manner-of-sale provisions and requirements as to notice and the
availability of current public information about O'Gara. Of the Restricted
Shares, approximately 4.6 million currently are eligible for sale pursuant to
Rule 144; and approximately 0.6 million will become eligible for sale under Rule
144 in the first quarter of 1998 upon the first anniversary of the Acquisitions.
Of these 5.2 million Restricted Shares, approximately 4.7 million are held by
affiliates of O'Gara and as a result will continue to be subject to the volume
limitations of Rule 144 indefinitely; approximately 0.2 million will become
eligible for sale without regard to the volume limitations of Rule 144 in
February, 1999, approximately 0.1 million will become eligible for resale
without regard to the volume limitations of Rule 144 in March, 1999, and the
remaining approximately 0.3 million are currently eligible for resale without
regard to the volume limitations of Rule 144.
Pursuant to Rule 145 under the Act, resale of the shares of O'Gara Common
Stock acquired in the Merger by any affiliate of Kroll prior to the Merger, or
O'Gara thereafter, will be subject to the provisions of Rule 144 (other than the
holding period requirement).
O'Gara has agreed to register certain of the Restricted Shares for sale
under the Act under certain circumstances. See "THE MERGER
AGREEMENT -- Registration Rights Agreements."
O'Gara has reserved up to 400,000 shares of O'Gara Common Stock for
issuance under the Plan. If the O'Gara Option Proposal is approved, the number
of shares subject to the Plan will be increased to 836,000. As of October 15,
1997, options for 274,050 shares of O'Gara Common Stock were outstanding under
the Plan. O'Gara has registered the shares of O'Gara Common Stock reserved for
issuance under the Plan. Subject to compliance with Rule 144 by affiliates of
O'Gara and to Section 16 of the Exchange Act by directors, officers and 10%
beneficial owners, any shares of O'Gara Common Stock issued upon exercise of
options granted under the Plan will be freely tradeable. O'Gara will reserve up
to an additional 551,489 shares of O'Gara Common Stock with respect to shares of
Kroll Stock subject to Kroll Issuance Agreements. See "THE MERGER AGREEMENT --
Conversion of Kroll Stock." O'Gara expects to register, effective at or about
the Effective Time, the shares of O'Gara Common Stock reserved for issuance
after the Effective Time with respect to Kroll Issuance Agreements.
Sales of substantial amounts of O'Gara Common Stock in the public market
could adversely affect prevailing market prices and O'Gara's ability to raise
capital at favorable prices.
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<PAGE> 108
COMPARISON OF SHAREHOLDERS' RIGHTS
O'Gara is organized under the laws of the State of Ohio and Kroll is
organized under the laws of the State of Delaware. The following discussion
summarizes material differences between the O'Gara Articles and the O'Gara Code
and the Certificate of Incorporation (the "Kroll Certificate") and Bylaws (the
"Kroll Bylaws") of Kroll and between certain provisions of the DGCL and the OGCL
affecting shareholders' rights.
Authorized Capital. The total number of authorized shares of capital stock
of Kroll is 200,000, consisting of 153,800 shares of Kroll Common Stock and
46,200 shares of Kroll Class A Common Stock. The authorized capital of O'Gara is
set forth under "DESCRIPTION OF O'GARA CAPITAL STOCK."
Directors. The O'Gara Code provides for no fewer directors than the lesser
of three or the number of shareholders of record, which number may be fixed or
changed upon approval of a majority of the shareholders or by action of the
O'Gara Board. Kroll's Bylaws provide for no fewer than three nor more than 10
directors, which number may be increased by the affirmative approval of a
majority of the Kroll directors at an annual or special meeting or the
affirmative approval of a majority in interest of the Kroll shareholders.
Amendment of Code of Regulations and Bylaws. The O'Gara Code may be
amended, pursuant to its terms, by the affirmative approval of the O'Gara
shareholders entitled to exercise a majority of the voting power of O'Gara. The
Kroll Certificate provides that the Kroll Board has the power by vote of the
majority of the Kroll directors and without the assent of the shareholders to
make, alter, amend, change, add to or repeal the Kroll Bylaws. Pursuant to its
terms, the Kroll Bylaws may be altered or repealed by the affirmative vote of
the holders of a majority of the outstanding capital stock entitled to vote
thereon.
Amendment of Charter Documents. Under the OGCL (as implemented by the
O'Gara Articles) and the DGCL, the affirmative vote of a majority of the
outstanding shares entitled to vote is required to amend a certificate of
incorporation or articles of incorporation, as the case may be. In addition,
amendments which make changes relating to the capital stock by increasing or
decreasing the par value or the aggregate number of authorized shares of a
class, or otherwise adversely affecting the rights of such class, must be
approved by the majority vote of each class or series of stock affected, even if
such stock would not otherwise have such voting rights.
Cumulative Voting. Cumulative voting permits a shareholder to cast as many
votes in the election of directors for each share of stock held as there are
directors to be elected and each shareholder may cast all his votes for a single
candidate or distribute such votes among two or more candidates. Under the OGCL,
cumulative voting is permitted unless the articles of incorporation otherwise
provide. Under the DGCL, cumulative voting is permitted only if it is provided
for in the certificate of incorporation. The Kroll Certificate does not provide
for, and the O'Gara Articles expressly prohibit, cumulative voting for
directors.
Filling Vacancies on the Board of Directors. Pursuant to the O'Gara Code,
any vacancy on the O'Gara Board may be filled for the unexpired portion of the
term by the vote of a majority of the remaining O'Gara directors then in office.
Under the Kroll Bylaws, any vacancy in the Kroll Board may be filled for the
unexpired portion of the term by the vote of a majority of the remaining Kroll
directors then in office.
Shareholder Meetings and Provisions for Notices. The O'Gara Code provides
that special meetings of shareholders may be called by the Chairman of the
Board, the President, a majority of directors, or person or persons holding 50%
of all voting power who would be entitled to vote at such meeting. Special
meetings of the shareholders may not be called by any other person or persons.
The Kroll Bylaws provide that a special meeting of shareholders may be called by
the President or Secretary or by resolution of the Kroll Board.
Pursuant to the O'Gara Code, written notice of any meeting of shareholders
stating the time and place of the meeting shall be given to each shareholder
entitled to vote at such meeting between seven and 60 days before the date of
such meeting. Written notice of a special meeting must also include the purpose
or purposes for which the meeting is called, and only such business as is stated
in such notice shall be acted upon thereat. Under the Kroll Bylaws, notice of
the time and place of annual or special meetings of shareholders shall be given
at least 10 days before the date of such annual or special meeting to each
shareholder entitled to vote thereat.
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<PAGE> 109
Under the OGCL, a proxy is valid for 11 months from its date, unless the
proxy provides otherwise. Under the DGCL, a proxy is valid for three years from
its date, unless the proxy provides for a longer period.
Notice of Director Nominations and New Business. The O'Gara Code provides
that, with respect to an annual meeting of shareholders, nominations of persons
for election to the O'Gara Board and the proposal of business to be considered
at the annual meeting must be (i) specified in the notice of annual meeting
given by or at the direction of the O'Gara Board, (ii) brought before the annual
meeting by or at the direction of the O'Gara Board, or (iii) brought before the
annual meeting by a shareholder who has complied with the advance notice
procedures set forth in the O'Gara Code. There is no similar provision in the
Kroll Certificate or the Kroll By-laws.
Quorum. Under the O'Gara Code, a quorum for the transaction of business at
any regular or special meeting of the O'Gara Board consists of not less than
one-half of the whole authorized number of directors. Under the Kroll Bylaws, a
quorum for the transaction of business at any regular or special meeting of the
Kroll Board consists of a majority of the directors of the Kroll Board.
Under the O'Gara Code, a quorum for the transaction of business at any
shareholder meeting consists of a number of shareholders representing the
majority of the voting power of O'Gara, present in person or represented by
proxy. Under the Kroll Bylaws, a quorum for the transaction of business at any
shareholder meeting consists of shareholders holding a majority of the stock of
Kroll entitled to vote, present in person or by proxy.
Preemptive Rights. Under the OGCL, shareholders have preemptive rights,
subject to certain limitations expressed in the OGCL, unless the articles of
incorporation provide otherwise. The O'Gara Articles prohibit O'Gara
shareholders from exercising preemptive rights. Under the DGCL, shareholders
have no preemptive rights unless such rights are provided for in the certificate
of incorporation. The Kroll Certificate does not provide for preemptive rights.
Voting by Shareholders. Under the O'Gara Code, except as otherwise
required by law, the O'Gara Articles or the O'Gara Code, action by O'Gara
shareholders is taken by the vote of the holders of a majority of the stock
represented and entitled to vote at a meeting of shareholders at which a quorum
is present. Under the Kroll Bylaws, except as otherwise required by law, the
Kroll Certificate or the Kroll Bylaws, action by Kroll shareholders is taken by
the vote of the holders of a majority of the stock entitled to vote.
Anti-takeover Statutes. Section 203 of the DGCL (the "Delaware Statute")
applies to a broad range of "business combinations" between a Delaware
corporation and an "interested shareholder." The Delaware Statute definition of
"business combination" includes mergers, sales of assets, issuance of voting
stock and almost any related party transaction.
The Delaware Statute prohibits a corporation from engaging in a business
combination with an interested shareholder for a period of three years following
the date on which the shareholder became an "interested shareholder" unless (i)
the board of directors approved the business combination before the shareholder
became an "interested shareholder," (ii) upon consummation of the transaction
which resulted in the shareholder becoming an "interested shareholder," such
shareholder owned at least 85% of the voting stock outstanding when the
transaction began, or (iii) the board of directors approved the business
combination after the shareholder became an "interested shareholder" and the
business combination was approved by at least two-thirds of the outstanding
voting stock not owned by such shareholder. An "interested shareholder" is
defined as any person who owns, directly or indirectly, 15% or more of the
outstanding voting stock of a corporation. A person "owns" voting stock if such
person individually or with or through any of its affiliates or associates (i)
beneficially owns such stock, directly or indirectly, (ii) has the right to
acquire or vote such stock pursuant to any agreement (except that a person who
has the right to vote such stock pursuant to an agreement which arises solely
from a revocable proxy given in response to a proxy solicitation made to ten or
more persons is not deemed to be an owner for purposes of the Delaware Statute),
or (iii) has any agreement for the purposes of acquiring, holding, voting or
disposing of such stock with any other person who beneficially owns such stock,
directly or indirectly.
Chapter 1704 of the Ohio Revised Code (the "Merger Moratorium Provisions")
prohibits certain business combinations and transactions between an "issuing
public corporation" and a beneficial owner of 10% or more of the shares of the
corporation (an "interested shareholder") for at least three years after the
interested
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shareholder attains 10% ownership, unless the board of directors of the issuing
public corporation approves the transaction before the interested shareholders
attains 10% ownership. Accordingly, the Merger Moratorium Provision may be
viewed as having an anti-takeover effect. An "issuing public corporation" is
defined as an Ohio corporation with 50 or more shareholders that has its
principal place of business, principal executive offices, or substantial assets
within the State of Ohio, and as to which no close corporation agreement exists.
O'Gara is an "issuing public corporation." Examples of transactions regulated by
the Merger Moratorium Provisions include the disposition of assets, mergers,
consolidations, voluntary dissolutions and the transfer of shares ("Moratorium
Transactions"). Subsequent to the three-year period, a Moratorium Transaction
may take place provided that certain conditions are satisfied, including that
(a) the board of directors approves the transaction, (b) the transaction is
approved by the holders of shares with at least two-thirds of the voting power
of the corporation (or a different proportion set forth in the articles of
incorporation), including at least a majority of the outstanding shares after
excluding shares controlled by the interested shareholder, or (c) the business
combination results in shareholders, other than the interested shareholder,
receiving a fair price plus interest for their shares. One significant effect of
the Merger Moratorium Provisions is to encourage a person to negotiate with the
board of directors of a corporation prior to becoming an interested shareholder.
Although the Merger Moratorium Provisions may apply, a corporation may elect not
to be covered by the Merger Moratorium Provisions, or subsequently elect to be
covered, with an appropriate amendment to its articles of incorporation. O'Gara
has not taken action to opt out of the Merger Moratorium Provisions.
In addition, Section 1707.043 of the Ohio Revised Code requires a person or
entity that makes a proposal to acquire the control of a corporation to repay to
that corporation any profits made from trades in the corporation's stock within
18 months after making the control proposal.
Although the Merger Moratorium Provisions are similar to the Delaware
Statute in some respects, there are significant differences. The Merger
Moratorium Provisions are triggered by the acquisition of 10% of the voting
power of a subject Ohio corporation rather than 15%. The prohibition imposed by
the Merger Moratorium Provisions continues indefinitely after the initial
three-year period unless the subject transaction is approved by the requisite
vote of the shareholders or satisfies statutory conditions relating to the
fairness of consideration received by shareholders who are not interested in the
subject transaction. During the initial three-year period the prohibition is
absolute absent prior approval by the board of directors of the acquisition of
voting power by which a person became an "interested shareholder" or of the
subject transaction. The Merger Moratorium Provisions do not provide any
exemption for an interested shareholder who acquires a significant percentage of
stock in the transaction which resulted in the shareholder becoming an
"interested shareholder" as does the Delaware Statute. The Merger Moratorium
Provisions' definition of "beneficial owner" of shares is essentially similar to
that of the Delaware Statute except that the Merger Moratorium Provisions do not
expressly exclude from the definition of beneficial owner a person who has the
right to vote stock pursuant to an agreement which arises solely from a
revocable proxy.
Section 1701.831 of the OGCL (the "Control Share Acquisition Act") provides
that certain notice and informational filings and special shareholder meetings
and voting procedures must occur prior to consummation of a proposed "Control
Share Acquisition," which is defined as any acquisition of an issuer's shares
that would entitle the acquirer to exercise or direct the voting power of the
issuer in the election of directors within any of the following ranges: (a)
one-fifth or more but less than one-third of such voting power; (b) one-third or
more but less than a majority of such voting power; or (c) a majority or more of
such voting power. Assuming compliance with the notice and information filing
requirements prescribed by the statute, the proposed Control Share Acquisition
may take place only if, at a duly convened special meeting of shareholders, the
acquisition is approved by both a majority of the voting power of the issuer
represented at the meeting and a majority of the voting power remaining after
excluding the combined voting power of the intended acquirer and the directors
and officers of the issuer. The Control Share Acquisition Act does not apply to
a corporation whose articles of incorporation or regulations so provide. O'Gara
has not opted out of the application of the Control Share Acquisition Act.
Delaware law contains no provisions comparable to Ohio's Control Share
Acquisition Act. The Control Share Acquisition Act does not apply to the
acquisition by Kroll shareholders of shares of O'Gara Common Stock in the
Merger.
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The expressed purpose of the Control Share Acquisition Act is to give
shareholders of Ohio corporations a reasonable opportunity to express their
views on a proposed shift in control, thereby reducing the potential coercion in
an unfriendly takeover. The provisions of the Control Share Acquisition Act
grant to the shareholders of O'Gara the assurance that they will have adequate
time to evaluate the proposal of the acquiring person, that they will be
permitted to vote on the issue of authorizing the acquiring person's purchase
program to go forward in the same manner and with the same proxy information
that would be available to them if a proposed merger of O'Gara were before them
and, most importantly, that the interests of all shareholders will be taken into
account in connection with such vote and the probability will be increased that
they will be treated equally regarding the price to be offered for their common
shares if the implementation of the proposal is approved.
The Control Share Acquisition Act applies not only to traditional offers
but also to open market purchases, privately negotiated transactions and
original issuances by an Ohio corporation, whether friendly or unfriendly. The
procedural requirements of the Control Share Acquisition Act could render
approval of any control share acquisition difficult in that the transaction must
be authorized at a special meeting of shareholders, at which a quorum is
present, by the affirmative vote of the majority of the voting power represented
and by a majority of the portion of such voting power excluding "interested
shares." It is recognized that any corporate defense against persons seeking to
acquire control may have the effect of discouraging or preventing offers which
some shareholders might find financially attractive. On the other hand, the need
on the part of the acquiring person to convince the shareholders of O'Gara of
the value and validity of his offer may cause such offer to be more financially
attractive in order to gain shareholder approval.
Section 1701.59 of the OGCL provides that in determining what such director
reasonably believes to be in the best interests of the corporation the director
may consider, in addition to the interests of the corporation's shareholders,
any of the interests of the corporation's employees, suppliers, creditors and
customers, the economy of the State of Ohio and the U.S., community and societal
considerations and the long-term as well as the short-term interests of the
corporation and its shareholders, including the possibility that these interests
may be best served by the continued independence of the corporation.
Mergers and Consolidations. Under the OGCL, an agreement of merger or
consolidation must be approved by the directors of each constituent corporation
and adopted by shareholders of each constituent Ohio corporation (other than the
surviving corporation) holding at least two-thirds of the corporation's voting
power, or a different proportion, but not less than a majority of the voting
power, as provided in the articles of incorporation. In the case of a merger,
the agreement must, in certain situations, also be adopted by the shareholders
of the surviving corporation by a similar vote. The O'Gara Articles provide that
any such agreement must be adopted by shareholders holding at least a majority
of the voting power.
Under the DGCL, an agreement of merger or consolidation must be approved by
the directors of each constituent corporation and adopted by the affirmative
vote of the holders of a majority of the outstanding shares entitled to vote
thereon, or by a greater vote as provided in the certificate of incorporation.
Under the DGCL the separate vote of any class of shares is not required.
Additionally, the DGCL provides that, unless the corporation's certificate of
incorporation provides otherwise, no vote of the shareholders of the surviving
corporation is required to approve the merger if (i) the agreement of merger
does not amend in any respect the corporation's certificate of incorporation,
(ii) each share outstanding immediately prior to the effective date is to be an
identical outstanding or treasury share of the surviving corporation after the
effective date, and (iii) the number of shares of the surviving corporation's
common stock to be issued in the merger plus the number of shares of common
stock into which any other securities to be issued in the merger are initially
convertible does not exceed 20% of its common stock outstanding immediately
prior to the effective date of the merger. The Kroll Certificate does not
require any such vote.
Other Corporate Transactions. Under the OGCL, as implemented by the O'Gara
Articles, subject to certain exceptions, the approval of a majority of the
voting power of the corporation, or a different proportion (not less than a
majority of the corporation's voting power) as provided in the articles of
incorporation, is required for (i) the consummation of combinations and majority
share acquisitions involving the transfer or issuance of such number of shares
as would entitle the holders thereof to exercise at least one-sixth of the
voting power of such corporation in the election of directors immediately after
the consummation of such transaction, (ii) the
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disposition of all or substantially all of the corporation's assets other than
in the regular course of business and (iii) voluntary dissolutions.
The DGCL does not require shareholder approval in the case of combinations
and majority share acquisitions, but does require a majority vote on disposition
of all or substantially all of a corporation's assets and on dissolutions,
unless a greater vote is provided for in the certificate of incorporation. The
Kroll Certificate does not require a greater vote.
Class Voting. Under the OGCL, holders of a particular class of shares are
entitled to vote as a separate class if the rights of such class are affected in
certain respects by mergers, consolidations or amendments to the articles of
incorporation.
The DGCL requires voting by separate classes only with respect to
amendments to the certificate of incorporation which adversely affect the
holders of such classes or which increase or decrease the aggregate number of
authorized shares or the par value of the shares of any such classes.
Appraisal Rights. Under the OGCL, dissenting shareholders are entitled to
appraisal rights in connection with the lease, sale, exchange, transfer or other
disposition of all or substantially all of the assets of a corporation and in
connection with certain amendments to its articles of incorporation. In
addition, shareholders of an Ohio corporation being merged into a new
corporation are also entitled to appraisal rights. Shareholders of an acquiring
corporation are entitled to appraisal rights in a merger, combination or
majority share acquisition in which such shareholders are entitled to voting
rights.
Under the DGCL, appraisal rights are available only in connection with
statutory mergers or consolidations. Even in such cases, unless the certificate
of incorporation otherwise provides, the DGCL does not recognize dissenters'
rights for any class or series of stock which is either listed on a national
securities exchange or held of record by more than 2,000 shareholders except
that appraisal rights are available for holders of stock who, by the terms of
the merger or consolidation, are required to accept anything except (i) stock of
the corporation surviving or resulting from the merger or consolidation, (ii)
shares which at the effective time of the merger or consolidation are either
listed on a national securities exchange or held of record by more than 2,000
shareholders, (iii) cash in lieu of fractional shares of stock described in the
foregoing clauses (i) and (ii), or (iv) any combination of stock and cash in
lieu of fractional shares described in the foregoing clauses (i), (ii) or (iii).
The Kroll Certificate does not grant dissenters' rights in such transactions
Dividends. An Ohio corporation may pay dividends out of surplus, however
created, but must notify its shareholders if a dividend is paid out of surplus
other than earned surplus. A Delaware corporation may pay dividends out of any
surplus and, if it has no surplus, out of any net profits for the fiscal year,
in which the dividend was declared or for the preceding fiscal year provided
that such payment will not reduce capital below the amount of capital
represented by all classes of shares having a preference upon the distribution
of assets.
Repurchases. Under the OGCL, a corporation may purchase or redeem its own
shares if authorized to do so by its articles of incorporation or under certain
other circumstances but may not do so if immediately thereafter its assets would
be less than its liabilities plus its stated capital, if any, or if the
corporation is insolvent or would be rendered insolvent by such a purchase or
redemption.
Under the DGCL, a corporation may repurchase or redeem its shares only out
of surplus and only if such purchase does not impair capital. However, a
corporation may redeem preferred stock out of capital if such shares will be
retired upon redemption and the stated capital of the corporation is thereupon
reduced pursuant to a resolution of its board of directors by the amount of
capital represented by such shares.
Indemnification and Limitation of Liability. Ohio and Delaware have
similar laws regarding indemnification by a corporation of its officers,
directors, employees and other agents. Under the OGCL and the DGCL, corporations
are authorized to indemnify any person who is, or is threatened to be made a
party, to any threatened, pending, or completed action, suit or proceeding
whether civil, criminal, administrative or investigative, other than an action
by or in the right of the corporation, by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another entity, against judgments, fines, amounts paid in settlement and
expenses
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(including attorneys' fees), actually and reasonably incurred by such person in
connection with any such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, if he had no reasonable cause to believe his conduct was unlawful.
With respect to actions by or in the right of the corporation, the OGCL and
the DGCL authorize indemnification of any director, officer, employee or agent
of the corporation against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit. To be entitled to indemnification, a person must have acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation except that court approval is required as
a prerequisite to indemnification of expenses in respect of any claim as to
which a person has been adjudged liable to the corporation.
The OGCL and the DGCL require indemnification against expenses actually and
reasonably incurred by any director, officer, employee or agent in connection
with a proceeding or action against such person in such capacity to the extent
that the person has been successful on the merits or otherwise successful in the
defense of such proceeding or action. The OGCL and the DGCL permit the
advancement of expenses (i.e., payment prior to a determination on the merits)
provided that the director or officer undertakes to repay such expenses if it is
ultimately determined that he is not entitled to indemnification. The
disinterested members of the board of directors (or independent legal counsel or
the stockholders) must determine, in each instance where indemnification is
expressly not required by law, that such director, officer, employee or agent is
entitled to indemnification.
The O'Gara Code provides that O'Gara shall indemnify to the fullest extent
permitted by law any person who was or is made or is threatened to be made a
party or is otherwise involved in any action, suit or proceeding by reason of
the fact that he is or was a director, officer, employee or agent of O'Gara, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another entity, against all expense, liability, and loss
(including, without limitation, attorneys' fees, costs of investigation,
judgments, fines, excise taxes or penalties arising under the Employee
Retirement Income Security Act of 1974 ("ERISA") or other federal or state acts)
actually incurred or suffered by such indemnitee in connection therewith.
Pursuant to Section 1701.59 of the OGCL a director is liable for damages
for any action he takes or fails to take as a director only if it is proved by
clear and convincing evidence that his action or failure to act involved an act
or omission undertaken with deliberate intent to cause injury to the corporation
or undertaken with reckless disregard for the best interests of the corporation.
The Kroll Certificate provides that Kroll shall indemnify directors to the
fullest extent permitted by law, as such law currently exists or as such law may
be amended in the future. The Kroll Bylaws also provide that Kroll shall
indemnify to the fullest extent authorized or permitted by law any person made,
or threatened to be made, a defendant or witness to any action, suit or
proceeding (whether civil or criminal or otherwise) by reason of the fact that
he is or was a director or officer of Kroll or by reason of the fact that such
director or officer, at the request of Kroll, is or was serving such other
organization in any capacity.
The Kroll Certificate provides that no director shall be liable for money
damages for breach of fiduciary duties, except for liability for (i) breaches of
the director's duty of loyalty to the corporation or its stockholders; (ii) acts
or omissions not in good faith or involving intentional misconduct or knowing
violations of law; (iii) the payment of unlawful dividends or unlawful stock
repurchases or redemptions; or (iv) transactions in which the director received
an improper personal benefit.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires O'Gara's executive officers and
directors, and persons who beneficially own more than ten percent of O'Gara's
equity securities, to file reports of security ownership and changes in such
ownership with the Commission. These persons also are required by the Commission
regulations to furnish O'Gara with copies of all Section 16(a) forms they file.
Based upon a review of copies of such forms and written representations from its
executive officers and directors, O'Gara believes that all Section 16(a) forms
were filed on a timely basis during and for 1996. In April 1997, however, O'Gara
ascertained that shares purchased by Mr. Lennon and Mr. Curotto in the Offering
had inadvertently been omitted from their Form 3 filings; amendments to these
Form 3s were filed promptly.
LEGAL MATTERS
The validity of the O'Gara Common Stock to be issued in connection with the
Merger will be passed upon by Taft, Stettinius & Hollister.
Taft, Stettinius & Hollister and Kramer, Levin, Naftalis & Frankel have
each delivered an opinion to the effect that the description of the Federal
income tax consequences of the Merger under the heading "THE MERGER -- Certain
Federal Income Tax Consequences" correctly sets forth the material Federal
income tax consequences of the Merger to O'Gara, Kroll and their respective
shareholders.
EXPERTS
The audited consolidated financial statements and schedule of O'Gara as of
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996, included in this Proxy Statement/Prospectus and elsewhere in
the Registration Statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of Kroll at December 31, 1996 and for
the year then ended, included in this Proxy Statement/Prospectus and the related
financial statement schedule included elsewhere in the Registration Statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the Registration Statement and
have been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements and schedules of Kroll as of December
31, 1995 and for each of the years in the two-year period ended December 31,
1995, have been included herein and in the registration statement in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
It is expected that representatives of Arthur Andersen LLP, O'Gara's
independent public accountants, will be present at the O'Gara Meeting and
representatives of Deloitte & Touche LLP, Kroll's independent public
accountants, will be present at the Kroll Meeting, where they will have an
opportunity to respond to appropriate questions of shareholders and to make a
statement if they so desire.
PROXY STATEMENT PROPOSALS
Shareholder proposals will be considered for inclusion in the Proxy
Statement for O'Gara's 1998 Annual Meeting if they are received by O'Gara before
the close of business on December 19, 1997.
OTHER BUSINESS
O'Gara is not aware of any matters which properly may be presented at the
O'Gara Meeting other than those discussed above. However, if other matters do
come before the O'Gara Meeting, proxies will be voted on those matters in
accordance with the recommendation of the O'Gara Board.
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AVAILABLE INFORMATION
O'Gara is subject to the reporting requirements of the Exchange Act, and,
in accordance therewith, files reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information may be
inspected and copied at the Commission's Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549, as well as the Commission's Regional
Offices at 7 World Trade Center, Suite 1300, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 upon payment of the prescribed fees. The Commission also maintains a Web
site that contains reports, proxy information and statements, and other
information regarding registrants that file electronically with the Commission.
The Web site address is http://www.sec.gov. O'Gara files electronically.
O'Gara has filed the Registration Statement with the Commission. This Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement filed by O'Gara with the Commission, certain portions of
which are omitted in accordance with the rules and regulations of the
Commission. Such additional information is available for inspection and copying
at the offices of the Commission. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated into this Proxy
Statement/Prospectus by reference as to the contents of any contract or other
documents referred to herein or therein are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement or such other document, each
such statement being qualified in all respects by such reference.
All information contained in this Proxy Statement/Prospectus relating to
O'Gara has been supplied by O'Gara and all such information relating to Kroll
has been supplied by Kroll.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT/PROSPECTUS AND, IF SO GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION
IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR THE
SALE OF ANY SECURITIES HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF O'GARA OR KROLL
SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
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FINANCIAL STATEMENT INDEX
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FINANCIAL STATEMENTS OF THE O'GARA COMPANY
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Consolidated Balance Sheets as of June 30, 1997 (unaudited).............. F-25
Consolidated Statements of Operations for the Six Months Ended June 30,
1996 and 1997 (unaudited)............................................. F-26
Consolidated Statement of Shareholders' Equity for the Six Months Ended
June 30, 1997......................................................... F-27
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1996 and 1997 (unaudited)............................................. F-28
Notes to Consolidated Unaudited Financial Statements..................... F-29
FINANCIAL STATEMENTS OF KROLL HOLDINGS, INC.
Independent Auditors' Report............................................. F-34
Consolidated Balance Sheets as of December 31, 1995 and 1996............. F-36
Consolidated Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996................................................... F-37
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1994, 1995 and 1996................................ F-38
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995, and 1996.................................................. F-39
Notes to Consolidated Financial Statements............................... F-41
Condensed Consolidated Balance Sheets as of December 31, 1996 and June
30, 1997 (unaudited).................................................. F-54
Consolidated Statements of Operations for the Six Months Ended June 30,
1996 and 1997 (unaudited)............................................. F-55
Statement of Cash Flows for the Six Months Ended June 30, 1996 and 1997
(unaudited)........................................................... F-56
Notes to Unaudited Financial Statements.................................. F-57
FINANCIAL STATEMENTS OF LABBE, S.A.
Report of Independent Public Accountants................................. F-58
Consolidated Balance Sheets as of December 31, 1995 and 1996............. F-59
Consolidated Statements of Operations for the Years Ended December 31,
1995 and 1996......................................................... F-60
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1995 and 1996............................................ F-61
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995 and 1996......................................................... F-62
Notes to Consolidated Financial Statements............................... F-63
PRO FORMA FINANCIAL STATEMENTS
O'Gara Pro Forma Consolidated Statements of Operations for the Year Ended
December 31, 1996..................................................... F-69
O'Gara-Kroll Pro Forma Combining Balance Sheets as of June 30, 1997...... F-71
O'Gara-Kroll Pro Forma Combining Statements of Operations for the Years
Ended December 31, 1994, 1995 and 1996 and the Six Months Ended June
30, 1996 and 1997..................................................... F-72
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F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The O'Gara Company:
We have audited the accompanying consolidated balance sheets of THE O'GARA
COMPANY (Note 1) and subsidiaries as of December 31, 1995 and 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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 financial position of The O'Gara
Company and subsidiaries as of December 31, 1995 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
LOGO
Cincinnati, Ohio
March 19, 1997,
except for Note 19 as to
which the date is August 8, 1997
F-2
<PAGE> 118
THE O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
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1995 1996
----------- -----------
<S> <C> <C>
ASSETS (NOTE 7)
CURRENT ASSETS:
Cash...................................................................... $ 323,851 $ 1,454,475
Trade accounts receivable, net of allowance for doubtful accounts of
approximately $211,000 and $109,000 in 1996 and 1995, respectively (Note
2)...................................................................... 7,094,894 7,736,286
Other receivables (Note 6)
Advances to shareholders................................................ 204,698 248,829
Affiliates.............................................................. 128,222 249,981
Advances to vendors (Notes 2 and 12)...................................... 2,496,689 664,539
Notes receivable -- shareholder (Note 6).................................. 233,253 --
Costs and estimated earnings in excess of billings on uncompleted
contracts (Note 2)...................................................... 7,700,075 15,326,548
Inventories (Note 2)...................................................... 4,927,499 8,733,640
Prepaid expenses.......................................................... 149,250 677,603
----------- -----------
Total current assets............................................... 23,258,431 35,091,901
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2 and 8):
Land...................................................................... 372,039 901,079
Buildings and improvements................................................ 2,762,905 3,772,295
Furniture and fixtures.................................................... 1,286,421 1,743,876
Machinery and equipment................................................... 2,260,005 2,797,433
----------- -----------
6,681,370 9,214,683
Less -- accumulated depreciation.......................................... (3,510,702) (4,289,861)
----------- -----------
3,170,668 4,924,822
----------- -----------
OTHER ASSETS (Note 2)....................................................... 1,387,887 3,921,664
----------- -----------
$27,816,986 $43,938,387
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit (Note 7)........................................ $10,188,765 $ 9,935,947
Current portion of long-term debt (Note 8)................................ 1,649,018 1,836,420
Notes payable -- shareholders (Note 6).................................... 308,630 --
Accounts payable
Trade................................................................... 10,075,075 11,087,422
Affiliates (Note 6)..................................................... 499,730 532,998
Billings in excess of costs and estimated earnings on uncompleted
contracts (Note 2)...................................................... 1,706,042 1,330,402
Accrued liabilities....................................................... 1,677,307 3,971,887
Customer deposits......................................................... 1,248,197 2,118,609
----------- -----------
Total current liabilities.......................................... 27,352,764 30,813,685
----------- -----------
LONG-TERM DEBT, net of current portion (Note 8)............................. 225,429 469,092
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
SHAREHOLDERS' EQUITY (Note 1):
Preferred stock, $0.01 par value, 100,000 shares authorized; none
issued.................................................................. -- --
Common stock, $0.01 par value, 25,000,000 shares authorized, 6,659,846 and
4,490,383 shares issued and outstanding in 1996 and 1995,
respectively............................................................ 15,235 66,598
Additional paid-in-capital................................................ 2,730,977 17,591,656
Retained deficit.......................................................... (2,508,834) (4,957,872)
Cumulative foreign currency translation adjustment (Note 2)............... 1,415 (44,772)
----------- -----------
Total shareholders' equity......................................... 238,793 12,655,610
----------- -----------
$27,816,986 $43,938,387
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE> 119
THE O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES........................................... $33,912,279 $32,816,996 $82,777,691
COST OF SALES....................................... 24,505,236 25,237,159 61,522,946
----------- ----------- -----------
Gross profit................................... 9,407,043 7,579,837 21,254,745
OPERATING EXPENSES:
Selling and marketing............................. 2,735,940 3,628,312 4,810,232
General and administrative........................ 4,440,552 4,129,017 7,930,293
----------- ----------- -----------
Operating income (loss)........................ 2,230,551 (177,492) 8,514,220
OTHER INCOME (EXPENSES):
Interest expense.................................. (410,325) (841,972) (1,299,930)
Other, net........................................ 60,250 (102,588) (37,687)
----------- ----------- -----------
Income (loss) before provision for income
taxes........................................ 1,880,476 (1,122,052) 7,176,603
Provision for income taxes (Note 4)............... -- -- 517,641
----------- ----------- -----------
Net income (loss)......................... $ 1,880,476 $(1,122,052) $ 6,658,962
=========== =========== ===========
UNAUDITED PRO FORMA INFORMATION (Note 18):
Gross profit...................................... $21,254,745
Selling and marketing............................. 4,810,232
General and administrative........................ 8,030,918
-----------
Operating income.................................. 8,413,595
Interest expense.................................. (960,866)
Other, net........................................ (37,687)
-----------
Income before provision for income taxes.......... 7,415,042
Provision for income taxes........................ 2,966,049
-----------
Net income........................................ $ 4,448,993
===========
Earnings per share................................ $ 0.69
===========
Weighted average shares outstanding............... 6,449,050
===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
<PAGE> 120
THE O'GARA COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
CURRENCY
ADDITIONAL TRANSLATION
COMMON PAID-IN RETAINED ADJUSTMENT
SHARES STOCK CAPITAL DEFICIT (NOTE 2) TOTAL
--------- ------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993...................... 2,681,012 $ 9,826 $ 1,121,996 $(2,155,308) $ -- $(1,023,486)
Net income................ -- -- -- 1,880,476 -- 1,880,476
Aggregate translation
adjustment............. -- -- -- -- 493 493
Issuance of OHE stock
(Note 15).............. 885,996 3,246 1,356,144 -- -- 1,359,390
Incorporation of
Limited................ 1,000 1,000 4,000 -- -- 5,000
Distributions to
shareholders........... -- -- -- (949,150) -- (949,150)
--------- ------- ----------- ----------- -------- -----------
BALANCE, December 31,
1994...................... 3,568,008 14,072 2,482,140 (1,223,982) 493 1,272,723
Net loss.................. -- -- -- (1,122,052) -- (1,122,052)
Aggregate translation
adjustment............. -- -- -- -- 922 922
Incorporation of OSN...... 922,375 1,163 248,837 -- -- 250,000
Distributions to
shareholders........... -- -- -- (162,800) -- (162,800)
--------- ------- ----------- ----------- -------- -----------
BALANCE, December 31,
1995...................... 4,490,383 15,235 2,730,977 (2,508,834) 1,415 238,793
Net income................ -- -- -- 6,658,962 -- 6,658,962
Aggregate translation
adjustment............. -- -- -- -- (46,187) (46,187)
Distributions to
shareholders, prior to
the offering........... -- -- -- (230,000) -- (230,000)
Sale of common stock
between shareholders
prior to the
offering............... -- -- 39,780 -- -- 39,780
Exercise of stock options,
prior to the offering
(Notes 11 and 17)...... 121,463 4 441 -- -- 445
Initial public offering of
common stock, net of
issuance costs of
approximately
$3,550,000 (Note 17)... 2,048,000 51,359 14,820,458 -- -- 14,871,817
Distribution of previously
taxed S Corp earnings
to S Corp shareholders
(Note 17).............. -- -- -- (9,000,000) -- (9,000,000)
Forgiveness of affiliate
obligation (Note 6).... -- -- -- 122,000 -- 122,000
--------- ------- ----------- ----------- -------- -----------
BALANCE, December 31,
1996...................... 6,659,846 $66,598 $17,591,656 $(4,957,872) $(44,772) $12,655,610
========= ======= =========== =========== ======== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
<PAGE> 121
THE O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 1,880,476 $(1,122,052) $ 6,658,962
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization....................... 469,889 476,868 851,332
Shareholder stock compensation...................... -- -- 39,780
Decrease (increase) in receivables.................. (4,887,854) 502,872 (807,282)
Decrease (increase) in advances to vendors.......... -- (3,360,136) 870,390
Increase in costs and estimated earnings in excess
of billings on uncompleted contracts.............. (1,608,458) (3,957,287) (7,626,473)
Increase in inventories............................. (444,879) (1,590,370) (3,806,141)
Decrease (increase) in prepaid expenses............. 47,839 (50,320) (528,353)
Increase in other assets............................ (146,882) (33,950) (322,342)
Increase in accounts payable........................ 106,655 6,070,946 1,167,615
Increase (decrease) in billings in excess of costs
and estimated earnings on uncompleted contracts... 427,650 (43,150) (375,640)
Increase (decrease) in accrued liabilities.......... 1,021,620 (502,422) 2,294,580
Increase (decrease) in customer deposits............ 871,021 (389,425) 870,412
----------- ----------- -----------
Net cash used in operating activities.......... (2,262,923) (3,998,426) (713,160)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net........ (683,319) (638,009) (2,534,617)
Decrease (increase) in notes
receivable -- shareholder........................... -- (233,253) 233,253
Acquisition costs (Note 3)............................. -- -- (305,128)
Purchase of Palmer net assets (Note 3)................. -- -- (509,582)
----------- ----------- -----------
Net cash used in investing activities.......... (683,319) (871,262) (3,116,074)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of
credit.............................................. 4,676,630 4,551,025 (252,818)
Proceeds from long-term debt........................... 30,958 41,608 50,899
Payments of long-term debt............................. (109,351) (120,869) (125,668)
Repayment of notes payable -- shareholder.............. (190,000) -- (308,630)
Net proceeds from issuance of common stock (Note 17)... 104,390 250,000 14,871,817
Foreign currency translation........................... 493 922 (46,187)
Distributions to shareholders.......................... (949,150) (162,800) (9,230,000)
Proceeds from exercise of stock options................ -- -- 445
----------- ----------- -----------
Net cash provided by financing activities...... 3,563,970 4,559,886 4,959,858
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH.......................... 617,728 (309,802) 1,130,624
CASH, beginning of year.................................. 15,925 633,653 323,851
----------- ----------- -----------
CASH, end of year........................................ $ 633,653 $ 323,851 $ 1,454,475
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................. $ 361,000 $ 796,000 $ 1,321,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Conversion of note payable to the majority shareholder
to common stock (Note 15)........................... $ 1,260,000 $ -- $ --
=========== =========== ===========
Note payable issued for purchase of Palmer net assets
(Note 3)............................................ $ -- $ -- $ 505,834
=========== =========== ===========
Affiliate obligation forgiven in connection with the
reorganization...................................... $ -- $ -- $ 122,000
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
<PAGE> 122
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(1) BASIS OF PRESENTATION
The O'Gara Company, an Ohio corporation, together with its subsidiaries
(collectively the "Company"), provides fully integrated ballistic and blast
protected vehicle armoring systems; planning, design and hardware and software
integration services which are customized to meet specific satellite
communications or site protection needs of customers; and customized turn-key
site security systems to international customers.
The Company was formed in 1996 for the purposes of becoming a holding
company, effecting a reorganization and a combination of certain affiliated
entities and carrying out an initial public offering of common stock which was
completed on November 15, 1996. Pursuant to the terms of the offering, the
Company issued 2,048,000 shares of common stock at $9.00 per share (Note 17).
The accompanying consolidated financial statements of the Company consist
of the following subsidiaries:
O'Gara-Hess & Eisenhardt Armoring Company (OHE) -- OHE is a Delaware
corporation whose principal business is the armoring of commercial and
military vehicles for the U.S. Government, foreign governments, large
foreign and domestic corporations and individuals.
O'Gara Satellite Networks, Limited (Satellite Ltd.), and its sister
corporation, O'Gara Satellite Networks, Inc. (Satellite Inc.) (collectively
"OSN") -- OSN is engaged in the business of providing satellite
communication equipment and services primarily to European and Middle
Eastern customers.
O'Gara-Hess & Eisenhardt Armoring Company Limited (Limited) -- Limited
is an Irish corporation that historically was engaged in the armoring of
commercial vehicles primarily for Middle Eastern governments, large foreign
corporations and individuals. Pursuant to the corporate reorganization on
October 28, 1996, OHE succeeded to substantially all of the businesses
formerly carried out by Limited either directly or through subsidiary
corporations.
O'Gara-Hess & Eisenhardt de Mexico S.A. de C.V. (OHEM) -- OHEM, a 100%
owned Mexican subsidiary of OHE, was formed in 1995 for the purpose of
producing light armored commercial vehicles primarily for customers in
Mexico.
O'Gara-Hess & Eisenhardt do Brasil (OHEB) -- OHEB, a 75% owned
Brazilian subsidiary of OHE, was formed in 1996 for the purpose of
producing armored commercial vehicles primarily for customers in South
America (Note 17).
O'Gara Security International, Inc. (OSI) -- OSI, a Delaware
corporation and a 100% owned subsidiary of OHE, was formed in 1996 for the
purpose of providing security products and services in the former Soviet
Union.
O'Gara-Hess & Eisenhardt, S.r.1. (Italy) -- Italy, a 90% owned Italian
subsidiary of OHE was formed in 1992 for the purpose of facilitating
contract manufacturing of armored commercial vehicles by an unrelated
manufacturer.
In connection with the Company's public equity offering, the above entities
and respective shareholders entered into a reorganization plan on October 28,
1996 which resulted in the following:
(1) The shareholders of OHE transferred their ownership interests in
OHE to the Company in exchange for 3,689,476 shares of common stock of the
Company. The ratio of exchange was 272.95 shares of Company common stock
for each share of OHE stock.
(2) The Company acquired all of the equity ownership of Satellite Ltd.
from the shareholders of Satellite Ltd. in exchange for 922,370 shares of
common stock of the Company. The ratio of exchange was 793.1 shares of
Company common stock for each share of OSN stock.
F-7
<PAGE> 123
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) OHE acquired substantially all of the operations and certain
selected assets and assumed certain selected liabilities of Limited for
consideration (including OHE's interest in O'Gara Overseas Services, S.A.),
which the Board of Directors of the Company believed represented the fair
value of such assets and liabilities.
Prior to the initial public offering, all entities that now comprise the
Company were owned or controlled by substantially the same shareholders, with
one such shareholder owning or controlling approximately 86% to 88% of each
entity. Accordingly, the accompanying consolidated 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 consolidated basis for all periods presented. All significant
balances and transactions between the consolidated entities have been eliminated
in these consolidated statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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
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.
(b) Trade Accounts Receivable and Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts -- The following summarizes the components of
trade accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
---------- -----------
<S> <C> <C>
United States Military:
Billed receivables............................... $2,322,553 $ 1,461,491
Costs and estimated earnings in excess of
billings on uncompleted contracts............. 6,201,466 10,189,891
---------- -----------
Total United States Military............. $8,524,019 $11,651,382
========== ===========
Other contracts:
Billed receivables............................... $4,772,341 $ 6,274,795
Costs and estimated earnings in excess of
billings on uncompleted contracts............. 1,498,609 5,136,657
---------- -----------
Total other contracts.................... $6,270,950 $11,411,452
========== ===========
Total trade accounts receivable.................... $7,094,894 $ 7,736,286
========== ===========
Total costs and estimated earnings in excess of
billings on uncompleted contracts................ $7,700,075 $15,326,548
========== ===========
</TABLE>
F-8
<PAGE> 124
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Costs and estimated earnings in excess of billings on uncompleted contracts
are net of $20,385,270 and $66,180,434 of progress billings to the United States
Military at December 31, 1995 and 1996, respectively.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized on long-term contracts in excess of billings
because amounts were not billable at the balance sheet date. It is anticipated
such unbilled amounts attributable to the United States Military will generally
be billed over the next 180 days as the contract is substantially completed.
Amounts receivable on other contracts are generally billed as shipments are
made. It is estimated that substantially all of such amounts will be billed
within one year, although contract extensions may delay certain collections
beyond one year.
(c) Advances to Vendors -- OHE and OSN periodically make advances to
vendors. Such advances are non-interest bearing and are generally applied to
vendor billings for shipments of inventory.
(d) Inventories -- Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method and include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
---------- ----------
<S> <C> <C>
Raw materials....................................... $2,306,176 $4,782,321
Vehicle costs and work-in-process................... 2,621,323 3,951,319
---------- -----------
$4,927,499 $8,733,640
========== ===========
</TABLE>
(e) Property, Plant and Equipment -- Property, plant and equipment are
stated at cost. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings and improvements....................................... 5-40 years
Furniture and fixtures........................................... 5-7 years
Machinery and equipment.......................................... 5-7 years
</TABLE>
(f) Other Assets -- Other assets are stated at cost less accumulated
amortization and are being amortized on a straight-line basis over their
estimated useful lives, as applicable. Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE -------------------------
DESCRIPTION (YEARS) 1995 1996
------------------------------------------------ ----------- ---------- ----------
<S> <C> <C> <C>
Advance to vendor (Notes 2(c) and 12(b))........ -- $ 863,447 $1,825,207
Goodwill, intangibles and acquisition costs
(Note 3)...................................... 1-25 50,000 1,420,543
Non-refundable deposit on an equipment lease
with a related party (Notes 6(f) and 9)....... 10 503,858 503,858
Non-compete agreement with a former OHEM
shareholder................................... 5 -- 115,000
Loan origination costs.......................... 30 152,940 152,940
Advance to minority shareholder of OHEB......... -- -- 60,000
Investment in OGM Communications, Ltd. (OGM)
(Note 2(k))................................... -- 25,215 69,266
Deferred bid costs and other.................... -- 23,461 76,753
---------- ----------
1,618,921 4,223,567
Less -- accumulated amortization................ (231,034) (301,903)
---------- ----------
$1,387,887 $3,921,664
========== ==========
</TABLE>
Costs applicable to bids in process are deferred when management believes
it is probable that future contracts will be obtained. These costs are
transferred to contract costs when contracts are awarded or are expensed when
the contract award is no longer considered probable.
F-9
<PAGE> 125
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(g) Foreign Currency Translation -- Assets and liabilities of foreign
operations are translated using year-end exchange rates and revenues and
expenses are translated using exchange rates prevailing during the year, with
gains or losses resulting from translation included in a separate component of
shareholders' equity. Gains and losses resulting from transactions in foreign
currencies were immaterial.
(h) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(i) Research and Development -- Research and development costs are expensed
as incurred. The Company incurred approximately $69,000, $91,000 and $130,000
for the years ended December 31, 1994, 1995 and 1996, respectively, for research
and development. These costs are included in general and administrative expenses
in the accompanying consolidated statements of operations.
(j) Advertising -- The Company expenses the cost of advertising as
incurred. Advertising expenses for the years ended December 31, 1994, 1995 and
1996 were $185,000, $280,000 and $638,000, respectively.
(k) Investments -- In May 1995, OSN entered into a joint venture, OGM, with
Morsviazsputnik (MVS), the Russian signatory to Inmarsat and a marketer of
Inmarsat mobile services. OSN owns a 49% interest in OGM. The investment in OGM
was recorded at the cost of the initial capital contribution of $50,000 in May
1995 and is accounted for on the equity method. The Company's proportionate
share of OGM's loss was $24,785 and $2,052 for the years ended December 31, 1995
and 1996, respectively.
(l) SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" -- In March 1996, the Financial Accounting
Standards Board issued Statement No. 121 (SFAS No. 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. This statement also addresses the accounting for long-lived
assets that are expected to be disposed of in the future. The Company adopted
SFAS No. 121 in the first quarter of fiscal 1996 with no material impact.
(m) SFAS 123 "Accounting for Stock-Based Compensation" -- The Company has
elected to account for the cost of its stock options utilizing the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25 (APB 25)
as allowed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" (SFAS 123). Accordingly, no compensation cost has
been recognized for stock options as all stock options were granted at fair
market value, as defined by the plan, at the measurement date. The pro forma
disclosures required by SFAS 123 are presented in Note 16.
(n) Reclassifications -- Certain reclassifications have been reflected in
1994 and 1995 to conform with the current period presentation.
(o) Preferred Stock -- In August 1996, the Company authorized the issuance
of up to 100,000 preferred shares, $0.01 par value.
(3) ACQUISITIONS
(a) Palmer Acquisition -- In October 1996, the Company completed the
purchase of substantially all of the assets and certain liabilities of Palmer
Associates, S.C., (Palmer) a security services provider, for approximately
$1,000,000, which resulted in goodwill and intangible assets equal to the
purchase price. The purchase was payable $500,000 at the closing of the
Company's completion of the common stock offering (Note 17) and
F-10
<PAGE> 126
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
$250,000 each in November 1997 and 1998. The former owner will also be subject
to a four-year non-competition agreement, payable in annual installments of
$50,000, and a two-year employment agreement.
(b) Next Destination Limited Acquisition -- On February 5, 1997, the
Company completed its acquisition of all of the shares of Next Destination
Limited (Next). Next, headquartered in Salisbury, United Kingdom (UK), is a
distributor of high technology communication equipment for the consumer
electronic, marine, aviation, professional and leisure markets in both the UK
and Europe. Pursuant to the agreement, the Company acquired Next for $3.5
million, consisting of $1.75 million in shares of the Company's common stock
(170,234 shares) and $1.75 million in seller-provided financing in the form of
three-year 6% notes. The former managing director and founder of Next will
continue to manage the business and is subject to a three-year non-competition
agreement.
(c) Labbe, S.A. Acquisition -- On February 12, 1997, the Company completed
its acquisition of Labbe, S.A. (Labbe) for $14,230,000. Labbe, headquartered in
Lamballe, France, provides vehicle armoring systems for commercial customers
located mainly in Western Europe. Pursuant to an agreement signed January 21,
1997, the Company acquired all of the shares of Labbe for $10.7 million in cash,
financed through funds advanced under the term loan portion of the new credit
agreement (Note 7) and 376,597 shares of the Company's common stock. The former
shareholders of Labbe, who were employed by Labbe prior to the acquisition, will
continue in their formerly-held capacities. The former shareholders will also be
subject to certain non-competition agreements upon their leaving the employment
of the Company. The Company has capitalized certain transaction costs related to
this acquisition as of December 31, 1996 which amounted to approximately
$305,000 (Note 2(f)). For accounting purposes, the acquisition was effective on
January 1, 1997 and the results of operations of Labbe are included in the
consolidated results of operations of the Company from that date forward.
(4) INCOME TAXES
Prior to October 28, 1996, OHE was an S Corporation. Accordingly, OHE
generally was not responsible for payment of income taxes. Rather, the
respective shareholders were taxed on OHE's taxable income at the respective
individual federal and state income tax rates. Therefore, no income taxes have
been provided in the accompanying consolidated financial statements for the
period prior to October 28, 1996.
Effective with the reorganization on October 28, 1996, the Company is
subject to federal and state income taxes as well as certain foreign income
taxes. The Company accounts for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Under the liability method, deferred tax liabilities and assets are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities using enacted tax rates.
The Company's provision for income taxes for the period October 28, 1996
through December 31, 1996 is summarized as follows:
<TABLE>
<S> <C>
Currently payable:
Federal................................................. $371,641
State................................................... 63,000
Foreign................................................. 83,000
--------
517,641
--------
Deferred.................................................. --
--------
$517,641
========
</TABLE>
F-11
<PAGE> 127
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
1996
---------------------
AMOUNT RATE
----------- -----
<S> <C> <C>
Provision for income taxes at the federal statutory rate........ $ 2,440,046 34.0%
State and local income taxes, net of federal benefit............ 41,303 0.6
Impact of S Corp income, prior to reorganization................ (2,087,529) (29.1)
Impact of foreign income, prior to reorganization............... (199,095) (2.8)
Change in valuation allowance................................... 176,080 2.5
Foreign losses providing no current benefit..................... 151,604 2.1
Other........................................................... (4,768) (0.1)
----------- -----
Provision for income taxes................................. $ 517,641 7.2%
=========== =====
</TABLE>
The components of the Company's consolidated deferred income tax asset as
of December 31, 1996 is summarized below:
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Deferred tax assets:
Inventory reserve............................................. $ 148,000
Vacation and other benefits................................... 220,000
Warranty reserve.............................................. 130,000
Allowance for doubtful accounts............................... 60,000
Other accruals................................................ 206,000
Foreign loss carryforwards.................................... 152,000
Other......................................................... 116,000
Valuation allowance........................................... (1,032,000)
-----------
$ --
===========
</TABLE>
The valuation allowance is required due to the recently completed
reorganization and the uncertainty of realizing the net future tax benefit
through future operations. A valuation allowance has been recorded in an amount
equal to the deferred tax asset associated with the differences between the
Company's basis for financial reporting and tax purposes. Adjustments to the
valuation allowance, if any, will be recorded in the periods in which it is
determined the asset is realizable.
(5) AFFILIATED ENTITIES
Affiliated entities are not included in the accompanying consolidated
financial statements, and include the following:
O'Gara Overseas Services, SA (OOS) -- OOS is a Swiss corporation that,
subsequent to the reorganization, is indirectly owned by the former
shareholders of OHE, through Overseas International (Overseas) and O'Gara
Overseas Services Trust (OOS Trust). OOS previously performed sales
functions, primarily in the Middle East, Africa and Europe.
Excel Armor Products, Inc. (Excel) -- Excel is a Delaware S
Corporation, owned substantially by the former shareholders of OHE, that
purchases and distributes dual-hard opaque armor material and armoring
products. Excel had an exclusive purchasing arrangement with a dual-hard
steel producer through December 31, 1996.
F-12
<PAGE> 128
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Longline Leasing, Inc. (Longline) -- Longline is a Delaware S
Corporation, owned substantially by the former shareholders of OHE. OHE
leases certain manufacturing and production equipment from Longline.
Longline and Excel have a 50/50 joint venture in a corporate aircraft. OHE
has a minimum monthly usage agreement with the joint venture.
O'Gara Protective Services, Inc. (OPS) -- OPS is a Delaware
corporation that provides protective training and services, primarily to
foreign governments. The former shareholders of OHE own approximately 47%
of OPS (see Note 12).
Overseas International (Overseas) -- In connection with the
reorganization discussed in Note 1, whereby OHE acquired substantially all
of the assets and assumed certain selected liabilities of Limited, Limited
changed its name to Overseas.
OLG, Limited (OLG) -- OLG is an Ohio limited liability company, owned
substantially by the former shareholders of OHE, which was organized in
March 1996. In 1996, OLG acquired a building for approximately $1.8 million
and leased the building to OHE for a one year period for $468,000.
Excel Metal Products, Inc. (Excel Metal) -- Excel Metal is a wholly
owned corporation of the former majority shareholder of OHE. Excel Metal
provides management consulting services to Satellite Inc.
Silver Springs Land and Cattle Company (Silver) -- Silver is a wholly
owned corporation of the former majority shareholder of OHE that provided
facilities for certain corporate meetings.
(6) RELATED PARTY TRANSACTIONS
(a) Notes Receivable -- Shareholder -- Notes receivable-shareholder
consisted of two unsecured promissory notes in the principal amounts of $100,000
and $130,000, respectively. These notes bore interest at the rate of 8.75% per
annum and were repaid upon the completion of the Company's common stock offering
(Note 17). Accrued interest amounted to $3,253 at December 31, 1995.
(b) Advances to Shareholders -- The Company periodically makes advances to
certain employee-shareholders. Such advances are due on demand and are
non-interest bearing. Advances to the Company's majority shareholder were
$189,698 and $120,191 at December 31, 1995 and 1996, respectively. At December
31, 1996 the Company also had an advance to the minority shareholder of OHEB in
the amount of $128,638.
(c) Notes Payable -- Shareholders -- OHE had the following notes payable to
shareholders, which were repaid upon the completion of the Company's common
stock offering (Note 17):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- --------
<S> <C> <C>
Note payable to former minority shareholder of OHE, interest at
10%, payable on demand, unsecured............................ $243,630 $ --
Notes payable to former minority shareholders of OHE, interest
at 7.5% through December 31, 1995, 10% thereafter, payable on
demand, unsecured............................................ 65,000 --
-------- --------
$308,630 $ --
======== ========
</TABLE>
Interest cost associated with the above obligations expensed by OHE
approximated $38,000, $33,000 and $27,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
(d) Sales -- Affiliated Entities -- In 1995, OHE entered into a contract
with Excel to provide certain manufacturing services. Total revenue recognized
under this contract approximated $27,000 and $97,000 for the years ended
December 31, 1995 and 1996, respectively.
F-13
<PAGE> 129
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Beginning in 1995, OSN entered into certain sales contracts with MVS for
the sale of portable satellite terminals. Total revenue recognized approximated
$66,000 and $139,000 for the years ended December 31, 1995 and 1996,
respectively.
(e) Purchases -- Affiliated Entities -- Prior to December 31, 1996, OHE
purchased dual-hard steel used in the vehicle armoring process from Excel.
Purchases were approximately $521,000 and $960,000 for the years ended December
31, 1995 and 1996, respectively.
OSN offers satellite air time to customers through an agreement with MVS.
Total purchases under this agreement were approximately $36,000 and $216,000 for
the years ended December 31, 1995 and 1996, respectively.
(f) Building and Equipment Leases -- OHE currently leases a corporate
aircraft from Longline/Excel under a ten year lease agreement which began in
February 1995. The lease stipulates minimum monthly payments of $35,200, with
additional charges accruing for usage in excess of established base limits. In
1994, OHE leased a corporate aircraft from Longline under a five year agreement.
This original lease was canceled upon the execution of the lease with
Longline/Excel. The terms of the original lease and the newly executed lease
required a non-refundable deposit. The original deposit of approximately
$504,000 is being amortized as rental expense over the existing lease period.
Rental expense, including amortization recognized, approximated $365,000,
$414,000 and $422,000 for the years ended December 31, 1994, 1995 and 1996,
respectively. Additionally, the Company paid Longline/Excel $327,000 related to
usage of the corporate aircraft during the roadshow for the initial public stock
offering and included such amount in issuance costs (Note 17). Management is of
the opinion that the hourly rate paid by the Company was equivalent to the rate
charged by Longline/Excel to other unrelated companies for IPO roadshows during
1996 and it was favorably comparable to rates charged by another unrelated
charter service for similar aircraft.
OHE is also currently leasing equipment from Longline under various three
year lease agreements which began in July 1995. Rental expense approximated
$17,000 and $381,000 for the years ended December 31, 1995 and 1996,
respectively.
OHE leases a manufacturing facility from OLG under a non-cancelable one
year lease agreement which began in March 1996. The lease stipulates monthly
payments of $39,000. Rental expense recognized approximated $376,000 for the
year ended December 31, 1996.
(g) Consulting Services -- OOS and a minority shareholder of the Company
provided certain sales and marketing services for OHE and OSN. OHE recognized
expense of approximately $490,000, $506,000 and $363,000 for the years ended
December 31, 1994, 1995 and 1996, respectively. Effective with the
reorganization (Note 1), these services were terminated.
In May 1993, OHE renewed an existing consulting agreement with a former
shareholder whereby Excel assumed a $10,000 monthly payment which was formerly
paid by OHE. In conjunction with this renewal, OHE provided a payment guarantee
to the former shareholder. For the year ended December 31, 1995, OHE incurred
$20,000 in expense relating to payments made under this guarantee. There were no
such payments during 1996. OHE's payment guarantee expired on December 31, 1996.
In 1996, OSN entered into a management consulting agreement with Excel
Metal which stipulates monthly payments of $6,000. OSN recognized approximately
$60,000 in expense in 1996 under this agreement. This agreement was terminated
upon the completion of the common stock offering (Note 17).
In 1994 and 1995, prior to joining the Company, a minority shareholder of
OSN was paid $45,000 and $135,000, respectively, in conjunction with a
consulting agreement. These payments were recognized in selling and marketing
expenses in the accompanying consolidated statements of operations.
F-14
<PAGE> 130
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(h) Commissions -- In accordance with the OGM joint venture agreement with
MVS (Note 2), OSN was required to pay a stipulated amount per minute for prepaid
time sold to customers in the form of phone cards through June 1996. Beginning
July 1, 1996, this requirement was terminated by agreement of OSN and MVS. For
the year ended December 31, 1996, OSN recognized commission expense of
approximately $43,000.
(i) Other -- During 1994, 1995 and 1996, OHE recognized approximately
$55,000, $11,000 and $3,000, respectively, in expense relating to payments made
to Silver for use of its facilities for corporate meetings.
(j) Summary of Related Party Transactions -- The following summarizes
transactions with related parties:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Sales
to Excel......................................... $ -- $ 27,000 $ 97,000
to MVS........................................... -- 66,000 139,000
Purchases
from Excel....................................... -- 521,000 960,000
from MVS......................................... -- 36,000 216,000
Lease expense
to Longline...................................... 365,000 17,000 381,000
to Longline/Excel................................ -- 414,000 422,000
to OLG........................................... -- -- 376,000
Consulting service expense
provided by OOS.................................. 361,000 377,000 245,000
provided by minority shareholder................. 129,000 129,000 118,000
provided by minority shareholder of OSN.......... 45,000 135,000 --
provided by Excel Metal.......................... -- -- 60,000
provided by former shareholder................... -- 20,000 --
Facility service fees paid to Silver............... 55,000 11,000 3,000
Commission expense to OGM.......................... -- -- 43,000
Charter fee included in costs of the offering (Note
17).............................................. -- -- 327,000
</TABLE>
(k) Other Receivables -- Affiliates -- Other receivables -- affiliates
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
-------- --------
<S> <C> <C>
Excel.............................................. $ 53,057 $210,659
OPS................................................ 9,657 39,322
OGM................................................ 38,669 --
Longline........................................... 26,839 --
-------- --------
$128,222 $249,981
======== ========
</TABLE>
F-15
<PAGE> 131
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(l) Accounts Payable -- Affiliates -- Accounts payable -- affiliates
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
-------- --------
<S> <C> <C>
OOS................................................ $348,535 $ 32,921
MVS................................................ 29,195 177,191
OOS Trust.......................................... 122,000 --
Longline........................................... -- 151,080
OGM................................................ -- 22,028
Overseas........................................... -- 149,778
-------- --------
$499,730 $532,998
======== ========
</TABLE>
In conjunction with the reorganization discussed in Note 1, the
shareholders of OOS Trust forgave the amount owed by OHE for no consideration.
OOS Trust is controlled by a shareholder of the Company and accordingly this
transaction has been reflected as a contribution of capital in the accompanying
consolidated statement of shareholders' equity.
(7) REVOLVING LINES OF CREDIT
OHE had a $12,000,000 revolving line of credit with a bank at December 31,
1996, which was renegotiated subsequent to year-end. Interest on the first
$8,500,000 was at the bank's prime rate, which approximated 8.25% at December
31, 1996, while interest on the remaining $3,500,000 was at the bank's prime
rate plus 1%. This line of credit was secured by substantially all of the assets
of OHE and, on the $3,500,000 portion of the revolver, included the personal
guarantees of certain former shareholders of OHE. Borrowings under this line of
credit were $7,601,686 and $9,935,947 at December 31, 1995 and 1996,
respectively.
On February 11, 1997, the Company entered into a new credit agreement which
provides a revolving line of credit of up to $12,000,000 through January 1998,
subject to a borrowing base calculation, a term loan of $16,000,000, through
January 2002, and a letter of credit facility of up to $5,500,000. Amounts
outstanding under the credit agreement bear interest at the prime rate plus a
percentage of up to 1.25% over the prime rate, or, at the Company's option,
LIBOR plus a percentage ranging from 2.25% to 3.5%, dependent upon the
calculation of certain financial ratios. Amounts outstanding under the credit
agreement are secured by substantially all of the Company's assets. The credit
agreement includes certain financial covenants which, among other restrictions,
prohibits dividends, requires the maintenance of certain financial ratios,
including tangible net worth and cash flow coverage, and imposes limitations on
foreign investment and capital expenditures. Additionally, the agreement also
requires the Company to obtain, by July 1, 1997, an interest rate protection
agreement.
OSN had a bank credit facility consisting of (i) a $1,000,000 six-month
revolving loan, of which $1,000,000 was outstanding at December 31, 1995, and
(ii) an available $3,000,000 six-month letter of credit of which $1,587,079 was
outstanding at December 31, 1995. These balances were repaid in November, 1996
with proceeds from the offering (Note 17) and the credit facility was
terminated.
In June 1996, OHEB obtained a $500,000 line of credit with interest at
prevailing Brazilian market rates. This line of credit matures on May 31, 1997
and is supported by a standby letter of credit issued by the Company's primary
lender with a similar maturity. As of December 31, 1996, there were no
borrowings under this line of credit.
F-16
<PAGE> 132
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(8) LONG-TERM DEBT
The components of long-term debt are as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Development Bonds, variable interest rate approximating
85% of the bond equivalent yield of 13 week U.S.
Treasury bills (not to exceed 12%), which approximated
3.6% at December 31, 1996, payable in scheduled
installments through September 2016, subject to optional
tender by the bondholders, secured by the property,
plant and equipment of OHE, the guaranty of OHE's former
majority shareholder and a bank letter of credit (Note
12)..................................................... $ 1,606,250 $ 1,525,000
Note payable to former shareholder of Palmer, interest at
7%, payable in scheduled installments through November
1998.................................................... -- 505,834
Mortgage note to bank, interest at 8.68%, payable in
monthly installments of $2,349, including interest,
through April 2003, secured by real estate and the
guaranty of OHE's former majority shareholder........... 208,274 195,723
Note payable to former shareholder of OHEM, interest
imputed at 9%, due October 1, 1997...................... -- 45,000
Other notes payable, interest at 6.84% to 15.7%, payable
in scheduled installments through July 2000, secured by
equipment............................................... 59,923 33,955
----------- -----------
1,874,447 2,305,512
Less -- current portion................................... (1,649,018) (1,836,420)
----------- -----------
$ 225,429 $ 469,092
=========== ===========
</TABLE>
Scheduled maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997, including $1,525,000 of Development Bonds subject to optional
tender by the bondholders.............................................. $1,836,420
1998..................................................................... 283,220
1999..................................................................... 23,829
2000..................................................................... 18,621
2001..................................................................... 16,210
Thereafter............................................................... 127,212
----------
$2,305,512
==========
</TABLE>
F-17
<PAGE> 133
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(9) OPERATING LEASES
The Company leases certain equipment under agreements with terms from one
to ten years. The following is a schedule, by year, of approximate future
minimum rental or usage payments required under operating leases that have
initial or non-cancelable lease terms in excess of one year as of December 31,
1996:
<TABLE>
<CAPTION>
AFFILIATED
COMPANIES OTHER TOTAL
---------- -------- ----------
<S> <C> <C> <C>
1997............................................ $ 883,573 $293,373 $1,176,946
1998............................................ 703,265 207,409 910,674
1999............................................ 439,600 166,941 606,541
2000............................................ 246,400 37,143 283,543
2001............................................ 422,400 -- 422,400
Thereafter...................................... 1,513,600 -- 1,513,600
---------- -------- ----------
$4,208,838 $704,866 $4,913,704
========== ======== ==========
</TABLE>
Rental expense charged against current operations amounted to approximately
$500,000, $670,000 and $1,521,000, for the years ended December 31, 1994, 1995
and 1996, respectively.
(10) RETIREMENT PLANS
During 1991, OHE established a non-contributory profit sharing/401(k) plan
covering substantially all employees. Contributions are discretionary and are
determined annually by OHE's Board of Directors. Plan contribution expense
charged against current operations amounted to approximately $75,000, $25,000
and $125,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
The Company does not maintain any other postretirement or postemployment
benefit plans.
(11) EXECUTIVE BONUS PLAN
During 1993, OHE adopted an executive bonus plan, which covered four
individuals. The plan awarded a bonus based on the attainment of goals
stipulated in the five year business plan, ranging from 50% to 120% of the
executives' base compensation. The bonus amounts were distributed 50% in cash
and 50% in non-qualified stock options to purchase stock of OHE. Subject to the
executives' ability to elect a decrease in the percentage of cash payments and
to increase the percentage of stock options, 50% of the bonus amount was payable
in cash, and the remainder in stock options. OHE issued 445 options in 1994
based on 1993's operating results and recorded compensation expense of
approximately $207,000 in fiscal 1994. No options were issued in 1995 or 1996.
In August 1996 the 445 options were exercised for 445 shares of OHE common stock
at their $1 per share stated value (121,463 shares of the Company, giving effect
to the reorganization) and the executive bonus plan was terminated.
(12) COMMITMENTS AND CONTINGENCIES
(a) Letters of Credit -- Under the terms of the Economic Development
Revenue Bonds Agreement, OHE is required to maintain a letter of credit
supporting the debt. OHE's lender is committed to providing this letter of
credit through September 2, 1997. As of December 31, 1996, OHE had an
outstanding letter of credit in the amount of $1,681,750.
At December 31, 1996, OHE had standby and purchase letters of credit,
issued by its primary lender, in the aggregate amount of $3,296,028.
(b) Supply and Purchase Agreements -- In June 1995, OSN entered into an
irrevocable supply agreement with Magellan Systems Corporation ("Magellan")
whereby Magellan will purchase 4,000 Compact-M portable
F-18
<PAGE> 134
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
satellite telecommunication units for delivery within two years of the first
shipment, which has already occurred, at a predetermined price for a total
contract value of approximately $16,000,000. In the agreement, OSN granted
worldwide distribution to Magellan except for certain limited markets retained
by OSN.
In June 1995, in connection with the above-mentioned supply agreement, OSN
entered into a firm purchase agreement with Glocom, Inc. ("Glocom"). The
agreement provides for an irrevocable purchase order for the purchase of 4,000
units of the Compact-M for approximately $12,000,000. In accordance with the
agreement, OSN advanced a total of $3,000,000 to Glocom for the funding of the
related production costs. As of December 31, 1995 and 1996, OSN had advances to
the above vendor of $1,607,597 and $2,320,307, respectively.
As a result of certain market conditions related to the sale of the Compact
M, the Company is in discussions with both Glocom and Magellan regarding
reducing the number of units required under the respective purchase and supply
agreements. These negotiations have not been concluded. Although the amount the
Company will ultimately realize may differ materially from carrying amounts,
management believes there will be no material impact on the results of future
operations, or the carrying value of inventory or the advances.
In 1996, OHEB committed to purchase 100 glass kits, valued at approximately
$675,000, for delivery at various dates prior to June 1997.
(c) Employment Agreements -- On September 1, 1996, the Company entered into
employment agreements with nine key officers and employees with annual base
compensation ranging in value from $110,000 to $250,000 per year. These
agreements provide for continued salary and benefits for a two year period
through August 31, 1998 in the event of a termination of employment without
cause, including a change in control of the Company. As of December 31, 1996,
the remaining aggregate commitment under these employment agreements was
approximately $2,200,000.
(d) Option to Purchase OHEB Minority Interest -- In August 1996, the
Company entered into an option agreement to acquire the minority interest in
OHEB on or prior to December 31, 1999. Under terms of the agreement, if the
Company exercises its option, it will be obligated to transfer to the former
shareholder, over a period of three years, common shares of the Company valued
at $1,200,000. The number of shares transferred is dependent on the market value
of the stock at the time of transfer. The exercise price for the purchase option
increases by $100,000 for each year after 1997 through 1999.
In conjunction with this agreement, the Company also entered into a two
year employment agreement with the former shareholder.
(e) Legal Matters -- The Company is party to various legal proceedings
arising from its consolidated operations. On October 9, 1996, the Company was
named in a lawsuit which alleges, among other allegations, that the Company's
expansion into the security services market constitutes a breach of a
non-competition agreement existing with OPS and the controlling shareholder of
OPS, Edward F. O'Gara, the brother of Thomas M. O'Gara, the Company's Chairman
of the Board, and Wilfred T. O'Gara, the Company's Chief Executive Officer. The
Company denies the assertions made by OPS in this matter. Management of the
Company believes that the outcome of this, as well as other proceedings,
individually and in the aggregate, will have no material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of significant current assets, current liabilities and
long-term debt approximate their respective historical carrying amounts.
F-19
<PAGE> 135
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(14) CUSTOMER AND SEGMENT DATA
(a)Segment Data -- The Company operates in three business segments, the
security hardware products group (Products Group), the security systems
integration group (Integration Group) and the security services group
(Services Group). The Products Group markets all of the Company's fully
integrated ballistic and blast protected vehicle armoring systems for
military, commercial and governmental clients worldwide. The Integration
Group provides vital communication systems for its clients by
integrating proprietary hardware and smart card billing software that
operate on the International Maritime Satellite ("Inmarsat") network.
The Services Group provides security-related services including, among
others, business intelligence, advanced driver training and security
background clearances to international customers. The following
summarizes information about the Company's business segments (in 000's):
<TABLE>
<CAPTION>
PRODUCTS INTEGRATION SERVICES
GROUP GROUP GROUP CONSOLIDATED
-------- ----------- -------- ------------
<S> <C> <C> <C> <C>
1994
Net sales to unaffiliated customers............ $ 33,466 $ 446 $ -- $ 33,912
======== ======= ==== ========
Operating income (loss)........................ $ 2,275 $ (44) $ -- $ 2,231
======== ======= ==== ========
Identifiable assets at year-end................ $ 19,108 $ 135 $ -- $ 19,243
======== ======= ==== ========
1995
Net sales to unaffiliated customers............ $ 30,773 $ 2,044 $ -- $ 32,817
======== ======= ==== ========
Operating income (loss)........................ $ 411 $ (588) $ -- $ (177)
======== ======= ==== ========
Identifiable assets at year-end................ $ 24,493 $ 3,324 $ -- $ 27,817
======== ======= ==== ========
1996
Net sales to unaffiliated customers............ $ 72,900 $ 9,823 $ 55 $ 82,778
======== ======= ==== ========
Operating income............................... $ 8,004 $ 505 $ 5 $ 8,514
======== ======= ==== ========
Identifiable assets at year-end................ $ 36,149 $ 6,816 $ 55 $ 43,020
======== ======= ====
Corporate assets............................... 918
--------
Total assets at year-end....................... $ 43,938
========
</TABLE>
Total net sales by segment includes sales to unaffiliated customers.
Intersegment sales are nominal. Operating income (loss) is total net sales less
operating expenses. Operating income (loss) does not include the following
items: interest expense, other expenses and income taxes. Depreciation expense
for the Products Group for the years ended December 31, 1994, 1995 and 1996 was
$360,713, $411,970 and $780,463, respectively. Capital expenditures for the
Products Group for the years ended December 31, 1994, 1995 and 1996 was
$683,319, $638,009 and $2,543,168, respectively. There were no capital
expenditures or depreciation expense for the Integration Group or the Services
Group during 1994, 1995 and 1996. Identifiable assets by segment are those
assets that are used in the Company's operations in each segment. Corporate
assets are principally cash, certain intangible assets and certain prepaid
expenses.
F-20
<PAGE> 136
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following summarizes information about the Company's different
geographic areas (in 000's):
<TABLE>
<CAPTION>
UNITED
STATES FOREIGN ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
1994
Net sales to unaffiliated customers................... $33,278 $ 634 $ -- $ 33,912
======= ======= ======= ========
Operating income...................................... $ 2,014 $ 217 $ -- $ 2,231
======= ======= ======= ========
Identifiable assets at year-end....................... $17,908 $ 1,335 $ -- $ 19,243
======= ======= ======= ========
1995
Net sales to unaffiliated customers................... $30,080 $ 2,737 $ -- $ 32,817
======= ======= ======= ========
Operating income (loss)............................... $ (336) $ 159 $ -- $ (177)
======= ======= ======= ========
Identifiable assets at year-end....................... $26,182 $ 1,635 $ -- $ 27,817
======= ======= ======= ========
1996
Net sales to unaffiliated customers................... $75,743 $ 7,035 $ -- $ 82,778
Intercompany.......................................... 2,226 -- (2,226) --
------- ------- ------- --------
Total net sales............................. $77,969 $ 7,035 $(2,226) $ 82,778
======= ======= ======= ========
Operating income...................................... $ 8,141 $ 373 $ -- $ 8,514
======= ======= ======= ========
Identifiable assets................................... $37,384 $ 6,291 $ (655) 43,020
======= ======= =======
Corporate assets...................................... 918
--------
Total assets at year-end.............................. $ 43,938
========
</TABLE>
The Company accounts for transfers between geographic areas at cost plus a
proportionate share of operating profit.
The following summarizes the Company's sales in the United States and
foreign locations (in 000's):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Sales to unaffiliated customers:
U.S. Government................................... $15,332 $11,514 $51,505
Other United States............................... 2,711 7,356 8,994
Middle East....................................... 7,795 8,582 7,598
Central & South America........................... 4,093 1,050 5,807
Other Foreign..................................... 3,981 4,315 8,874
------- ------- -------
$33,912 $32,817 $82,778
======= ======= =======
</TABLE>
Export sales by the Company's domestic operations were approximately 46%,
37% and 21% of net sales for the years ended December 31, 1994, 1995 and 1996,
respectively.
The Company is subject to audit and investigation by various agencies which
oversee contract performance in connection with the Company's contracts with the
U.S. Government. Management believes that potential claims from such audits and
investigations will not have a material adverse effect on the consolidated
financial statements. In addition, contracts with the U.S. Government may
contain cost or performance incentives or both based on stated targets or other
criteria. Cost or performance incentives are recorded at the time there is
sufficient information to relate actual performance to targets or other
criteria.
F-21
<PAGE> 137
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company has foreign operations and assets in Brazil, Mexico, Russia and
Italy. In addition, the Company sells its products and services in other foreign
countries and continues to increase its level of international activity.
Accordingly, the Company is subject to various risks including, among others,
foreign currency restrictions, exchange rate fluctuations, government
instability and complexities of local laws and regulations.
(b) Major Customers -- During the years ended December 31, 1994, 1995 and
1996 sales to three customers and their affiliated entities approximated 64%,
52% and 68%, respectively, of the Company's net sales. These customers are
individually presented as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Government......................................... 45% 35% 62%
Middle East Foreign Government A........................ 9% 14% 6%
Middle East Foreign Government B........................ 10% 3% --
-- -- --
64% 52% 68%
== == ==
</TABLE>
The year-end accounts receivable balances of these customers approximated
61%, 62% and 22% of the Company's total trade receivable balance at December 31,
1994, 1995 and 1996, respectively. In addition, two other customers not included
above had year-end accounts receivable balances which approximated 16% and 10%
of total trade accounts receivable as of December 31, 1994 and 1996,
respectively.
(15) ISSUANCE OF OHE STOCK
Prior to August 1994, OHE was indebted to Letter International Limited
Irrevocable Trust (Trust), a trust for which OHE was the sole beneficiary, in
the amount of $1,260,000. At the same time, the Trust was indebted in an equal
amount to OHE's majority shareholder. In August 1994, the majority shareholder
received from the Trust an assignment of OHE's obligation. The majority
shareholder then agreed to the cancellation of this indebtedness of OHE in
exchange for 2,692 shares of common stock of OHE (734,781 shares of the Company,
giving effect to the reorganization).
(16) STOCK OPTION PLANS
In 1996, the Company adopted a stock option plan (the 1996 Plan) for
employees and non-employee directors. Had compensation cost for this plan been
determined consistent with SFAS 123, the Company's net income and earnings per
share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net income
As reported................................................. $6,658,962
Pro forma................................................... $6,636,312
Earnings per share
Pro forma before SFAS No. 123 impact........................ $ 0.69
Pro forma after SFAS No. 123 impact......................... $ 0.69
</TABLE>
The Company may grant options for up to 400,000 shares under the 1996 Plan.
The Company granted options for 180,000 shares during fiscal 1996 at the initial
public offering price. Options granted under the plan are generally granted at
fair market value at the date of grant and are exercisable over periods not
exceeding ten years.
F-22
<PAGE> 138
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of the status of the Company's stock option plan at December 31,
1996, and the change during the year then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
SHARES PRICE
------- -----
<S> <C> <C>
Outstanding, beginning of year............................. -- $ --
Granted.................................................... 180,000 9.00
Exercised.................................................. -- --
Forfeited/Expired.......................................... -- --
------- ------
Outstanding, end of year................................... 180,000 $9.00
======= ======
Exercisable, end of year................................... -- $ --
======= ======
</TABLE>
At December 31, 1996, all 180,000 of the options have an exercise price of
$9.00, a fair value of $4.98, and remaining contractual life of 10 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Dividend yield........................................ 0%
Expected volatility................................... 39.3%
Risk-free interest rate............................... 6.5%
Expected lives........................................ 7.5 years
</TABLE>
(17) INITIAL PUBLIC OFFERING
On November 15, 1996, the Company completed its initial public offering of
common stock. The proceeds from the sale of 2,048,000 shares of common stock,
including 48,000 shares issued through the underwriters' partial exercise of
their over-allotment option, were used by the Company for retirement of bank
debt, payment of the AAA notes described below, purchase of a manufacturing
facility in Mexico, acquisition of Palmer net assets (Note 3) and transaction
costs associated with the offering.
On October 28, 1996 OHE distributed to its shareholders a dividend of
$9,000,000 in the form of long-term notes (the "AAA Notes") which represented
the undistributed previously taxed income of OHE as an S Corporation through the
effective date of the reorganization. During 1996 the Company recognized
approximately $27,000 in interest expense related to the AAA notes.
F-23
<PAGE> 139
THE O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(18) PRO FORMA INFORMATION (UNAUDITED)
(a) Pro Forma Consolidated Statements of Operations Adjustments -- The pro
forma consolidated statements of operations information presents the pro forma
effects on the historical consolidated financial information reflecting certain
transactions as if they occurred on January 1, 1996. The following adjustments
have been reflected in the pro forma consolidated statements of operations
information:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Amortization on intangible assets resulting from the purchase of
Palmer net assets................................................... $ (101,000)
The elimination of interest expense relating to the retirement of bank
debt................................................................ 339,000
The provision for income taxes at an effective rate of 40% as if the
Company had filed a consolidated U.S. Federal tax return............ (2,448,000)
------------
Total....................................................... $ (2,210,000)
============
</TABLE>
(b) Pro Forma Net Income Per Share -- Pro forma net income per common share
is based on the weighted average number of shares of common stock of the Company
outstanding during the period (assuming the reorganization had occurred as of
the beginning of the year and using the treasury stock method), plus the number
of shares required to fund the distribution to shareholders and the number of
shares required to repay existing debt.
Supplemental pro forma income per share considering only the repayment of
existing debt would have been $0.83 for the year ended December 31, 1996, based
on the weighted average number of shares of common stock outstanding during the
period, plus the estimated number of shares to be issued to repay existing debt.
(19) SUBSEQUENT EVENT (UNAUDITED)
On August 8, 1997, the Company entered into a merger agreement with Kroll
Holdings, Inc. (Kroll). In the proposed merger, Kroll would become a wholly
owned subsidiary of the Company and holders of Kroll stock and stock options
would receive an aggregate of 6,650,000 shares of O'Gara common stock. The
merger is intended to be a tax-free reorganization and will be accounted for as
a pooling of interests.
F-24
<PAGE> 140
THE O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1997
--------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents....................................................................... $ 7,874
Marketable securities...................................................................... 3,011
Trade accounts receivable, net of allowance for doubtful accounts of $467.................. 20,064
Other receivables
Advances to shareholders................................................................. 69
Affiliates............................................................................... 398
Advances to vendors........................................................................ 505
Costs and estimated earnings in excess of billings on uncompleted contracts................ 12,616
Inventories................................................................................ 15,211
Prepaid expenses........................................................................... 1,590
--------
Total current assets................................................................ 61,338
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land....................................................................................... 1,255
Buildings and improvements................................................................. 5,525
Furniture and fixtures..................................................................... 2,080
Machinery and equipment.................................................................... 5,074
--------
13,934
Less: accumulated depreciation............................................................. (4,851)
--------
9,083
--------
COSTS IN EXCESS OF ASSETS ACQUIRED, net of accumulated amortization of $215.................. 12,949
OTHER ASSETS................................................................................. 6,377
--------
19,326
--------
$ 89,747
========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit.................................................................. $ --
Current portion of long-term debt.......................................................... 2,030
Accounts payable-
Trade.................................................................................... 16,703
Affiliates............................................................................... 1,014
Billings in excess of costs and estimated earnings on uncompleted contracts................ 732
Accrued liabilities........................................................................ 6,917
Customer deposits.......................................................................... 1,610
--------
Total current liabilities........................................................... 29,006
LONG-TERM DEBT, net of current portion....................................................... 39,944
MINORITY INTEREST............................................................................ 45
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 100,000 shares authorized, none issued................... --
Common stock, $0.01 par value, 25,000,000 shares authorized, 7,279,310 shares issued and
outstanding in 1997...................................................................... 73
Additional paid-in-capital................................................................. 23,726
Retained deficit........................................................................... (2,470)
Cumulative foreign currency translation adjustment......................................... (577)
--------
Total shareholders' equity.......................................................... 20,752
--------
$ 89,747
========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
F-25
<PAGE> 141
THE O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1997
--------- ---------
<S> <C> <C>
NET SALES....................................................................... $ 41,521 $ 51,853
COST OF SALES................................................................... 31,383 37,484
--------- ---------
Gross profit.................................................................. 10,138 14,369
OPERATING EXPENSES:
Selling and marketing......................................................... 2,159 3,794
General and administrative.................................................... 3,286 5,121
--------- ---------
Operating income.......................................................... 4,693 5,454
OTHER INCOME (EXPENSE):
Interest expense.............................................................. (613) (1,404)
Other, net.................................................................... (78) 329
--------- ---------
Income before minority interest, provision for income taxes and
extraordinary item......................................................... 4,002 4,379
Minority interest............................................................... -- (74)
--------- ---------
Income before provision for income taxes and extraordinary item............. 4,002 4,305
Provision for income taxes...................................................... -- 1,623
--------- ---------
Income before extraordinary item............................................ 4,002 2,682
Extraordinary item, cost of early extinguishment of debt, net of $129 tax
benefit....................................................................... -- 194
--------- ---------
Net income............................................................. $ 4,002 $ 2,488
========= =========
Earnings per share.............................................................. $ 0.35
=========
Weighted average shares outstanding............................................. 7,141,389
=========
UNAUDITED PRO FORMA INFORMATION:
Gross profit.................................................................. $ 10,138
Selling and marketing expenses................................................ 2,159
General and administrative expenses........................................... 3,356
---------
Operating income.............................................................. 4,623
Interest expense.............................................................. (457)
Other, net.................................................................... (78)
---------
Income before provision for income taxes...................................... 4,088
Provision for income taxes.................................................... 1,635
---------
Net income................................................................ $ 2,453
=========
Earnings per share............................................................ $ 0.40
=========
Weighted average shares outstanding........................................... 6,173,728
=========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-26
<PAGE> 142
THE O'GARA COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION
SHARES STOCK CAPITAL DEFICIT ADJUSTMENT TOTAL
--------- ------ ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........... 6,659,846 $ 66 $ 17,592 $ (4,958) $ (44) $12,656
Net income........................... -- -- -- 2,488 -- 2,488
Aggregate translation adjustment..... -- -- -- -- (533) (533)
Issuance of stock bonus to certain
employees.......................... 4,547 -- 49 -- -- 49
Issuance of stock in conjunction with
the purchase of Labbe.............. 376,597 4 3,426 -- -- 3,430
Issuance of stock in conjunction with
the purchase of Next Destination... 170,234 2 1,850 -- -- 1,852
Issuance of stock in conjunction with
the purchase of ITI................ 68,086 1 809 -- -- 810
--------- --- ------- ------- ----- -------
Balance, June 30, 1997............... 7,279,310 $ 73 $ 23,726 $ (2,470) $ (577) $20,752
========= ==== ======== ======== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 143
THE O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------
1996 1997
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 4,002 $ 2,488
Adjustments to reconcile net income to net cash used in operating
activities
Depreciation and amortization................................... 317 908
Minority interest............................................... -- 13
Decrease (increase) in receivables.............................. 602 (5,546)
Decrease in advances to vendors................................. 157 159
Increase (decrease) in costs and estimated earnings in excess of
billings on uncompleted contracts.............................. (4,452) 3,443
Increase in inventories......................................... (2,345) (2,290)
Increase in prepaid expenses.................................... (137) (844)
Increase in other assets........................................ (622) (1,076)
Increase (decrease) in accounts payable......................... 229 (575)
Decrease in billings in excess of costs and estimated earnings
on uncompleted contracts....................................... (1,236) (598)
Increase (decrease) in accrued liabilities...................... 385 (1,879)
Increase (decrease) in customer deposits........................ 1,856 (509)
-------- ---------
Net cash used in operating activities...................... (1,244) (6,306)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net.................... (787) (1,064)
Purchase of Labbe, net of cash acquired............................ -- (7,229)
Purchase of ITI, net of cash acquired.............................. -- (377)
Purchase of marketable securities.................................. (3,011)
Investment in shareholder and affiliate notes...................... (317) --
-------- ---------
Net cash used in investing activities...................... $ (1,104) $ (11,681)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of credit........ 3,457 (9,936)
Proceeds from long-term debt....................................... -- 34,875
Payments of long-term debt......................................... (80) --
Repayment of shareholder notes..................................... (40) --
Distribution to shareholders....................................... (230) --
Foreign currency translation....................................... 5 (532)
-------- ---------
Net cash provided by financing activities.................. 3,112 24,407
-------- ---------
NET INCREASE IN CASH AND EQUIVALENTS................................. 764 6,420
-------- ---------
CASH AND EQUIVALENTS, beginning of period............................ 324 1,454
-------- ---------
CASH AND EQUIVALENTS, end of period.................................. $ 1,088 $ 7,874
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................. $ 565 $ 924
======== =========
Cash paid for taxes................................................ $ -- $ 1,510
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE> 144
THE O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The O'Gara Company (the "Company") is an integrated security company with
three business lines: security hardware products, security systems integration
and security services. The Security Hardware Products Group markets all of the
Company's armoring products, including ballistic and blast protected armoring
systems for military and commercial vehicles, aircraft and missile components,
through the Company's various O'Gara-Hess & Eisenhardt Armoring Company
subsidiaries and Labbe, S.A ("Labbe"). The Security Systems Integration Group
offers planning, design and hardware and software integration services which are
customized to meet specific satellite communications or site protection needs of
customers through its O'Gara Satellite Networks ("OSN"), Next Destination
Limited ("Next Destination") and O'Gara Security International, Inc.
subsidiaries. The Security Services Group offers security-related services such
as advanced driver training, background clearances, business intelligence,
country risk assessments, forensic auditing, force protection consulting and
private security agent training through its Palmer Associates division and its
O'Gara Security Associates, Inc. and International Training, Inc. ("ITI")
subsidiaries.
On November 15, 1996, the Company completed an initial public offering of
2,048,000 shares of common stock at $9.00 per share, including 48,000 shares
issued through the underwriters' partial exercise of their over-allotment
option. The net proceeds from the offering were used by the Company for
retirement of bank debt, payment of the AAA Notes described below (Note 4),
purchase of a manufacturing facility in Mexico, initial payments in connection
with the acquisition of the net assets of Palmer Associates and transaction
costs associated with the offering.
The accompanying unaudited consolidated 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 six month periods ended June
30, 1997, are not necessarily indicative of the results that may be expected for
the year ended December 31, 1997. The accompanying financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1996.
The accompanying consolidated 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 consolidated 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 consolidated basis for all periods
presented. All significant balances and transactions between the consolidated
entities have been eliminated in these consolidated 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 exceed effort expended.
Contract costs include all direct material and labor costs, along with certain
direct overhead costs related to contract production.
F-29
<PAGE> 145
THE O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- CONTINUED
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) ACQUISITIONS
The Company completed the following acquisitions during the first quarter
of 1997. All three of these acquisitions were accounted for as purchases and the
results of the acquired entities are included in the consolidated results of the
Company from their respective dates of acquisition. The Company is still
awaiting results of certain appraisals and other analysis; therefore the
allocation of purchase price is still preliminary in each case.
(a) Next Destination Acquisition -- On February 5, 1997, the Company
acquired all of the shares of Next Destination for $3.5 million,
consisting of approximately $1.9 million in shares of the Company's
common stock (170,234 shares) and approximately $1.6 million in
seller-provided financing in the form of three-year 6% notes. The
former managing director and founder of Next Destination continues to
manage the business and is subject to a three year non-competition
agreement. Costs in excess of assets acquired is expected to be $3.2
million and will be amortized over 15 years.
(b) Labbe Acquisition -- On February 12, 1997, the Company acquired all
of the shares of Labbe for approximately $14.2 million consisting of
$10.7 million in cash, financed through funds advanced under the
Company's credit facility, and 376,597 shares of the Company's common
stock. For accounting purposes, the acquisition was effective on
January 1, 1997 and the results of operations of Labbe are included
in the consolidated results of operations of the Company from that
date forward. The former shareholders of Labbe, who were employed by
Labbe prior to the acquisition, continue in their formerly-held
capacities. The former shareholders also are subject to certain
non-competition agreements upon their leaving the employment of the
Company. Costs in excess of assets acquired is expected to be $7.0
million and will be amortized over 30 years.
(c) ITI Acquisition -- On March 24, 1997, the Company acquired all of the
shares of ITI for approximately $2.5 million, consisting of $0.5
million in cash, financed through the Company's credit facility,
68,086 shares of the Company's common stock, and $1.2 million in
seller provided financing in the form of 2-year, 10%, subordinated
notes. The former shareholders of ITI, who were employed by ITI prior
to the acquisition, continue in their formerly-held capacities. The
former shareholders are also subject to certain non-competition
agreements upon their leaving the employment of the Company. Costs in
excess of assets acquired is expected to be $2.0 million and will be
amortized over 15 years.
F-30
<PAGE> 146
THE O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- CONTINUED
In connection with the acquisitions of Labbe, Next Destination and ITI,
assets were acquired and liabilities were assumed as follows (in thousands):
<TABLE>
<CAPTION>
NEXT
DESTINATION ITI LABBE
----------- ------- --------
<S> <C> <C> <C>
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash................................................ -- $ 23 $ 3,501
Accounts receivable................................. $ 1,830 310 4,690
Inventories......................................... 1,276 -- 2,911
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... -- -- 732
Prepaid expenses.................................... -- 4 64
Property, plant & equipment......................... 80 213 3,360
Intangible assets................................... -- -- 802
Other non-current assets............................ -- 12 2,357
Goodwill............................................ 3,207 2,015 6,961
----------- ------- --------
6,393 $ 2,577 $ 25,378
Less: Cash paid for net assets...................... -- (500) (10,730)
Fair value of debt issued..................... (1,575) (1,231) --
Fair value of stock issued.................... (1,851) (810) (3,435)
----------- ------- --------
$ 2,967 $ 36 $ 11,213
======== ======= ========
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition costs........... $ 2,967 $ 19 $ 9,710
Debt................................................ -- 17 1,503
----------- ------- --------
$ 2,967 $ 36 $ 11,213
======== ======= ========
</TABLE>
(4) S CORPORATION DISTRIBUTION
From 1988, when O'Gara-Hess & Eisenhardt Armoring Company ("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 the form of long-term notes (the "AAA Notes"), which represented the
undistributed previously taxed income of OHE as an S Corporation through the
effective date of the Reorganization.
(5) PROVISION FOR INCOME TAXES
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 and,
from that date forward, is responsible for federal and state income tax.
F-31
<PAGE> 147
THE O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- CONTINUED
(6) INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and includes the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
1997
--------
<S> <C>
Raw materials................................................ $ 7,671
Vehicle costs and work-in-process............................ 7,540
------
$ 15,211
========
</TABLE>
(7) PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS (UNAUDITED)
The pro forma consolidated statements of operations information presents
the pro forma effects on the historical consolidated financial information
reflecting certain transactions as if they occurred on January 1, 1996. The
following adjustments have been reflected in the pro forma consolidated
statements of operations information (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1996
-------------
<S> <C>
Amortization of intangible assets resulting from the purchase of Palmer
Associates, S.C...................................................... $ (70)
Elimination of interest expense relating to the retirement of bank
debt................................................................. 156
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
U.S. Federal tax return.............................................. (1,635)
-------
Total.................................................................. $(1,549)
=======
</TABLE>
(8) NEW PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128),
effective for fiscal years ending after December 15, 1997. The new standard
replaces primary earnings per share ("EPS") with basic EPS, simplifies EPS
calculations and requires restatement of all prior period EPS data. The Company
intends to adopt the provisions of SFAS 128 during the fourth quarter of 1997
with no material impact anticipated.
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, REPORTING COMPREHENSIVE INCOME (SFAS No. 130), which requires comprehensive
income and the associated income tax expense or benefit be reported in a
financial statement with the same prominence as other financial statements with
an aggregate amount of comprehensive income reported in that same financial
statement. SFAS No. 130 permits the statement of changes in shareholders equity
to be used to meet this requirement. "Other Comprehensive Income" refers to
revenues, expenses, gains and losses that under GAAP are included in
comprehensive income but bypass net income. The Company intends to adopt SFAS
No. 130 in the first quarter of fiscal 1998. The Company anticipates that
adoption of SFAS No. 130 will not be material.
1997, the FASB issued Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS No.
131), which requires disclosure for each segment in which the chief operating
decision maker organizes these segments within a company for making operating
decisions and assessing performance. Reportable segments are based on products
F-32
<PAGE> 148
THE O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- CONTINUED
and services, geography, legal structure, management structure and any manner in
which management disaggregates a company. The Company intends to adopt SFAS No.
131 in the first quarter of fiscal 1998. The Company anticipates that adoption
of SFAS No. 131 will not be material.
(9) SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash and equivalents consist of all operating cash accounts and investments
with an original maturity of three months or less. Marketable securities consist
of available-for-sale commercial paper obligations which mature or will be
available for use in operations in 1997. These securities are valued at current
market value, which approximates cost.
Non-cash activity (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ------
<S> <C> <C>
Fair value of stock issued in connection with acquisition
of ITI................................................. -- $ 810
Notes issued in connection with acquisition of ITI....... -- $1,231
Fair value of stock issued in connection with acquisition
of Next Destination.................................... -- $1,851
Notes issued in connection with acquisition of Next
Destination............................................ -- $1,575
Fair value of stock issued in connection with acquisition
of Labbe............................................... -- $3,435
Note payable obligation incurred and receivable forgiven
in connection with non-compete agreement............... $115 --
</TABLE>
(10) FUTURES CONTRACT
The Company on occasion utilizes derivative financial instruments,
primarily futures contracts, to mitigate its exposure to foreign currency rate
fluctuations in transactions denominated in a foreign currency. At June 30,
1997, one such futures contract was outstanding with a bank at a contract amount
in excess of its calculated fair market value. As a result, an adjustment has
been recorded in Cumulative Foreign Currency Translation in the balance sheet.
The contract effectively hedges the Company's exposure to foreign currency
fluctuations associated with a loan to its Labbe subsidiary.
F-33
<PAGE> 149
INDEPENDENT AUDITORS' REPORT
The Stockholders of
Kroll Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Kroll
Holdings, Inc. (the "Company") and subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries as
of December 31, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
LOGO
New York, New York
March 13, 1997
(August 8, 1997 as to Notes 7 and 17)
F-34
<PAGE> 150
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Kroll Holdings, Inc.:
We have audited the consolidated balance sheet of Kroll Holdings, Inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the two year period ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 financial position of Kroll
Holdings, Inc. and subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
LOGO
New York, New York
March 28, 1996
F-35
<PAGE> 151
KROLL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 2,367,453 $ 3,306,989
Marketable securities................................................ -- 47,500
Accounts receivable, net............................................. 19,855,478 15,204,779
Unbilled revenues.................................................... 1,936,425 4,150,307
Amounts due from employees........................................... 196,410 490,881
Refundable income taxes.............................................. 95,619 154,333
Amounts due from affiliated companies................................ 162,680 41,970
Notes receivable..................................................... 471,289 100,000
Prepaid income taxes................................................. 69,802 382,602
Prepaid expenses..................................................... 1,615,411 917,483
----------- -----------
Total current assets............................................... 26,770,567 24,796,844
DATABASES (Net of accumulated amortization of $13,618,339 and
$16,568,473 in 1995 and 1996, respectively).......................... 7,114,223 7,415,449
PROPERTY AND EQUIPMENT--Net............................................ 3,705,133 3,638,526
INTANGIBLE AND OTHER ASSETS (Net of accumulated amortization of
$150,085 and $77,556 in 1995 and 1996, respectively)................. 1,248,111 1,333,033
OTHER ASSETS........................................................... 111,811 111,732
----------- -----------
TOTAL ASSETS........................................................... $38,949,845 $37,295,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--trade.............................................. $ 4,538,749 $ 4,910,286
Accrued compensation................................................. 397,449 2,621,343
Accrued interest payable............................................. 1,258,746 209,171
Deferred revenue..................................................... 167,582 1,064,955
Accounts payable other............................................... 2,719,852 3,341,385
Deferred income taxes................................................ 2,506,932 1,703,377
Current maturities of long-term debt................................. 5,000,000 2,625,000
Amount due to stockholder............................................ 2,000,000 2,000,000
----------- -----------
Total current liabilities.......................................... 18,589,310 18,475,517
DEFERRED RENT.......................................................... 1,559,576 1,588,718
OTHER LONG-TERM LIABILITIES............................................ 1,235,295 468,479
AMOUNT DUE TO STOCKHOLDERS............................................. 3,543,381 5,048,266
LONG-TERM DEBT--Less current maturities................................ 8,000,000 5,500,000
DEFERRED INCOME TAXES.................................................. 1,604,604 2,002,779
----------- -----------
TOTAL LIABILITIES...................................................... 34,532,166 33,083,759
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 11 and 13)
STOCKHOLDERS' EQUITY:
Class A common stock ($0.01 par value; authorized 46,200 shares)..... 231 231
Common stock ($0.01 par value; authorized 153,800 shares)............ 654 718
Additional paid-in capital........................................... 19,364,159 20,255,161
Accumulated deficit.................................................. (15,143,498) (15,945,238)
Unrealized appreciation of marketable securities..................... -- 14,167
Cumulative translation adjustment.................................... 196,133 (113,214)
----------- -----------
Total stockholders' equity......................................... 4,417,679 4,211,825
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $38,949,845 $37,295,584
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 152
KROLL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES............................................ $52,871,687 $53,024,304 $70,883,058
COST OF SALES....................................... 31,683,853 35,205,810 47,899,920
----------- ----------- -----------
Gross profit (loss)............................... 21,187,834 17,818,494 22,983,138
OPERATING EXPENSES:
Selling and marketing............................. 4,700,040 5,489,615 4,632,013
General and administrative........................ 18,076,344 16,788,146 18,349,974
----------- ----------- -----------
Operating income (loss)........................ (1,588,550) (4,459,267) 1,151
OTHER INCOME (EXPENSE):
Interest expense.................................. (2,188,404) (1,970,483) (1,839,984)
Other, net........................................ 406,757 (281,774) 357,828
----------- ----------- -----------
LOSS BEFORE INCOME TAXES............................ (3,370,197) (6,711,524) (1,481,005)
INCOME TAX BENEFIT.................................. (1,751,098) (1,297,837) (679,265)
----------- ----------- -----------
NET LOSS............................................ $(1,619,099) $(5,413,687) $ (801,740)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 153
KROLL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL APPRECIATION OF CUMULATIVE
PAID-IN ACCUMULATED MARKETABLE TRANSLATION
CLASS A COMMON CAPITAL DEFICIT SECURITIES ADJUSTMENT TOTAL
------- ------ ----------- ------------ ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE at December 31, 1993
(88,450 shares issued and
outstanding)............... $ 231 $654 $19,364,159 $ (8,110,712) $ -- $ 108,146 $11,362,478
Cumulative translation
adjustment............... -- -- -- -- -- 59,174 59,174
Net loss................... -- -- -- (1,619,099) -- -- (1,619,099)
---- ---- ----------- ------------ -------- --------- -----------
BALANCE at December 31, 1994
(88,450 shares issued and
outstanding)............... 231 654 19,364,159 (9,729,811) -- 167,320 9,802,553
Cumulative translation
adjustment............... -- -- -- -- -- 28,813 28,813
Net loss................... -- -- -- (5,413,687) -- -- (5,413,687)
---- ---- ----------- ------------ -------- --------- -----------
BALANCE at December 31, 1995
(88,450 shares issued and
outstanding)............... 231 654 19,364,159 (15,143,498) -- 196,133 4,417,679
Cumulative translation
adjustment............... -- -- -- -- -- (309,347) (309,347)
Issuance of 6,457 shares... -- 64 891,002 -- -- -- 891,066
Unrealized appreciation of
marketable securities.... -- -- -- -- 14,167 -- 14,167
Net loss................... -- -- -- (801,740) -- -- (801,740)
---- ---- ----------- ------------ -------- --------- -----------
BALANCE at December 31, 1996
(94,907 shares issued and
outstanding)............... $ 231 $718 $20,255,161 $(15,945,238) $ 14,167 $(113,214) $ 4,211,825
==== ==== =========== ============ ======== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 154
KROLL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(1,619,099) $(5,413,687) $ (801,740)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
provided
by operating activities:
Depreciation and amortization -- property and
equipment.................................... 1,042,748 841,294 751,083
Amortization for goodwill...................... 19,143 26,939 26,992
Amortization for noncompete agreement.......... 33,334 16,667 --
Amortization for databases..................... 2,469,576 2,470,696 2,949,134
Bad debt expense............................... 2,032,749 3,050,310 8,108,976
Common stock issued as compensation............ -- -- 891,066
Loss on write-off of notes receivables......... -- 55,966 --
Share in net (income) loss of joint ventures... (1,749) 224,789 (19,224)
(Gain) loss on sale of property and
equipment.................................... (54,554) 6,245 1,872
Minority interest.............................. 53,785 -- --
Gain on sale of marketable securities.......... -- -- (108,646)
Changes in current assets and liabilities:
Decrease (increase) in accounts receivable... 1,918,332 (1,952,444) (3,681,011)
(Increase) decrease in unbilled revenues..... (129,654) 1,391,221 (2,334,527)
(Increase) decrease in refundable income
taxes..................................... (340,501) 299,959 (58,714)
(Increase) decrease in prepaid income
taxes..................................... (202,834) 112,581 (312,800)
Decrease (increase) in amounts due from
affiliated companies...................... (1,080,756) (61,579) 120,710
Decrease in prepaid expenses................. 107,838 54,377 944,217
(Increase) decrease in intangibles and other
assets.................................... 29,463 (24,052) (111,914)
Increase in accounts payable and accrued
expenses.................................. 123,409 1,344,204 3,064,762
(Increase) decrease in amounts due to/from
employees................................. (23,695) 19,820 (294,471)
Decrease in deferred income taxes payable.... (409,517) (875,312) (405,380)
Decrease in income taxes payable............. (1,109,009) -- --
Increase (decrease) in long-term
liabilities............................... 289,231 349,103 (680,802)
Increase (decrease) in deferred rent......... 29,929 (199,363) 29,142
----------- ----------- -----------
Total adjustments.............................. 4,797,268 7,151,421 8,880,465
----------- ----------- -----------
Net cash provided by operating activities...... 3,178,169 1,737,734 8,078,725
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............... (497,795) (489,667) (686,948)
Proceeds from sale of property and equipment...... 80,765 4,235 600
Additions to databases............................ (3,065,554) (2,985,409) (3,250,360)
Purchase 50% of Kroll Asia (net of cash acquired
of $1,026)..................................... (334,538) -- --
Sale of marketable securities..................... -- -- 200,313
Other............................................. (127,289) (27,600) (66,711)
----------- ----------- -----------
Net cash used in investing activities.......... (3,944,411) (3,498,441) (3,803,106)
----------- ----------- -----------
</TABLE>
F-39
<PAGE> 155
KROLL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt........................ $(1,062,986) $(3,615,876) $(4,875,000)
Proceeds from borrowings from stockholders......... 106,500 2,600,000 2,000,000
Repayment of borrowings from stockholder........... -- (106,500) (495,115)
----------- ----------- -----------
Net cash used in financing activities........... (956,486) (1,122,376) (3,370,115)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................................ (1,722,728) (2,883,083) 905,504
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES ON CASH... -- -- 34,032
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR....... 6,973,264 5,250,536 2,367,453
----------- ----------- -----------
CASH AND CASH EQUIVALENTS -- END OF YEAR............. $ 5,250,536 $ 2,367,453 $ 3,306,989
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Noncash items:
Exchange of note receivable for trade
receivables................................... $ 409,967 $ 60,000 $ --
=========== =========== ===========
Exchange of stock in an unaffiliated company for
trade receivables............................. $ -- $ 125,000 $ --
=========== =========== ===========
Issuance of restricted stock.................... $ -- $ -- $ 891,066
=========== =========== ===========
Cash paid during the year for:
Interest........................................ $ 1,382,698 $ 1,840,061 $ 2,972,970
=========== =========== ===========
Income taxes.................................... $ 595,387 $ 123,686 $ 97,629
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE> 156
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. ORGANIZATION
General -- In June 1993, Kroll Holdings, Inc., a Delaware corporation,
commenced operations. The Company was established as a holding company for
previously affiliated companies, hereinafter referred to as the Kroll Group, all
of whom were owned by common stockholders.
Description of Business -- Kroll is an international investigative and
consulting professional services organization. By combining sophisticated
investigative techniques with state of the art research methods, Kroll provides
services involving major financial transactions, corporate fraud, international
expansion, litigation, corporate takeovers, competitor actions, bankruptcies,
environmental liability, crisis management and other business concerns.
Reorganization -- During June 1993, pursuant to an unanimous consent of
stockholders, the holders of capital stock of the Kroll Group and an outside
investor entered into a Plan of Reorganization and Stockholders Agreement (the
"Plan"). Under the Plan, the outside investor contributed cash and notes to the
Company in exchange for 23,100 shares of the Company's Class A Common Stock, par
value $.01 per share. At December 31, 1993, the notes contributed by the outside
investor had been fully satisfied. The existing stockholders contributed all of
the capital stock of the Kroll Group in exchange for shares of the Company's
Common Stock, par value $.01. Due to the common ownership of the Kroll Group
Companies and Kroll Holdings, Inc., this reorganization has been accounted for
as a transaction between entities under common control. Accordingly, all assets
and liabilities of the entities have been combined at their historical net book
values and the exchange of shares by the existing stockholders has been
reflected in the accompanying consolidated financial statements as of January 1,
1993. The Reorganization qualified as a tax-free transaction as provided in
Section 351 of the Internal Revenue Code of 1986.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The accompanying consolidated financial
statements of Kroll Holdings, Inc. ("Holdings") and its wholly owned
subsidiaries include the accounts of Kroll Associates, Inc. ("KAI"), Kroll
Associates UK Limited ("Kroll UK"), Kroll Associates France SARL ("Kroll
France"), Kroll Environmental Enterprises, Inc. ("KEE"), Kroll Information
Services, Inc. ("KINS"), Kroll Associates Brazil Limited ("Kroll Brazil"), Kroll
Electronic Recovery Inc. ("KER"), Kroll Travel Security Services, Inc. ("Kroll
Travel"), Kroll Associates (Asia) Limited ("Kroll Asia"), Kroll International
Holdings, Inc. ("KIHI") and Kroll International, Inc. ("KII"). In April 1988,
Kroll Associates entered into a joint venture agreement. The investment in the
joint venture represented 50% of the common stock of Kroll Asia. In May 1994,
the remaining 50% of the common stock of Kroll Asia was purchased by Kroll
Holdings, Inc. Beginning with the year ended December 31, 1994, Kroll Asia has
been consolidated into the Kroll Holdings, Inc. financial statements. All
significant intercompany accounts and transactions among these companies have
been eliminated in consolidation. KIHI and KII are newly formed companies and
are included in the consolidated financial statements of KHI for the year ended
December 31, 1996.
Property and Equipment -- Property and equipment are carried at cost.
Depreciation, including amortization of leasehold improvements, is computed
using the straight-line method over the estimated useful life of the asset. When
assets are retired or sold, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is recognized in
income for the period. The cost of maintenance and repairs is charged to income
as incurred.
Databases -- Databases are capitalized costs incurred to obtain information
from third-party databases. Amortization is computed using the straight-line
method over the estimated useful life of five years.
Revenue Recognition -- Revenue from services is recognized as the services
are performed. The Company records either billed or unbilled accounts receivable
based on case-by-case invoicing determinations.
F-41
<PAGE> 157
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Income Taxes -- Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Foreign Currency -- The functional currency for the Company's foreign
subsidiaries is the applicable local currency. The translation from the
applicable foreign currencies to U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average exchange rate during
the period. The gains or losses resulting from such translation are included in
stockholders' equity.
Gains or losses resulting from foreign currency transactions are translated
to local currency at the rates of exchange prevailing at the dates of the
transactions. Amounts receivable or payable in foreign currencies, other than
the subsidiary's local currency, are translated at the rates of exchange
prevailing at the balance sheet date. The effect of transactional gains or
losses is included in other income (expense).
Statement of Cash Flows -- Cash equivalents of $600,000, $600,000 and
$890,000 at December 31, 1994, 1995 and 1996, respectively, consist of
certificates of deposit with a maturity of less than three months.
For purposes of the consolidated statements of cash flows, the Company
considers all investments with maturities of three months or less from purchase
date to be cash equivalents.
Intangibles -- The excess of cost over the fair value of net assets of
businesses acquired is recorded as goodwill and is amortized on a straight-line
basis over a period of 40 years. The period of amortization of goodwill is
evaluated at least annually to determine whether events and circumstances
warrant revised estimates of useful lives. This evaluation considers, among
other factors, expected cash flows and profits of the businesses to which the
goodwill relates. Goodwill is written off when it becomes evident that it has
become permanently impaired.
Concentrations of Credit Risk -- Financial instruments which subject the
Company to concentrations of credit risk consist principally of trade
receivables. Concentrations of credit risk with respect to accounts receivable
are limited due to the large number of clients comprising the Company's client
base and their dispersion across many different industries and geographic
regions. Generally, the Company does not require collateral or other security to
support client receivables, except for certain significant receivables in 1995.
The Company has four significant foreign clients with receivables in the
aggregate accounting for approximately $7,456,000 or 35% and $6,531,000 or 33%
of the accounts receivable balance at December 31, 1994 and 1995, respectively.
A substantial portion of these receivables have been outstanding for more than a
year. During 1996, approximately $5,179,000 of such receivables were written
off. The Company establishes an allowance for doubtful accounts based upon facts
surrounding the credit risk of specific clients, historical trends and other
information. Management does not anticipate incurring losses on its trade
receivables in excess of established allowances.
Use of Estimates -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets, primarily in the
area of accounts receivable, and liabilities and the disclosure of contingent
assets and liabilities to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Marketable Securities -- The Company adopted the provisions of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, for the
year ended December 31, 1996. Under SFAS 115, the
F-42
<PAGE> 158
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Company must classify its debt and marketable securities in one of three
categories: trading, available-for-sale or held-to-maturity. The Company has
classified equity securities as "Available for Sale."
Unrealized holding gains and losses, net of the related income tax effect
on the available-for-sale securities are excluded from earnings and are reported
as a separate component of stockholders' equity until realized. The Company
recorded an unrealized gain of $14,167 during the year ended December 31, 1996.
A decline in the market of any available-for-sale security below cost that
is deemed other than temporary is charged to earnings resulting in the
establishment of a new cost basis for the security.
Reclassifications -- Certain prior year balances have been reclassified to
conform with current year presentation.
3. ACCOUNTS RECEIVABLE
Accounts receivable, net, include an allowance for doubtful accounts of
$2,451,294 and $1,702,731 at December 31, 1995 and 1996, respectively. Refer to
Note 1, "Concentrations of Credit Risk."
4. SALES OF RECEIVABLES
During the year ended December 31, 1995, KAI entered into agreements to
sell, without recourse, accounts receivable in the amount of $4,507,800, to a
stockholder. A discount of $225,390, or 5%, was applied to the sales. Under the
terms of the agreements, a portion of the sales proceeds was withheld by the
purchaser subject to a final determination of the specific account receivables
to be included in the sale. At December 31, 1995, all obligations to the
purchaser, pursuant to the agreements, have been satisfied.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
ESTIMATED
1995 1996 USEFUL LIVES
----------- ----------- ---------------
<S> <C> <C> <C>
Furniture and fixtures............................ $ 1,948,611 $ 1,997,508 5 years
Office equipment.................................. 5,161,819 5,637,538 5 years
Automobiles....................................... 52,558 53,377 3 years
Leasehold improvements............................ 4,995,745 5,186,648 Term of leases
----------- -----------
12,158,733 12,875,071
----------- -----------
Less accumulated depreciation and amortization:
Furniture and fixtures.......................... 1,781,578 1,851,464
Office equipment................................ 4,339,416 4,668,046
Automobiles..................................... 26,279 44,481
Leasehold improvements.......................... 2,306,327 2,672,554
----------- -----------
8,453,600 9,236,545
----------- -----------
$ 3,705,133 $ 3,638,526
=========== ===========
</TABLE>
Depreciation and amortization charged to income amounted to $1,042,748,
$841,294 and $751,083 for 1994, 1995 and 1996, respectively.
6. INVESTMENT IN JOINT VENTURES
Investment in Electronic Recovery Group--In May 1994, KER entered into a
partnership agreement with Sabin Environmental Processing, Inc., a Connecticut
corporation, to form Electronic Recovery Group (ERG).
F-43
<PAGE> 159
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
KER owns 50% of the partnership. At December 31, 1996 and 1995, KER's share of
accumulated losses is in excess of its investment in the amounts of $93,947 and
$145,883, respectively. The Company's liability for such is included in Other
Long-Term Liabilities.
7. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
10.95% Senior Notes due December 15, 1999......... $13,000,000 $8,125,000
Less current maturities........................... 5,000,000 2,625,000
----------- ----------
$ 8,000,000 $5,500,000
=========== ==========
</TABLE>
The aggregate annual principal payments during the succeeding years are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-----------
<S> <C>
1997................................................. $2,625,000
1998................................................. 2,500,000
1999................................................. 3,000,000
----------
$8,125,000
==========
</TABLE>
Under the terms of the Note Purchase Agreement governing the Senior Notes,
certain wholly owned subsidiaries of the Company are subject to certain
restrictions relating to, among other things: liens; indebtedness;
consolidations, mergers and sale of assets; investments; certain payments in
respect of capital stock; dividends; changes in the business; maintenance of
certain financial conditions; and use of proceeds. At December 31, 1996, the
Company was in violation of one of the covenants in connection with this credit
agreement. The violation related to a financial matter regarding maintaining
certain levels of modified working capital. However, subsequent to December 31,
1996, the Company has obtained from lender a waiver with respect to such
violation.
8. EMPLOYEE BENEFIT PLANS
a. PENSION AND SAVINGS PLANS
i) Money Purchase Pension Plan -- Effective January 1, 1991, the
Company adopted the Kroll Associates Money Purchase Pension Plan and Trust
(the "Plan"). The Plan is a defined contribution plan which covers all
domestic employees.
Under the Plan, a separate account is maintained for each participant. In
general, annual contributions to each participant's account under the Plan
are based on the participant's base salary.
The total cost of the Plan for 1994, 1995 and 1996 was $768,120, $818,180
and $826,278, respectively.
ii) 401(k) Plan -- Effective January 1, 1991, the Company also adopted
the Kroll Associates 401(k) Savings Plan and Trust (the "Savings Plan").
The Savings Plan is a defined contribution plan with a cash or deferred
feature that allows participant contributions. The Savings Plan covers all
eligible domestic employees of the Company.
To encourage employees to participate, the Savings Plan offers a matching
contribution whereby the Company will contribute 25% of the amount a
participant contributes on contributions up to 5% of salary, limited to a
maximum annual matching contribution of $500.
The cost of the Company's matching contribution for 1994, 1995 and 1996 was
$66,410, $58,662 and $57,479, respectively.
F-44
<PAGE> 160
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
iii) U.K. Defined Contribution Plan -- Kroll UK operates a defined
contribution Group Personal Pension Scheme (the "Scheme") which is open to
all local employees. The assets of the Scheme are held in an independently
administered fund. The pension cost amounted to $98,629, $93,309 and
$141,161 in 1994, 1995 and 1996, respectively.
(iv) Kroll Asia Defined Contribution Plan -- Kroll Asia operates a
defined contribution Pooled Provident Fund (the "Fund") which is open to
all local employees. The assets of the Fund are held in an independently
administered fund. The pension cost amounted to $87,948 and $85,924 in 1995
and 1996, respectively.
(v) Japan Defined Contribution Plan -- Kroll Japan operates a defined
contribution Pooled Provident Fund (the "Fund") which is open to all local
employees. The assets of the Fund are held in an independently administered
fund. The pension costs amounted to $7,125 in 1996.
b. RESTRICTED STOCK PLAN
The Company adopted a long-term incentive plan designed to give managing
directors and other key employees a stake in the long-term success of the
Company through grants of phantom stock options. Each option gave the right to
receive a payment equal to the appreciation in the price of the option at the
payment determination date.
Effective June 14, 1993, the Company replaced the long-term incentive plan
with a restricted stock plan. The restricted stock plan provides for cliff
vesting after a five-year period from the date the stock is awarded.
Participants who were awarded stock under the long-term incentive plan prior to
or in January 1991, vested in three years, as they received a two-year credit
toward vesting. Participants who were awarded stock under the long-term
incentive plan after January 1, 1991 and prior to, or in January 1992, will vest
in four years, as they receive a one-year credit toward vesting. Under the
provisions of the plan, a participant has the ability to put the stock back to
the Company and receive cash for the then fair value of the stock. The fair
value of a Common Share shall be determined by an appraisal and shall be equal
to the fair value of the Company divided by the total number of shares of Common
Stock issued and outstanding at the time determined on a fully diluted basis. In
determining the fair value of the Company, the appraiser will consider such
factors as the financial condition and operating results and prospects of the
Company. No payment of awards to any participant shall be made if, at the time
payment would otherwise be made, an event of default under any note purchase
agreement has occurred and is continuing.
During 1996, 4,147 shares of restricted stock fully vested and were issued.
Based on a valuation of the Company, the total value assigned to the shares on
the vesting date equaled $572,286.
At December 31, 1994, 1995 and 1996, 7,858, 7,289 and 3,068 shares,
respectively, were outstanding relating to the restricted stock plan and an
additional 1,382, 1,951 and 2,025 shares at December 31, 1994, 1995 and 1996,
were reserved for issuance. As a result, at December 31, 1994, 1995 and 1996,
$490,831, $732,234 and $374,532, respectively, was accrued in connection with
these benefits.
c. SUPPLEMENTAL EXECUTIVE AWARD AGREEMENTS
The Company entered into agreements with certain senior executives which
provided additional benefits to the participants. During 1996, all 2,310 shares
fully vested and were issued. Based on a valuation of the Company, the total
value assigned to the shares on the vesting date equaled $318,780. At December
31, 1994 and 1995, $215,400 and $323,100, respectively, was accrued in
connection with these benefits.
F-45
<PAGE> 161
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
d. PROFIT AND REVENUE SHARING PLANS
In 1991, the Company adopted a Profit and Revenue Sharing Plan to give
employees an annual cash incentive bonus based on the Company's performance. The
new plans made a portion of most employees' compensation (except administrative
personnel, who have a guaranteed bonus) contingent. There were two plans under
the Profit and Revenue Sharing Plan umbrella -- the Profit and Revenue Sharing
Plan for Managing Directors and the Bonus Plan for Professionals and Senior
Administrative Employees.
PROFIT AND REVENUE SHARING PLAN FOR MANAGING DIRECTORS
The managing directors' bonus plan is based on a matrix of firmwide revenue
and a percentage of operating profit. The maximum bonus opportunity for managing
directors was 50%, 50% and 15% of salary in 1994, 1995 and 1996, respectively.
The administrator may amend, modify or terminate the plan at any time.
BONUS PLAN FOR PROFESSIONAL AND SENIOR ADMINISTRATIVE STAFF
Similar to the managing directors' bonus plan, the plan for the
professional staff is based on a matrix of firmwide revenue and a percentage of
operating profit. The maximum bonus opportunity for this group ranged from 18%
to 26% of salary in 1994 and 1995 and from 15% of salary in 1996 depending on
the employee's level in the Company. The administrator may amend, modify or
terminate the plan at any time.
The Company incurred approximately $99,000, $314,000 and $2,288,000
associated with the profit and revenue sharing plans in 1994, 1995 and 1996,
respectively.
e. STOCK OPTIONS
Effective January 1995, the Company established the Kroll Holdings, Inc.
Management Stock Option Plan (the "Management Stock Option Plan"). The
Management Stock Option Plan shall be administered by a committee (the
"Committee") appointed by the Board of Directors. In administering the
Management Stock Option Plan, the Committee may adopt rules and regulations for
carrying out the Management Stock Option Plan and shall determine the vesting
period and exercise price of options granted. In addition, the Committee shall
determine which employees are granted options.
The Management Stock Option Plan provides for the issuance of options to
purchase up to 7,700 shares of the Company's common stock. Options granted under
the Management Stock Option Plan shall be nonqualified stock options which are
not entitled to tax treatment as incentive stock options under Section 422 of
the Internal Revenue Code. Options may only be exercised while a participant is
employed, or in the event of disability, death, termination of employment after
the age of 65, within a 90-day period of the participant's termination of
employment. Options may be terminated at the Committee's discretion with
compensation paid to participants based on a current valuation (as defined in
the Management Stock Option Plan) of the options. Common stock granted on the
exercise of options shall generally not be transferable; however, after holding
such shares for one year, a participant has the right to sell, and the Company
has an obligation to purchase, shares put to the Company, with the share price
based on a current valuation of the Company. Options to purchase 6,090 and 535
shares of common stock were granted under the Management Stock Option Plan in
1995 and 1996, respectively. In addition, during 1996, options to purchase 2,196
shares of common stock were issued to two key employees with an exercise price
above market price.
F-46
<PAGE> 162
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of the status of the Company's stock options as of December 31,
1995 and 1996 and changes during the years then ended is presented below.
<TABLE>
<CAPTION>
1995 1996
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... -- $ -- 6,090 $400
Granted.................................. 6,090 400 2,731 199
----- ---- ----- ----
Outstanding at end of year............... 6,090 $400 8,821 $338
===== ==== ===== ====
Options exercisable at end of year....... -- -- 3,763 $327
===== ==== ===== ====
Weighted average fair market value of
options granted during the year........ $0.00 $0.00
===== =====
</TABLE>
The fair value of each option granted during 1995 and 1996 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<S> <C>
Dividend yield..................................................... 0%
Expected volatility................................................ 0%
Risk-free interest rate............................................ 6.00%
Expected life...................................................... 5 years
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ ---------------------
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING WEIGHTED OUTSTANDING WEIGHTED
RANGE OF AT CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE DECEMBER LIFE EXERCISE DECEMBER EXERCISE
PRICES 31, 1996 (YEARS) PRICE 31, 1996 PRICE
- -------- -------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$150 2,196 10 years $150 1,098 $150
400 6,625 9 years 400 2,665 400
------ ------
8,821 3,763
====== ======
</TABLE>
The Company applies APB Option No. 25 and related Interpretations in
accounting for stock options. Accordingly, no compensation cost has been
recognized with respect to the plans. Had compensation cost for the Company's
stock option plans been determined consistent with Statement of Financial
Accounting Standards No. 123, Accounting for Stock -- Based Compensation ("SFAS
123"), there would have been no effect on the Company's net loss, as the options
granted during 1995 and 1996 were determined to have a fair value of $-0-.
9. RELATED PARTY TRANSACTIONS
a. Investment in One Sky Consulting -- During 1994 and 1995, the Company
rendered services to an affiliated company, One Sky Consulting ("One Sky").
Included in revenues on the accompanying consolidated statements of operations
for 1994 and 1995 is $101,276 and $115,067, respectively, billed to this
company.
F-47
<PAGE> 163
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
b. Amounts Due from Affiliated Companies -- Amounts due from affiliated
companies include the following at December 31:
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Net receivable from One Sky............................. $153,713 $ 289
Advances due (to) from ERG.............................. (13,533) 8,906
Net receivable due to ERG............................... -- (708)
Note receivable from ERG................................ -- 13,500
Advances due from Kroll Stevens......................... 22,500 19,983
-------- -------
$162,680 $41,970
======== =======
</TABLE>
c. Transactions with Stockholder -- During 1994, 1995 and 1996, the Company
rendered services to a corporation which became an outside investor in June
1993. Included in revenue on the accompanying consolidated statements of
operations for 1994, 1995 and 1996 is $3,158,113, $3,868,967 and $5,325,559,
respectively, billed to this company. Included in costs and expenses on the
consolidated statements of operations for 1994, 1995 and 1996 is $936,870,
$485,807 and $824,348, respectively, billed by this company. Included in
accounts receivable for 1995 and 1996 is $923,400 and $857,820, respectively.
The outside investor has the right to designate one individual for membership on
the Company's Board of Directors.
10. LEASE COMMITMENTS
The Company leases office space under agreements that expire at various
dates through 2007. The aggregate minimum rental commitments under operating
leases for succeeding years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-----------
<S> <C>
1997........................................................... $ 3,002,950
1998........................................................... 2,845,399
1999........................................................... 2,258,467
2000........................................................... 2,073,328
2001........................................................... 1,768,837
Thereafter..................................................... 9,440,164
-----------
$21,389,145
===========
</TABLE>
Other lease commitments for equipment and automobiles are:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-----------
<S> <C>
1997.............................................................. $131,177
1998.............................................................. 406,364
--------
$537,541
========
</TABLE>
For 1994, 1995 and 1996, rent expense amounted to $2,847,521, $2,646,658
and $3,074,454, respectively.
Future annual rent expense will differ from actual payments made due to
rent abatements in the initial period of various leases. This results in
deferred rent.
F-48
<PAGE> 164
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. INCOME TAXES
Income tax benefit amounted to $1,751,098, $1,297,837 and $679,265 for
1994, 1995 and 1996, respectively. The actual tax benefit differs from the
"expected" tax benefit (computed by applying the U.S. Federal statutory tax rate
of 34% to income before income taxes) as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- ---------
<S> <C> <C> <C>
Computed "expected" tax benefit............... $(1,145,867) $(2,281,918) $(503,542)
Effect of foreign income/loss................. 249,043 1,443,806 (227,149)
Nondeductible expenses........................ 76,579 78,220 65,702
Foreign taxes................................. (329,371) -- --
State and local taxes (net of Federal income
tax benefit)................................ (457,418) (370,496) 41,453
Other......................................... (144,064) (167,449) (55,729)
----------- ----------- ---------
Actual tax benefit.......................... $(1,751,098) $(1,297,837) $(679,265)
=========== =========== =========
</TABLE>
The components of income tax benefit for 1994 are as follows:
<TABLE>
<CAPTION>
STATE AND
FEDERAL LOCAL FOREIGN TOTAL
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Current............................ $(664,798) $(347,412) $(329,371) $(1,341,581)
Deferred........................... (63,871) (345,646) -- (409,517)
--------- --------- --------- -----------
$(728,669) $(693,058) $(329,371) $(1,751,098)
========= ========= ========= ===========
</TABLE>
The components of income tax benefit for 1995 are as follows:
<TABLE>
<CAPTION>
STATE AND
FEDERAL LOCAL FOREIGN TOTAL
--------- --------- ------- -----------
<S> <C> <C> <C> <C>
Current............................. $(159,569) $(262,956) $ -- $ (422,525)
Deferred............................ (576,910) (298,402) -- (875,312)
--------- --------- ----- -----------
$(736,479) $(561,358) $ -- $(1,297,837)
========= ========= ===== ===========
</TABLE>
The components of income tax benefit for 1996 are as follows:
<TABLE>
<CAPTION>
STATE AND
FEDERAL LOCAL FOREIGN TOTAL
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
Current................................ $(482,629) $ 208,744 $ -- $(273,885)
Deferred............................... (259,443) (145,937) -- (405,380)
--------- --------- ----- ---------
$(742,072) $ 62,807 $ -- $(679,265)
========= ========= ===== =========
</TABLE>
F-49
<PAGE> 165
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts......................... $ 547,247 $ 588,773
Fixed assets, principally due to differences in
depreciation and amortization........................ 591,319 576,996
Accrual for restricted stock plan....................... 464,347 164,794
Net operating loss...................................... 1,365,895 1,271,336
Other................................................... 65,087 --
----------- -----------
Total gross deferred tax assets...................... 3,033,895 2,601,889
Less valuation allowance................................ (1,338,113) (1,271,336)
----------- -----------
1,695,782 1,330,563
----------- -----------
Deferred tax liabilities:
Nonaccrual service fee receivable....................... (219,560) (219,560)
Deferred revenue........................................ (1,678,846) (2,072,590)
Database capitalization................................. (2,644,120) (2,738,824)
S to C conversion....................................... (1,264,792) (5,745)
----------- -----------
Total gross deferred tax liabilities................. (5,807,318) (5,036,719)
----------- -----------
Net deferred tax liability........................... $(4,111,536) $(3,706,156)
=========== ===========
</TABLE>
A valuation reserve is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The change in the
valuation reserve from January 1 to December 31 was $1,338,113 and $(66,777) for
1995 and 1996, respectively.
At December 31, 1994, 1995 and 1996, the Company had approximately $237,000
of net operating loss carryforwards for Federal income tax purposes attributable
to years in which KEE was taxed at the corporate level. The net operating loss
carryforwards are limited in their use; therefore, they have been reserved for
in the valuation allowance, due to the uncertainty of their realization. The
carryforwards for Federal income tax purposes expire as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
----------- --------
<S> <C>
2001.............................................................. $ 19,000
2002.............................................................. 91,000
2003.............................................................. 127,000
--------
$237,000
========
</TABLE>
At December 31, 1995 and 1996, Kroll UK had approximately $756,000 and
$985,000, respectively, of net operating loss carryforwards. Kroll Asia had
approximately $420,000 and $206,000 of net operating loss carryforwards at
December 31, 1995 and 1996, respectively. A valuation allowance, for the full
amount of all carryforwards has been provided for both the Kroll UK & the Kroll
Asia carryforwards as it is not certain that the tax benefit will be realized in
the foreseeable future.
F-50
<PAGE> 166
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. AMOUNTS DUE TO/FROM STOCKHOLDERS
Amounts due to/from the majority stockholders of the Company include the
following amounts due to/from the various consolidated companies:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Amounts due from majority stockholder of the Company:
KAI............................................................. $ 1,345,499 $ 1,345,499
----------- -----------
Amounts due to stockholders of the Company:
KAI............................................................. (5,233,881) (6,738,766)
KEE............................................................. (1,057,500) (1,057,500)
KINS............................................................ (597,499) (597,499)
----------- -----------
(6,888,880) (8,393,765)
----------- -----------
Net due to stockholders...................................... $(5,543,381) $(7,048,266)
=========== ===========
</TABLE>
Balances included in Amounts Due To/From Stockholders are classified as
open advance accounts (held with the majority shareholder) or term loans (held
with the majority shareholder and a minority shareholder). The net due to
stockholders under the term loans was $2,309,500 at December 31, 1995 and 1996.
The balances due and activity in the open advance accounts for the period was as
follows:
<TABLE>
<CAPTION>
ADVANCE NO. 1 ADVANCE NO. 2 TOTAL
------------- ------------- ----------
<S> <C> <C> <C>
Balance, January 1, 1994................ $ 2,633,881 $ -- $2,633,881
Advances................................ 600,000 -- 600,000
Repayments.............................. -- -- --
----------- ----------- ----------
Balance, December 31, 1995.............. 3,233,881 -- 3,233,881
Advances................................ -- 2,000,000 2,000,000
Repayments.............................. (43,458) (451,657) (495,115)
----------- ----------- ----------
Balance, December 31, 1996.............. $ 3,190,423 $ 1,548,343 $4,738,766
=========== =========== ==========
</TABLE>
F-51
<PAGE> 167
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
13. CUSTOMER AND SEGMENT DATA
Kroll operates in a single segment, providing consulting services. The
following summarizes Kroll's foreign and domestic sales (in thousands of
dollars):
<TABLE>
<CAPTION>
U.S. FOREIGN ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
1994
Net sales to unaffiliated customers............ $36,239 $16,633 $ -- $ 52,872
Intercompany................................... 725 1,047 (1,772) --
------- ------- ------- -------
Total net sales...................... $36,964 $17,680 $ (1,772) $ 52,872
======= ======= ======= =======
Operating income (loss)........................ $(3,159) $ 1,570 $ -- $ (1,589)
======= ======= ======= =======
Identifiable assets............................ $36,882 $ 3,716 $ (1,088) 39,510
======= ======= =======
Corporate assets............................... 5,149
-------
Total assets at year-end....................... $ 44,659
=======
1995
Net sales to unaffiliated customers............ $37,768 $15,256 $ -- $ 53,024
Intercompany................................... 782 1,469 (2,251) --
------- ------- ------- -------
Total net sales...................... $38,550 $16,725 $ (2,251) $ 53,024
======= ======= ======= =======
Operating income (loss)........................ $(3,094) $(1,365) $ -- $ (4,459)
======= ======= ======= =======
Identifiable assets............................ $33,680 $ 1,508 $ (1,127) 34,061
======= ======= =======
Corporate assets............................... 4,889
-------
Total assets at year-end....................... $ 38,950
=======
1996
Net sales to unaffiliated customers............ $52,086 $18,797 $ -- $ 70,883
Intercompany................................... 1,023 2,761 (3,784) --
------- ------- ------- -------
Total net sales...................... $53,109 $21,558 $ (3,784) $ 70,883
======= ======= ======= =======
Operating income (loss)........................ $(1,908) $ 1,909 $ -- $ 1
======= ======= ======= =======
Identifiable assets............................ $28,716 $ 4,967 $ (1,187) 32,496
======= ======= =======
Corporate assets............................... 4,800
-------
Total assets at year-end....................... $ 37,296
=======
</TABLE>
Kroll accounts for transfers between geographic areas at cost plus a
proportionate share of operating profit. Operating income (loss) does not
include the following items: interest expense, other expenses and income taxes.
Identifiable assets by segment are those assets that are used in Kroll's
operations in each segment. Corporate assets are principally advances to
subsidiaries and affiliates, cash and investments.
The following summarizes Kroll's sales to unaffiliated customers in the
United States and foreign locations (in 000's):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
United States, including Latin America........................ $36,239 $37,768 $52,086
Europe, including United Kingdom.............................. 10,892 8,527 9,851
Asia.......................................................... 5,741 6,729 8,946
-------- -------- --------
$52,872 $53,024 $70,883
======= ======= =======
</TABLE>
F-52
<PAGE> 168
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
During the years ended December 31, 1994, 1995 and 1996 no single foreign
geographical area other than as shown accounted for 10% or more of Kroll's sales
and no single foreign geographical area accounted for 10% or more of Kroll's
operating income or identifiable assets.
14. OTHER COMMITMENTS AND CONTINGENCIES
a. Letters of Credit
i) During 1993, KAI's bank issued an irrevocable standby letter of
credit for $400,000 in connection with the execution and delivery
of a new lease. This irrevocable standby letter of credit expires
on December 31, 1997.
ii) During 1992, KAI's bank issued a second irrevocable letter of
credit for L100,000 ($171,250*). This letter of credit expires on
August 23, 1997.
iii) During 1994, KAI's bank issued a third irrevocable letter of
credit for HK$4,000,000 ($517,200*). This letter of credit expired
on March 21, 1996.
iv) During 1994, the Company issued an irrevocable standby letter of
credit for $250,000. This letter of credit expires on
June 3, 1997.
v) During 1996, KAI's bank issued an irrevocable letter of credit for
Canadian $50,000 ($36,496*). This letter of credit expires on July
31, 2001.
No amounts were outstanding under the letter of credit arrangements at December
31, 1995 and 1996.
* Based on December 31, 1996 foreign exchange rates.
b. Litigation
The Company is involved in various claims arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the accompanying consolidated
financial statements.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade accounts
receivables amounts, due from employees, other current assets, accounts payable,
due to stockholders, and accrued expenses approximate fair value because of the
short maturity of those instruments. Management of the Company believes that the
carrying value of long-term debt approximate fair value which is based on rates
currently available to the Kroll Group.
16. VALUATION OF LONG-LIVED ASSETS
The Company undertakes a review and evaluation of the net carrying value,
recoverability and write-off period of all categories of its long-lived assets.
The Company, in its valuation, considers current market values of its
properties, competition, and the Company's and the industry's historical and
current growth patterns.
The Company's long-lived assets are stated at the lower of cost or market
and are amortized over their respective, expected lives.
17. SUBSEQUENT EVENTS
On August 8, 1997, the Company entered into a merger agreement whereby it
will exchange all of its outstanding shares of common stock for common shares of
an unrelated third party.
******
F-53
<PAGE> 169
KROLL HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................... $ 3,307 $ 3,478
Marketable securities.............................................. 48 53
Accounts receivable................................................ 15,205 14,339
Unbilled revenue................................................... 4,150 4,108
Amounts due from employees......................................... 491 471
Amounts due from affiliated companies.............................. 42 27
Other current assets............................................... 1,554 1,649
------- -------
Total current assets....................................... 24,797 24,125
PROPERTY, PLANT AND EQUIPMENT, NET................................... 3,639 4,227
DATABASES, NET....................................................... 7,415 7,632
OTHER ASSETS......................................................... 1,445 1,430
------- -------
Total assets............................................... $ 37,296 $ 37,414
======= =======
CURRENT LIABILITIES:
Accounts payable and accrued liabilities........................... 12,147 13,596
Current portion of long-term debt.................................. 2,625 2,625
Notes payable -- stockholder....................................... 2,000 2,000
Other current liabilities.......................................... 1,703 2,066
------- -------
Total current liabilities.................................. 18,475 20,287
LONG-TERM DEBT, NET OF CURRENT PORTION............................... 5,500 5,500
NOTES PAYABLE-STOCKHOLDERS........................................... 5,048 4,472
OTHER LIABILITIES.................................................... 4,061 4,136
STOCKHOLDERS' EQUITY:
Class A common stock ($0.01 par value; authorized 46,200 shares;
23,100 shares issued and outstanding)........................... -- --
Common stock ($0.01 par value; authorized 153,800 shares; 71,807
shares issued; 71,807 and 69,108 shares outstanding,
respectively)................................................... 1 1
Additional paid-in capital......................................... 20,255 20,255
Accumulated deficit................................................ (15,945) (14,611)
Unrealized appreciation of marketable securities................... 14 19
Cumulative translation adjustment.................................. (113) (92)
Less -- treasury stock, 2,699 shares at cost....................... -- (2,553)
------- -------
Total stockholders' equity......................................... 4,212 3,019
------- -------
Total liabilities and stockholders' equity................. $ 37,296 $ 37,414
======= =======
</TABLE>
The accompanying notes to the unaudited financial statements are an integral
part
of these consolidated financial statements.
F-54
<PAGE> 170
KROLL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1996 1997
------- -------
<S> <C> <C>
NET SALES................................................................ $33,374 $36,746
COST OF SALES............................................................ 21,772 21,073
------- -------
Gross margin........................................................ 11,602 15,673
OPERATING EXPENSES
Selling................................................................ 2,097 2,581
General and administrative............................................. 8,689 9,513
------- -------
Operating income.................................................... 816 3,579
OTHER INCOME (EXPENSE)
Interest expense....................................................... (950) (783)
Other, net............................................................. 71 (135)
------- -------
Income (loss) before provision for taxes............................ (63) 2,661
Provision (benefit) for income taxes................................ (57) 1,326
------- -------
Net income (loss).............................................. $ (6) $ 1,335
======= =======
</TABLE>
The accompanying notes to the unaudited financial statements are an integral
part of these consolidated financial statements.
F-55
<PAGE> 171
KROLL HOLDINGS, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. $ (6) $ 1,335
Adjustments to reconcile net loss to net cash provided by operating activities:
Cumulative translation adjustment............................................ (35) 21
Depreciation and amortization-property and equipment......................... 363 410
Amortization for goodwill.................................................... 14 13
Amortization for databases................................................... 781 788
Bad debt expense............................................................. 3,432 637
Share in net loss of joint venture........................................... 7 43
Loss on sale of property and equipment....................................... -- 6
Gain on sale of marketable securities........................................ (45) --
Changes in current assets and liabilities:
Decrease (increase) in accounts receivable................................. (1,780) 228
Decrease (increase) in unbilled revenues................................... (1,445) 43
Decrease (increase) in refundable income taxes............................. (2) 111
Decrease in prepaid income taxes........................................... -- 383
Decrease (increase) in amounts due from affiliated companies............... (12) 15
Increase in prepaid expenses............................................... (171) (574)
Increase in intangibles and other assets................................... (80) (27)
Increase in accounts payable and accrued expenses.......................... 21 1,449
Increase in amounts due from employees..................................... 1 20
Increase in deferred income taxes payable.................................. 109 --
Increase in income taxes payable........................................... (243) 363
Increase in long-term liabilities.......................................... 190 71
Decrease in deferred rent.................................................. (103) (26)
---------- ----------
Total adjustments....................................................... 1,002 3,974
Net cash provided by operating activities............................... 996 5,309
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment............................................ (234) (1,004)
Payments from loan receivable.................................................. 386 --
Additions to database.......................................................... (766) (1,081)
Sale of marketable securities.................................................. (17) --
Other.......................................................................... (10) 77
---------- ----------
Net cash used in investing activities................................... (641) (2,008)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock for treasury........................................ -- (2,553)
Repayment of long-term debt.................................................... (2,375) --
Proceeds from borrowings from stockholder...................................... 2,000 --
Repayment of borrowings from stockholder....................................... (44) (577)
---------- ----------
Net cash used in financing activities................................... (419) (3,130)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. (64) 171
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................................... 2,368 3,307
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR........................................... $ 2,304 $ 3,478
========== ==========
SUPPLEMENTAL DISCLOSURES OF NON-CASH ITEMS:
Cash paid for interest......................................................... $ 1,973 $ 751
========== ==========
Cash paid for income taxes..................................................... $ 98 $ 555
========== ==========
</TABLE>
The accompanying notes to the unaudited financial statements
are an integral part of these consolidated financial statements.
F-56
<PAGE> 172
KROLL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Kroll is an international investigative and consulting professional
services organization. By combining sophisticated investigative techniques with
state of the art research methods, Kroll provides services involving major
financial transactions, corporate fraud, international expansion, litigation,
competitor actions, corporate takeovers, bankruptcies, environmental liability,
crisis management and other business concerns.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information. 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, the accompanying interim unaudited
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the consolidated financial
position of Kroll Holdings, Inc. ("Kroll") and subsidiaries as of June 30, 1997
and the results of its consolidated operations and cash flows for the six months
ended June 30, 1996 and 1997. It is suggested that the statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Kroll's December 31, 1996 consolidated financial statements.
(2) REVENUE RECOGNITION
Revenue from services is recognized as the services are performed. Kroll
records either billed or unbilled accounts receivable based on case-by-case
invoicing determinations.
(3) ACCOUNTS RECEIVABLE
Accounts receivable, net, include an allowance for doubtful accounts of
$1,702,731 and $1,987,484 at December 31, 1996 and June 30, 1997, respectively.
(4) SUBSEQUENT EVENTS
On August 8, 1997, Kroll entered into a merger agreement whereby it will
exchange all of its outstanding shares of common stock for common shares of an
unrelated third party.
(5) NEW PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS No. 130), which requires comprehensive income and the associated
income tax expense or benefit be reported in a financial statement with the same
prominence as other financial statements with an aggregate amount of
comprehensive income reported in the same financial statement. SFAS No. 130
permits the statement of changes in shareholders' equity to be used to meet this
requirement. "Other Comprehensive Income" refers to revenues, expenses, gains
and losses that under Generally Accepted Accounting Principles are included in
comprehensive income but bypass net income. Kroll intends to adopt SFAS No. 130
in the first quarter of fiscal 1998. Kroll anticipates that adoption of SFAS No.
130 will not be material.
F-57
<PAGE> 173
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Labbe (Note
1) (a French corporation) and subsidiaries as of December 31, 1995 and December
31 1996, and the related consolidated statements of operations and shareholders'
equity and cash flows for the two years in the period ended December 31, 1996.
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 financial statements referred to above present fairly,
in all material respects, the financial position of Labbe (Note 1) and
subsidiaries as of December 31, 1995 and December 31, 1996 and the results of
their operations and cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles
in the United States of America.
April 25, 1997
Paris, France
/s/ PGA
Member Firm of Andersen Worldwide
Philippe Mongin
F-58
<PAGE> 174
LABBE
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
AS OF
12.31.95 12.31.96
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash (note 2)........................................................ $ 1,987 $ 3,501
Accounts receivable, net of allowance for doubtful accounts of $169
in 1995 and $272 in 1996.......................................... 7,572 4,389
Other receivables (note 2)........................................... 759 300
Inventories (note 2)................................................. 5,143 3,643
Prepaid expenses..................................................... 151 65
------ ------
Total current assets......................................... 15,612 11,898
------ ------
PROPERTY, PLANT AND EQUIPMENT (note 2)
Land and land improvements........................................... 281 263
Buildings and improvements........................................... 2,472 2,361
Furniture and fixtures............................................... 677 695
Machinery and equipment.............................................. 1,503 1,427
Other................................................................ 524 537
------ ------
Total................................................................ 5,457 5,284
Less accumulated depreciation........................................ 2,447 2,664
Net property, plant and equipment.................................... 3,010 2,620
GOODWILL AND INTANGIBLES
Goodwill............................................................. 612 530
Franchises and licenses.............................................. -- 12
------ ------
612 542
Other assets (note 2)................................................ 2,160 2,202
------ ------
Total assets................................................. $21,394 $17,262
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving lines of credit (note 3)................................... $ 18 $ --
Current portion of long term debt (note 4)........................... 630 498
Accounts payable..................................................... 6,210 3,694
Accrued liabilities (note 2)......................................... 5,145 4,819
Deferred tax liabilities (note 2).................................... 243 37
------ ------
Total current liabilities.................................... 12,246 9,048
------ ------
Long term debt (note 4).............................................. 2,039 1,472
Minority interest.................................................... 54 31
SHAREHOLDERS' EQUITY
Common stock, 150,000 shares of FF100 par value...................... 1,871 2,848
Additional paid in capital........................................... 22 22
Retained earnings.................................................... 4,655 3,792
Translation adjustment............................................... 506 49
------ ------
Total shareholders' equity................................... 7,054 6,711
------ ------
Total liabilities and shareholders' equity................... $21,394 $17,262
====== ======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-59
<PAGE> 175
LABBE
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
12.31.95 12.31.96
----------- -----------
(12 MONTHS) (12 MONTHS)
<S> <C> <C>
Net sales............................................................. $ 25,461 $ 24,118
Cost of sales......................................................... (19,725) (19,656)
-------- --------
Gross profit.......................................................... 5,736 4,462
OPERATING EXPENSES
Selling and marketing............................................... (1,229) (1,084)
General and administrative.......................................... (1,179) (1,093)
-------- --------
Total operating expenses............................................ (2,407) (2,177)
-------- --------
Operating income.................................................... 3,329 2,285
OTHER INCOME (EXPENSE)
Interest expense.................................................... (303) (476)
Interest income..................................................... 172 380
Other............................................................... (515) (537)
-------- --------
Total other income (expense)................................ (646) (633)
-------- --------
PRE-TAX INCOME........................................................ 2,682 1,652
Provision for income taxes (note 2)................................... (985) (827)
Deferred tax (note 2)................................................. (25) 195
Minority interest..................................................... (21) (6)
-------- --------
NET INCOME.................................................. $ 1,648 $ 1,014
======== ========
Net income per share........................................ $ 16.48 $ 8.27
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-60
<PAGE> 176
LABBE
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ---------- -------- ----------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994...................... 1,871 $ 22 $ 3,408 $ -- $5,301
Net income.................................... -- -- 1,648 -- 1,648
Aggregate translation adjustment.............. -- -- -- 506 506
Distribution to shareholders.................. -- -- (401) -- (401)
----- ---- ----- ----- -----
BALANCE, December 31, 1995...................... 1,871 22 4,655 506 7,054
Net income.................................... -- -- 1,014 -- 1,014
Aggregate translation adjustment.............. -- -- -- (457) (457)
Distribution to shareholders.................. -- -- (391) -- (391)
Decrease in capital........................... (196) -- (313) -- (509)
Increase in capital........................... 1,173 -- (1,173) -- --
----- ---- ----- ----- -----
BALANCE, December 31, 1996...................... 2,848 $ 22 $ 3,792 $ 49 $6,711
===== ==== ===== ===== =====
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-61
<PAGE> 177
LABBE
CONSOLIDATED CASH FLOWS STATEMENTS
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
12.31.95 12.31.96
----------- -----------
(12 MONTHS) (12 MONTHS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................ $ 1,648 $ 1,014
Adjustments to reconcile net income to net cash provided by (used for)
operating activities
Depreciation and amortization......................................... 490 437
(Gain) or loss on sales of assets..................................... -- 21
Provision for doubtful accounts....................................... 21 114
Provision for slow moving inventories................................. (91) (30)
Changes in operating assets & liabilities
(Increase) decrease in accounts receivable.......................... (1,475) 2,582
(Increase) decrease in other receivables............................ (50) 410
(Increase) decrease in inventories.................................. 257 1,199
(Increase) decrease in prepaid expenses............................. (60) 78
(Increase) decrease in deferred income taxes........................ -- (191)
Increase (decrease) in accounts payables............................ 332 (2,116)
Increase (decrease) in accrued liabilities.......................... 276 4
Increase (decrease) in deferred tax liabilities..................... 30 --
------ ------
(270) 2,508
Increase (decrease) of minority interest.............................. (12) (20)
------ ------
Net cash provided by operating activities............................. 1,366 3,502
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of HELLIO Company (net of cash acquired)..................... (1,073) --
Purchase of property and equipment.................................... (438) (254)
(Increase) decrease in other assets................................... (1,990) (181)
Proceeds from sale of equipment....................................... 22 22
(Increase) decrease in deferred credit................................ (4) --
------ ------
Net cash used for investing activities................................ (3,485) (413)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital leases............................................ (178) (156)
Proceeds from capital leases.......................................... 94 38
Proceeds from borrowings.............................................. 828 14
Payments of borrowings................................................ (577) (424)
Payments of dividend to shareholders.................................. (401) (391)
Translation adjustment................................................ 24 (2)
Decrease in capital................................................... -- (509)
------ ------
Net cash used for financing activities................................ (210) (1,430)
------ ------
NET INCREASE (DECREASE) IN CASH....................................... (2,329) 1,659
------ ------
CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR.......................... 4,082 1,968
Impact of change in exchange rates on translations.................... 215 (126)
------ ------
CASH AND CASH EQUIVALENTS: END OF YEAR................................ $ 1,968 $ 3,501
====== ======
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-62
<PAGE> 178
LABBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(ALL AMOUNTS IN THOUSANDS OF US DOLLARS)
(1) BASIS OF PRESENTATION
(a) Consolidated entities
The accompanying consolidated financial statements consist of the following
entities.
-- Normandie Carrosserie is a company, whose principal business is
repairing industrial coachwork. Labbe owned 65% of this company until
1994, then has increased its shareholder owning up to 84%
(approximately).
-- Societe de Blindage et de Securite (S.B.S.) is engaged in the business
of providing armored products and repairing industrial coachwork. Labbe
owns approximately 100% of this entity.
-- Hellio is a company that is building and repairing industrial coachwork.
Labbe owns approximately 100% of this entity.
As Labbe has a voting interest in the above companies of more than 50%,
these companies are fully consolidated into the consolidated financial
statements.
Some companies in which Labbe holds a majority interest are not
consolidated in the consolidated financial statements because they are not
significant and will be sold in 1997.
(b) Business
The company operates in two segments, providing security products and
industrial coachwork. The Company's primary products include the armoring of
commercial and private vehicles. The following summarizes the company's foreign
and domestic sales:
<TABLE>
<CAPTION>
12.31.95 12.31.96
-------- --------
<S> <C> <C>
France:................................................ $ 19,839 $ 16,051
Foreign countries:..................................... 5,622 8,067
------ ------
$ 25,461 $ 24,118
====== ======
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles in the United States of America.
(a) Revenue recognition
Revenue related to most commercial contracts results principally from both
short-term and 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 cost incurred
to date to estimated total cost of 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 cost incurred materially exceeds effort expended.
Contract costs includes 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.
F-63
<PAGE> 179
LABBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(b) Cash and cash equivalents
Cash and cash equivalents are composed as follows:
<TABLE>
<CAPTION>
12.31.95 12.31.96
-------- --------
<S> <C> <C>
Mutual funds.......................................... $ 442 $2,075
Short term deposits................................... 571 --
Cash.................................................. 974 1,426
------ ------
$1,987 $3,501
====== ======
</TABLE>
(c) Other receivables
Other receivables are composed as follows:
<TABLE>
<CAPTION>
12.31.95 12.31.96
-------- --------
<S> <C> <C>
Income tax............................................ $432 $ 11
VAT................................................... 96 50
Suppliers discount to obtain.......................... 72 110
Other................................................. 159 129
---- ----
$759 $300
==== ====
</TABLE>
(d) Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and include the following:
<TABLE>
<CAPTION>
12.31.95 12.31.96
-------- --------
<S> <C> <C>
Raw materials......................................... $2,101 $1,934
Merchandises.......................................... 64 79
Work-in-process and finished goods.................... 2,568 1,723
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 810 251
------ ------
Gross inventory....................................... 5,543 3,987
Less-accumulated depreciation......................... 400 344
------ ------
Net inventory......................................... $5,143 $3,643
====== ======
</TABLE>
(e) Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation is computed
on the straight-line method over the estimated useful lives of the related
assets as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 19-40 years
Furniture and fixtures...................................... 5-7 years
Machinery and equipment..................................... 5-7 years
</TABLE>
(f) Research and development costs
Research and development costs are expensed as incurred. These costs are
included in cost of sales as they are directly affected to specific orders.
F-64
<PAGE> 180
LABBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(g) Other assets
The components of other assets are as follows:
<TABLE>
<CAPTION>
12.31.95 12.31.96
-------- --------
<S> <C> <C>
Investments in affiliated companies.......... $ 326 $ 305
Deposits..................................... 267 147
Loans to affiliated companies................ 1,753 1,766
----- -----
Gross Value.................................. 2,346 2,219
Less accumulated depreciation................ 186 17
----- -----
Net value.................................... $2,160 $2,202
===== =====
</TABLE>
Loans to affiliated companies mainly correspond to a loan to Holding Saint
Roch (H.S.R.) amounting to $1,571 and one to Verem amounting to $169 as of
December 31, 1996.
(h) Accrued liabilities
<TABLE>
<CAPTION>
12.31.95 12.31.96
-------- --------
<S> <C> <C>
Income tax................................... $ 262 $ 168
Other taxes.................................. 60 49
----- -----
Tax payable.................................. 322 217
Wages...................................... 1,444 1,146
Social security charges.................... 864 748
Retirement indemnity....................... 226 320
Employee profit sharing.................... 683 981
----- -----
Accrued compensation......................... 3,217 3,195
Deferred revenue............................. 931 558
VAT sales tax payable........................ 195 184
Guarantees and warranty costs.............. 183 276
Litigation, claims, assessments............ 102 224
Other...................................... 195 165
----- -----
Other liabilities............................ 480 665
----- -----
$5,145 $4,819
===== =====
</TABLE>
Income tax assets and liabilities can not be compensated as they do not
relate to the same legal entities and as the Labbe group does not take the
advantage of tax consolidation.
Retirement indemnity has only been calculated for Labbe for the year 1995
and for each entity of the Labbe group for the year 1996.
Deferred revenue consists of goods not delivered before year end but
already invoiced.
(i) Income taxes
Labbe and consolidated subsidiaries are subjected to corporate income tax
(applicable rates were 36 2/3% in 1995 and 1996).
F-65
<PAGE> 181
LABBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The provision for income taxes consists of:
<TABLE>
<CAPTION>
12.31.95 12.31.96
-------- --------
<S> <C> <C>
Labbe................................................. $ (792) $ (649)
Normandie Carrosserie................................. (60) (22)
Societe de Blindage et de Securite.................... (9) --
Hellio................................................ (124) (156)
------ ----
Total current......................................... (985) (827)
Deferred.............................................. (25) 195
------ ----
Total provision for income tax........................ $ (1,010) $ (632)
====== ====
</TABLE>
In addition, the Labbe Group recognizes a deferred tax asset for cumulative
temporary differences between financial reporting and tax reporting, which
includes primarily accruals and reserves not currently deductible for tax
purposes.
The components of the deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
12.31.95 12.31.96
-------- --------
<S> <C> <C>
Profit sharing scheme................................. $ 120 $ 99
Capital lease......................................... (97) (106)
Amortization and depreciation......................... (64) (83)
Retirement indemnities................................ 83 117
Inventory valuation................................... (315) (91)
Other................................................. 30 27
---- ----
Total net deferred tax liabilities.................... $ (243) $ (37)
==== ====
</TABLE>
(j) Foreign Currency Translation
Assets and liabilities of foreign operations are translated using year-end
exchange rates prevailing during the year. Gains and losses resulting from
transactions in foreign currencies are immaterial.
(k) Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
short-term low risk instruments. Concentrations of credit risk with respect to
trade receivables are limited due to the nature of customers comprising the
Company's customer base (state-owned or private car manufacturers, French
Military).
(3) REVOLVING LINES OF CREDIT
Considering the level of cash of the Labbe group, bank accounts showing a
credit balance remain exceptional.
F-66
<PAGE> 182
LABBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) LONG TERM DEBT
The components of the long term debts (including current portions) consist
of the following:
<TABLE>
<CAPTION>
12.31.95 12.31.96
-------- --------
<S> <C> <C>
Borrowings............................................ $1,408 $ 908
Capital leases........................................ 1,261 1,062
------ ------
$2,669 $1,970
====== ======
</TABLE>
a) Long term debt except capital lease
The components of long term debt are as follows:
<TABLE>
<CAPTION>
INTEREST RATE REMAINING REMAINING
--------------- DEBT DEBT
BANK INITIAL DEBT 12.31.95 12.31.96
-------------------------------------- ------------ (%) --------- ---------
<S> <C> <C> <C> <C>
BCMB.................................. 48 8.50 $ 30 $ 18
Credit Maritime....................... 96 T4M - 0.25 10 --
96 10.25 13 --
191 10.30 83 35
67 8.75 34 17
29 10.75 15 8
CIO................................... 72 Codevi + 4.75 20 2
Credit Agricole....................... 67 8.25 17 --
72 8.25 19 --
72 10.00 19 --
286 7.25 211 141
764 7.2 until April 747 561
1996 then 6.2
Advance granted by the regional
Council............................. 95 0 102 87
COFACE................................ 14
Advances from shareholders............ 50 21
Accrued interests loan................ 7 4
Other liabilities..................... 31 --
Total long-term debt.................. 1,408 908
Less current portion.................. 468 334
------- -----
Total................................. $ 940 $ 574
======= =====
</TABLE>
Scheduled maturities of long term debt as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997.............................. $334
1998.............................. 278
1999.............................. 208
2000.............................. 88
----
$908
====
</TABLE>
F-67
<PAGE> 183
LABBE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
b) Capital leases
<TABLE>
<CAPTION>
12-31-95 12-31-96
--------- ---------
<S> <C> <C>
Current portion....................................................... $ 162 $ 164
Long term credit...................................................... 1,099 898
----- -----
$ 1,261 $ 1,062
===== =====
</TABLE>
Scheduled maturities of leasing as of December 31,1996 are as follows:
<TABLE>
<S> <C>
1997............................ $ 164
1998............................ 155
1999............................ 138
2000............................ 130
2001............................ 130
After 2001...................... 345
-----
$1,062
=====
</TABLE>
Interests on capital leases are not included in the above figures.
(5) COMMITMENTS AND CONTINGENCIES
a) Guaranties given
Guaranties given for consolidated entities and affiliated companies amount
to $663.
b) Unrecorded obligation
The consolidated company "S.B.S" is committed to buy the assets of the
former company S.I.B.S., which went bankrupt, for an amount of $306. However,
S.B.S's ownership on these assets is contested by the previous owners. S.B.S.
only paid $38 as an advance payment. Therefore, the unrecorded obligation
amounts to $268 that will be paid when the claim is solved.
F-68
<PAGE> 184
O'GARA PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1996 assumes O'Gara's acquisition of Labbe occurred on
January 1, 1996, and should be read in conjunction with, and are qualified by
reference to the audited consolidated financial statements of O'Gara and Labbe
included elsewhere in this Proxy Statement/Prospectus. For purposes of the
unaudited pro forma statements of operations, O'Gara's consolidated statement of
operations for the fiscal year ended December 31, 1996 has been combined with
the consolidated statement of operations of Labbe for the fiscal year ended
December 31, 1996.
The pro forma data is presented for illustration purposes only, and is not
necessarily indicative of the operating results that would have been achieved if
the acquisition of Labbe had been consummated as of the beginning of the period
indicated, nor is it necessarily indicative of future results of operations.
O'GARA PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL LABBE(1) ADJUSTMENTS PRO FORMA
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales............................... $ 82,778 $ 24,118 $ -- $ 106,896
Cost of sales........................... 61,523 19,656 -- 81,179
--------- -------- ------- ---------
Gross profit.......................... 21,255 4,462 -- 25,717
Operating expenses:
Selling and marketing................. 4,810 1,084 -- 5,894
General and administrative............ 7,930 1,093 300(2)(4)(5)(6)(7) 9,323
--------- -------- ------- ---------
Operating income.............. 8,515 2,285 (300) 10,500
Other income (expense):
Interest expense...................... (1,300) (476) (993)(3) (2,769)
Other, net............................ (38) (163) -- (201)
--------- -------- ------- ---------
Income before provision for income
taxes................................. 7,177 1,646 (1,293) 7,530
Provision for income taxes.............. 518 632 (474)(8) 676
--------- -------- ------- ---------
Net income.................... $ 6,659 $ 1,014 $ (819) $ 6,854
========= ======== ======= =========
UNAUDITED PRO FORMA INFORMATION:
Gross profit.......................... 21,255 25,717
Selling and marketing................. 4,810 5,894
General and administrative............ 8,031 9,424
--------- ---------
Operating income...................... 8,414 10,399
Interest expense...................... (961) (2,436)
Other, net............................ (38) (201)
--------- -------- ------- ---------
Income before provision for income
taxes.............................. 7,415 1,646 (1,293) 7,768
Provision for income taxes............ 2,966 632 (474) 3,124
--------- -------- ------- ---------
Net income............................ $ 4,449 $ 1,014 $ (819) $ 4,644
========= ======== ======= =========
Pro Forma earnings per share.......... $ 0.69 $ 0.68
========= =========
Pro Forma weighted average shares
outstanding........................ 6,449,050 6,825,647
========= =========
</TABLE>
- ---------------
(1) To include historical results of operations for Labbe for the year ended
December 31, 1996.
(2) To record amortization on goodwill resulting from acquisition of Labbe
(gross cost -- $6,961 over 30 years).
F-69
<PAGE> 185
(3) To reflect interest expense on debt incurred to fund acquisition of Labbe
($10,730 at 9.25%).
(4) To amortize capitalized acquisition costs associated with Labbe ($662 over
30 years).
(5) To amortize trademarks and customer lists identified in conjunction with
the completion of the Labbe acquisition (customer lists -- $100 over 5
years; trademarks -- $40 over 15 years).
(6) To deduct $30 in amortization recorded in historical Labbe results of
operations for pre-existing intangible assets.
(7) To record additional depreciation on fixed assets revalued in conjunction
with the completion of the Labbe acquisition (increase to building -- $470
over 20 years and machinery and equipment -- $190 over 7 years).
(8) To recognize the benefit for income taxes at an effective rate of
approximately 37% on the pro forma adjustments.
F-70
<PAGE> 186
O'GARA-KROLL PRO FORMA COMBINING FINANCIAL STATEMENTS
The unaudited pro forma combining financial data gives effect to the Merger
as a pooling of interests, and should be read in conjunction with, and are
qualified by reference to the audited consolidated financial statements of
O'Gara and Kroll and the notes thereto included elsewhere in this Proxy
Statement/Prospectus. For purposes of the unaudited pro forma operating data,
O'Gara's consolidated financial statements for the three fiscal years ended
December 31, 1996 and for the six months ended June 30, 1996 and 1997 have been
combined with the consolidated financial statements of Kroll for the three
fiscal years ended December 31, 1996 and for the six months ended June 30, 1996
and 1997, respectively. For purposes of the unaudited pro forma combined balance
sheet data, O'Gara's consolidated financial data at June 30, 1997 has been
combined with Kroll's consolidated financial data at June 30, 1997.
The pro forma data is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have been achieved if the Merger had been consummated as of the beginning of the
periods indicated, nor is it indicative of future financial position or results
of operations.
THE O'GARA COMPANY AND KROLL HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING BALANCE SHEETS
AS OF JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
O'GARA KROLL PRO FORMA
------- ------- ---------
<S> <C> <C> <C>
Current Assets:
Cash....................................................... $ 7,874 $ 3,478 $ 11,352
Marketable securities...................................... 3,011 53 3,064
Accounts receivable........................................ 20,064 14,339 34,403
Costs and estimated earnings in excess of billings
on uncompleted contracts................................ 12,616 -- 12,616
Unbilled revenue........................................... -- 4,108 4,108
Inventories................................................ 15,211 -- 15,211
Other current assets....................................... 2,562 2,147 4,709
------- ------- --------
Total current assets.................................... 61,338 24,125 85,463
Property, plant and equipment, net........................... 9,083 4,227 13,310
Databases.................................................... -- 7,632 7,632
Other assets................................................. 19,326 1,430 20,756
------- ------- --------
Total assets............................................ $89,747 $37,414 $127,161
======= ======= ========
Current liabilities:
Accounts payable and accrued liabilities................... 16,703 13,596 30,299
Current portion of long-term debt.......................... 2,030 2,625 4,655
Notes payable -- shareholder............................... -- 2,000 2,000
Other current liabilities.................................. 10,273 2,066 12,339
------- ------- --------
Total current liabilities............................... 29,006 20,287 49,293
Long-term debt, net of current portion....................... 39,944 5,500 45,444
Notes payable-shareholders................................... -- 4,472 4,472
Other liabilities............................................ 45 4,136 4,181
Shareholders' equity......................................... 20,752 3,019 23,771
------- ------- --------
Total liabilities and shareholders' equity.............. $89,747 $37,414 $127,161
======= ======= ========
</TABLE>
F-71
<PAGE> 187
THE O'GARA COMPANY AND KROLL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
O'GARA KROLL PRO FORMA
---------- ---------- -----------
<S> <C> <C> <C>
Net sales............................................ $ 51,853 $ 36,746 $ 88,599
Cost of sales........................................ 37,484 21,073 58,557
---------- ---------- -----------
Gross profit....................................... 14,369 15,673 30,042
Operating expenses
Selling............................................ 3,794 2,581 6,375
General and administrative......................... 5,121 9,513 14,634
---------- ---------- -----------
Operating income................................... 5,454 3,579 9,033
Other income (expense)
Interest expense................................... (1,404) (783) (2,187)
Other, net......................................... 329 (135) 194
---------- ---------- -----------
Income before minority interest, provision for
income taxes and extraordinary item........... 4,379 2,661 7,040
Minority interest.................................... (74) -- (74)
---------- ---------- -----------
Income before provision for taxes and
extraordinary item............................ 4,305 2,661 6,966
Provision for income taxes........................... 1,623 1,326 2,949
---------- ---------- -----------
Income before extraordinary item................ 2,682 1,335 4,017
Extraordinary item................................... 194 -- 194
---------- ---------- -----------
Net income...................................... $ 2,488 $ 1,335 $ 3,823
========== ========== ===========
Earnings per share................................... $ 0.35 $ 0.28
========== ===========
Weighted average shares outstanding.................. 7,141,389 6,650,000 13,791,389
========== ========== ===========
</TABLE>
F-72
<PAGE> 188
THE O'GARA COMPANY AND KROLL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
O'GARA KROLL PRO FORMA
---------- ------- ---------
<S> <C> <C> <C>
Net sales................................................ $ 41,521 $33,374 $74,895
Cost of sales............................................ 31,383 21,772 53,155
------- ------- -------
Gross profit........................................... 10,138 11,602 21,740
Operating expenses
Selling................................................ 2,159 2,097 4,256
General and administrative............................. 3,286 8,689 11,975
------- ------- -------
Operating income.................................... 4,693 816 5,509
Other income (expense)
Interest expense....................................... (613) (950) (1,563)
Other, net............................................. (78) 71 (7)
------- ------- -------
Income (loss) before provision (benefit) for
taxes............................................. 4,002 (63) 3,939
Provision (benefit) for income taxes..................... -- (57) (57)
------- ------- -------
Net income (loss)................................... $ 4,002 $ (6) $ 3,996
======= ======= =======
UNAUDITED PRO FORMA INFORMATION:
Gross profit........................................... $ 10,138
Selling and marketing expenses......................... 2,159
General and administrative expenses.................... 3,356
-------
Operating income....................................... 4,623
Interest expense....................................... (457)
Other, net............................................. (78)
-------
Income before provision for income taxes............ 4,088
Provision for income taxes............................. 1,635
-------
Net income.......................................... $ 2,435
=======
Earnings per share..................................... $ 0.40
=======
Weighted average shares outstanding.................... 6,173,728
=======
</TABLE>
F-73
<PAGE> 189
THE O'GARA COMPANY AND KROLL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
O'GARA KROLL PRO FORMA
---------- ---------- -----------
<S> <C> <C> <C>
Net sales............................................ $ 82,778 $ 70,883 $ 153,661
Cost of sales........................................ 61,523 47,900 109,423
---------- ---------- -----------
Gross profit.................................... 21,255 22,983 44,238
Operating expenses
Selling......................................... 4,810 4,632 9,442
General and administrative...................... 7,930 18,350 26,280
---------- ---------- -----------
Operating income........................... 8,515 1 8,516
Other income (expense)
Interest expense................................ (1,300) (1,840) (3,140)
Other, net...................................... (38) 358 320
---------- ---------- -----------
Income (loss) before provision (benefit)
for taxes................................ 7,177 (1,481) 5,696
Provision (benefit) for income taxes................. 518 (679) (161)
---------- ---------- -----------
Net income (loss).......................... $ 6,659 $ (802) $ 5,857
========== ========== ===========
Pro Forma net income (loss).......................... $ 4,449 $ (802) $ 3,647
========== ========== ===========
Pro Forma earnings per share......................... $ 0.69 $ 0.28
========== ===========
Weighted average shares outstanding.................. 6,449,050 6,650,000 13,099,050
========== ========== ===========
</TABLE>
F-74
<PAGE> 190
THE O'GARA COMPANY AND KROLL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
O'GARA KROLL PRO FORMA
------- ------- ---------
<S> <C> <C> <C>
Net sales................................................... $32,817 $53,024 $85,841
Cost of sales............................................... 25,237 35,206 60,443
------- ------- -------
Gross profit.............................................. 7,580 17,818 25,398
Operating expenses
Selling................................................... 3,628 5,490 9,118
General and administrative................................ 4,129 16,788 20,917
------- ------- -------
Operating income (loss)................................... (177) (4,460) (4,637)
Other income (expense)
Interest expense.......................................... (842) (1,970) (2,812)
Other, net................................................ (103) (282) (385)
------- ------- -------
Income (loss) before provision (benefit) for taxes........ (1,122) (6,712) (7,834)
Provision (benefit) for income taxes........................ -- (1,298) (1,298)
------- ------- -------
Net income (loss)......................................... $(1,122) $(5,414) $(6,536)
======= ======= =======
</TABLE>
F-75
<PAGE> 191
THE O'GARA COMPANY AND KROLL HOLDINGS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
O'GARA KROLL PRO FORMA
------- ------- ---------
<S> <C> <C> <C>
Net sales................................................... $33,912 $52,872 $ 86,784
Cost of sales............................................... 24,505 31,684 56,189
------- ------- --------
Gross profit.............................................. 9,407 21,188 30,595
Operating expenses
Selling................................................... 2,736 4,700 7,436
General and administrative................................ 4,441 18,076 22,517
------- ------- --------
Operating income (loss)................................... 2,230 (1,588) 642
Other income (expense)
Interest expense.......................................... (410) (2,188) (2,598)
Other, net................................................ 60 406 466
------- ------- --------
Income (loss) before provision (benefit) for taxes........ 1,880 (3,370) (1,490)
Provision (benefit) for income taxes........................ -- (1,751) (1,751)
------- ------- --------
Net income (loss)......................................... $ 1,880 $(1,619) $ 261
======= ======= ========
</TABLE>
F-76
<PAGE> 192
APPENDIX A
PLAN AND AGREEMENT
TO MERGE
VDE, INC.
WITH AND INTO
KROLL HOLDINGS, INC.
<PAGE> 193
PLAN AND AGREEMENT TO MERGE
VDE, INC.
WITH AND INTO KROLL HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Recitals................................................................................. 1
ARTICLE I
MERGER OF NEWCO INTO KHI................................................................. 2
1.01 Merger........................................................................... 2
1.02 Effective Time of the Merger..................................................... 2
1.03 The Closing...................................................................... 2
1.04 Effect of Merger................................................................. 2
1.05 Payment to Dissenting KHI Shareholders........................................... 2
1.06 Payment to Dissenting O'Gara Shareholders........................................ 2
1.07 Certificate of Incorporation..................................................... 2
ARTICLE II
CONVERSION AND EXCHANGE OF SHARES........................................................ 2
2.01 Conversion of Shares............................................................. 2
2.02 Exchange of Certificates; Issuance of New Certificates........................... 3
2.03 No Further Transfers............................................................. 4
2.04 Treatment of KHI Stock Options................................................... 4
2.05 Dissenters' Rights............................................................... 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF KHI AND THE KHI PRINCIPAL SHAREHOLDER..................
4
3.01 Organization and Capitalization.................................................. 4
3.02 Power and Authority and Board and Shareholder Approval........................... 5
3.03 Subsidiaries..................................................................... 5
3.04 Stock Options and Other Arrangements............................................. 5
3.05 Financial Statements............................................................. 6
3.06 Liabilities...................................................................... 6
3.07 Claims........................................................................... 6
3.08 Assets........................................................................... 6
3.09 Operations Since December 31, 1996............................................... 7
3.10 Taxes............................................................................ 7
3.11 Insurance........................................................................ 7
3.12 Contracts........................................................................ 8
3.13 Employee Benefit Plans........................................................... 8
3.14 No Default....................................................................... 10
3.15 Joint Proxy Statement............................................................ 10
3.16 Compliance with Laws............................................................. 10
3.17 Consents and Approvals........................................................... 11
3.18 Patents, Trademarks and Copyrights............................................... 11
3.19 Environmental Matters............................................................ 11
3.20 Pooling-of-Interests............................................................. 12
3.21 No Material Adverse Change....................................................... 12
3.22 Licenses and Permits............................................................. 12
3.23 Orders, Actions, Etc. ........................................................... 13
3.24 Labor Matters.................................................................... 13
</TABLE>
i
<PAGE> 194
<TABLE>
<S> <C> <C>
3.25 Brokers.......................................................................... 13
3.26 Full Disclosure.................................................................. 13
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF O'GARA AND NEWCO....................................... 13
4.01 Organization and Capitalization.................................................. 13
4.02 Power and Authority and Board Approval........................................... 14
4.03 Subsidiaries..................................................................... 14
4.04 Stock Options and Other Arrangements............................................. 14
4.05 SEC Filings and Financial Statements............................................. 14
4.06 Liabilities...................................................................... 15
4.07 Claims........................................................................... 15
4.08 Assets........................................................................... 15
4.09 Operations Since December 31, 1996............................................... 16
4.10 Taxes............................................................................ 16
4.11 Insurance........................................................................ 16
4.12 Contracts........................................................................ 16
4.13 Employee Benefit Plans........................................................... 17
4.14 No Default....................................................................... 19
4.15 Joint Proxy Statement............................................................ 19
4.16 Compliance with Laws............................................................. 19
4.17 Consents and Approvals........................................................... 19
4.18 Patents, Trademarks and Copyrights............................................... 19
4.19 Environmental Matters............................................................ 20
4.20 No Material Adverse Change....................................................... 21
4.21 Licenses and Permits............................................................. 21
4.22 Orders, Actions, Etc. ........................................................... 21
4.23 Labor Matters.................................................................... 21
4.24 Brokers.......................................................................... 21
4.25 Pooling-of-Interests............................................................. 21
4.26 Full Disclosure.................................................................. 21
ARTICLE V
REGISTRATION OF O'GARA COMMON STOCK...................................................... 22
ARTICLE VI
CONDITIONS TO OBLIGATIONS OF O'GARA, NEWCO, KHI AND THE KHI PRINCIPAL SHAREHOLDER........
22
6.01 Necessary Governmental Approvals................................................. 22
6.02 Effectiveness of Registration Statement.......................................... 22
6.03 No Injunction.................................................................... 23
6.04 AIG Director..................................................................... 23
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF O'GARA AND NEWCO............................................ 23
7.01 Representations and Warranties True; Covenants and Obligations Performed......... 23
7.02 Opinion of Counsel............................................................... 23
7.03 Auditor's Comfort Letter......................................................... 23
7.04 Pooling-of-Interests............................................................. 24
7.05 Opinion of Financial Advisor..................................................... 24
7.06 Shareholder Approval............................................................. 24
7.07 Required Consents................................................................ 24
</TABLE>
ii
<PAGE> 195
<TABLE>
<S> <C> <C>
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF KHI AND THE KHI PRINCIPAL SHAREHOLDER....................... 24
8.01 Representations and Warranties True; Covenants and Obligations Performed......... 24
8.02 Opinion of Counsel............................................................... 24
8.03 Auditor's Comfort Letter......................................................... 24
8.04 Required Consents................................................................ 25
8.05 Election of Principal Shareholder................................................ 25
8.06 No Labor Strikes................................................................. 25
8.07 HMMWV Contract................................................................... 25
ARTICLE IX
COVENANTS OF KHI......................................................................... 25
9.01 Access to Properties and Records................................................. 25
9.02 Operations Pending Merger........................................................ 25
9.03 Best Efforts to Expedite Closing................................................. 26
9.04 No Solicitation.................................................................. 26
9.05 Tax Information.................................................................. 27
ARTICLE X
COVENANTS OF O'GARA AND NEWCO............................................................ 27
10.01 Access to Properties and Records................................................. 27
10.02 Operations Pending Merger........................................................ 27
10.03 Best Efforts to Expedite Closing................................................. 28
10.04 Repayment of KHI Shareholder Debt................................................ 28
10.05 Tax Information.................................................................. 28
ARTICLE XI
SHAREHOLDERS' MEETINGS................................................................... 29
ARTICLE XII
TERMINATION OF MERGER AGREEMENT.......................................................... 29
ARTICLE XIII
MUTUAL COVENANTS......................................................................... 29
13.01 Satisfaction of Conditions....................................................... 29
13.02 Further Assurances............................................................... 29
ARTICLE XIV
INDEMNIFICATION.......................................................................... 29
14.01 Pre-closing Indemnification by KHI and the KHI Principal Shareholder............. 29
14.02 Pre-closing Indemnification by O'Gara............................................ 30
14.03 Post-closing Indemnification by the KHI Principal Shareholder.................... 30
14.04 Survival......................................................................... 31
14.05 Survives Termination............................................................. 31
ARTICLE XV
FEES AND EXPENSES........................................................................ 31
ARTICLE XVI
NOTICES.................................................................................. 31
ARTICLE XVII
PUBLIC ANNOUNCEMENT...................................................................... 32
</TABLE>
iii
<PAGE> 196
<TABLE>
<S> <C> <C>
ARTICLE XVIII
GOVERNING LAW............................................................................ 33
ARTICLE XIX
CAPTIONS; COUNTERPARTS................................................................... 33
ARTICLE XX
ENTIRE AGREEMENT......................................................................... 33
ARTICLE XXI
WAIVER; MODIFICATION; ASSIGNMENT......................................................... 33
Exhibit 7.02 Form of Opinion of Counsel to KHI and the KHI Principal Shareholder........ 35
Exhibit 8.02 Form of Opinion of Counsel to O'Gara and NEWCO............................. 36
</TABLE>
iv
<PAGE> 197
PLAN AND AGREEMENT TO MERGE
VDE, INC.
WITH AND INTO KROLL HOLDINGS, INC.
This Plan and Agreement to Merge dated as of August 8, 1997 (the
"Agreement") is entered into by and among THE O'GARA COMPANY, an Ohio
corporation ("O'Gara"), VDE, INC., a Delaware corporation and a wholly owned
subsidiary of O'Gara ("NEWCO"), KROLL HOLDINGS, INC., a Delaware corporation
("KHI") and Jules Kroll, individually ("Kroll") (Kroll is sometimes referred to
herein as the "KHI Principal Shareholder").
RECITALS
A. O'Gara is an Ohio corporation and has its main office at 9113 LeSaint
Drive, Fairfield, Ohio 45014. O'Gara's authorized capital stock consists of
25,000,000 shares of common stock of the par value of one cent ($.01) per share
("O'Gara Common Stock"), of which 7,279,310 shares have been issued and are
outstanding as of the date hereof, and no shares of which are held by O'Gara as
treasury stock as of the date hereof, and 100,000 shares of preferred stock of
the par value of one cent ($.01) per share ("O'Gara Preferred Stock"), none of
which is outstanding as of the date hereof.
B. NEWCO is a Delaware corporation and has its main office at 9113 LeSaint
Drive, Fairfield, Ohio 45014. NEWCO's authorized capital stock consists of 100
shares of common stock without par value ("NEWCO Common Stock"), all of which
shares have been issued and are outstanding and are held by O'Gara.
C. KHI is a Delaware corporation and has its main office at 900 Third
Avenue, New York, New York 10022. KHI's authorized capital stock consists of
46,200 Class A shares of common stock of the par value of one cent ($.01) per
share (the "KHI Class A Common Stock"), 23,100 of which are outstanding, and
153,800 shares of common stock of the par value of one cent ($.01) per share
("KHI Common Stock), of which 76,624 are issued and outstanding and of which
8,821 are covered by options to purchase (the KHI Class A Common Stock and KHI
Common Stock are hereafter referred to collectively as "KHI Capital Stock").
D. The holders of the KHI Capital Stock, the holders of O'Gara Common Stock
and O'Gara as the holder of NEWCO Common Stock are entitled to vote on this
Agreement.
E. O'Gara, NEWCO and KHI desire that the merger provided for in this
Agreement shall qualify as a tax-free reorganization pursuant to Section
368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code").
F. The respective Boards of Directors of KHI, O'Gara and NEWCO deem it
advisable and in the best interests of their respective corporations and their
shareholders that NEWCO merge with and into KHI on the terms and conditions
hereinafter set forth (the "Merger").
G. In order to induce O'Gara to enter into this Agreement, the KHI
Principal Shareholder and American International Group, Inc., a Delaware
corporation and a shareholder of KHI ("AIG"), have entered into agreements with
O'Gara as of the date hereof with respect to (a) the voting of their shares of
KHI Capital Stock in favor of the Merger and (b) certain other matters.
H. In order to induce KHI to enter into this Agreement, Thomas M. O'Gara, a
shareholder of O'Gara, has entered into an agreement with KHI as of the date
hereof with respect to (a) the voting of his shares of O'Gara Common Stock in
favor of the Merger and (b) certain other matters.
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NOW THEREFORE, in consideration of the premises and the mutual agreements,
provisions and covenants contained herein, the parties agree as follows:
ARTICLE I
MERGER OF NEWCO INTO KHI
1.01 Merger. At the Effective Time (as defined in Section 1.02), NEWCO
shall merge with and into KHI, and KHI, as the surviving corporation, shall
continue its existence under the laws of the State of Delaware under the name
"Kroll Holdings, Inc."
1.02 Effective Time of the Merger. The Merger shall become effective as of
the close of business on the date that the Certificate of Merger with respect to
this Agreement is filed with the office of the Secretary of State of the State
of Delaware (the "Effective Time").
1.03 The Closing. Subject to the provisions of Articles VI, VII, and VIII
hereof, the closing of the Merger (the "Closing") shall be held as soon as
practicable after the shareholders of O'Gara, NEWCO and KHI duly approve the
Merger, but in no event more than ten (10) business days after such approval,
and shall take place at the offices of Taft, Stettinius & Hollister, 1800 Star
Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202 on the date of the
Closing. All parties agree to use their respective commercially reasonable best
efforts to cause the conditions set forth in Articles VI, VII and VIII hereof to
be satisfied on or before the date of the shareholders' meetings held pursuant
to Article XI hereof.
1.04 Effect of Merger. At the Effective Time, the separate corporate
existence of NEWCO shall cease, and NEWCO shall be merged into and continued in
KHI, which shall be the "Surviving Corporation," pursuant to the provisions of
and with the effect provided in the General Corporation Law of the State of
Delaware (the "Delaware Law"). The Surviving Corporation shall possess all the
rights, privileges, immunities, powers and franchises and shall be subject to
all of the duties and liabilities of a corporation organized and existing under
the Delaware Law.
1.05 Payment to Dissenting KHI Shareholders. KHI will pay to the
dissenting shareholders of KHI the amount, if any, to which they shall be
entitled under the provisions of Chapter 262 of the Delaware Law.
1.06 Payment to Dissenting O'Gara Shareholders. O'Gara will pay to the
dissenting shareholders of O'Gara the amount, if any, to which they shall be
entitled under the provisions of Section 1701.85 of the Ohio General Corporation
Law.
1.07 Certificate of Incorporation. At the Effective Time, the Certificate
of Incorporation of KHI shall be, without any further action on the part of
O'Gara or KHI, the Certificate of Incorporation of the Surviving Corporation.
ARTICLE II
CONVERSION AND EXCHANGE OF SHARES
2.01 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of the holder thereof:
(a) All of the shares of NEWCO Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted into and become
an aggregate of 100 fully paid and nonassessable shares of KHI Common
Stock;
(b) Each share of KHI Capital Stock held in the treasury of KHI or
owned by O'Gara or NEWCO immediately prior to the Effective Time shall be
canceled and retired and shall cease to exist and no consideration shall be
delivered in exchange for such shares;
(c) Each share of KHI Class A Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares referred to in
Section 2.01(b) above and Dissenting Shares (as defined
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below)) shall be converted into that number of fully paid and nonassessable
shares of O'Gara Common Stock equal to one times the Share Conversion
Multiplier (as defined in paragraph (e) of this Section 2.01);
(d) Each share of KHI Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares referred to in Section
2.01(b) above and Dissenting Shares) shall be converted into that number of
fully paid and nonassessable shares of O'Gara Common Stock equal to one
times the Share Conversion Multiplier (as defined in paragraph (e) of this
Section 2.01.)
(e) For purposes of this Agreement, the term "Share Conversion
Multiplier" shall mean a fraction, the numerator of which is 6,650,000, and
the denominator of which is equal to the sum of (1) the total number of
shares of KHI Capital Stock issued and outstanding immediately prior to the
Effective Time, and (2) the total number of shares of KHI Capital Stock
issuable pursuant to all warrants, options and other stock issuance
agreements (including conversion rights under any instruments convertible
into shares of KHI Capital Stock) existing immediately prior to the
Effective Time, assuming all of such warrants, options or other stock
issuance agreements are fully exercisable and the rights of the holders
thereof are fully vested therein and in the stock issuable pursuant
thereto.
2.02. Exchange of Certificates; Issuance of New Certificates.
(a) Promptly after the Effective Time, O'Gara shall mail to each registered
holder of a certificate or certificates which immediately prior to the Effective
Time evidenced outstanding shares of KHI Capital Stock (the "KHI Certificates")
a letter of transmittal providing for the surrender of such KHI Certificates to
O'Gara's transfer agent, The Fifth Third Bank, for exchange. Until so
surrendered, such KHI Certificates shall represent solely the right to receive
the applicable number of whole shares, and, if applicable, cash for fractional
shares, of O'Gara Common Stock with respect to the number of shares of KHI
Capital Stock evidenced thereby. No dividends or other distributions declared or
made after the Effective Time with respect to shares of O'Gara Common Stock with
a record date after the Effective Time shall be paid to the holder of an
unsurrendered KHI Certificate with respect to the shares of O'Gara Common Stock
represented thereby, and no cash payment in lieu of fractional shares shall be
paid to any such holder, in each case unless and until the holder of record of
such KHI Certificate shall surrender such KHI Certificate. Subject to the effect
of unclaimed property, escheat and other applicable laws, upon surrender of any
such KHI Certificate, such KHI Certificate shall be cancelled and there shall be
issued or paid to the registered holder of such KHI Certificate, without
interest, (i) such number of whole shares of O'Gara Common Stock as are to be
issued in exchange for such KHI Certificate pursuant to Section 2.01 of this
Agreement, and (ii) the amount of any cash payable in lieu of a fractional share
of O'Gara Common Stock to which such holder is entitled pursuant to Section
2.02(b) hereof and the amount of dividends or other distributions payable to
holders of record as of a record date after the Effective Time theretofore paid
with respect to whole shares of O'Gara Common Stock issued pursuant to clause
(i) above. If any cash or certificate evidencing shares of O'Gara Common Stock
is to be paid to or issued in a name other than that in which the KHI
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the KHI Certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange shall pay to O'Gara any transfer or other taxes
required by reason of the issuance of certificates for such shares of O'Gara
Common Stock in, or the payment of cash to, a name other than that of the
registered holder of the KHI Certificate surrendered, or shall establish to the
satisfaction of O'Gara that such tax has been paid or is not applicable.
(b) Notwithstanding any other provision of this Agreement, no certificates
or scrip representing fractional shares of O'Gara Common Stock shall be issued
upon the surrender for exchange of KHI Certificates. Any holder of KHI Capital
Stock who would otherwise have been entitled to a fractional share of O'Gara
Common Stock shall be entitled to receive a cash payment in lieu of such
fractional share in an amount equal to the product of such fraction multiplied
by the average of the last reported prices per share of O'Gara Common Stock on
the NASDAQ National Market on the ten consecutive trading days ending with the
last trading day prior to the Effective Time on which O'Gara Common Stock was
traded on the NASDAQ National Market, without any interest thereon. Any such
holder shall not be entitled to vote or to any other rights of a holder of
O'Gara Common Stock in respect of such fractional share.
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2.03. No Further Transfers. From and after the Effective Time, there shall
be no transfers on the stock transfer books of KHI of any shares of KHI Capital
Stock. If, after the Effective Time, certificates evidencing KHI Capital Stock
are presented to KHI for transfer, such certificates shall be canceled and
exchanged for certificates evidencing the applicable number of whole shares of
O'Gara Common Stock and, if applicable, cash in lieu of fractional shares as
provided in Section 2.02.
2.04 Treatment of KHI Stock Options. All warrants, options and other stock
issuance agreements (including conversion rights under any instruments
convertible into shares of KHI Capital Stock) (collectively, "KHI Issuance
Agreements") shall, to the extent the shares of KHI Capital Stock issuable
pursuant thereto have been included in the denominator in determining the Share
Conversion Multiplier, be converted into the right to receive, upon exercise,
subject to and in accordance with the terms of such KHI Issuance Agreements and
further subject to payment in full of the exercise price under such KHI Issuance
Agreements, that number of shares of O'Gara Common Stock equal to the product of
(i) the number of shares of KHI Capital Stock issuable upon exercise of such KHI
Issuance Agreements, and (ii) the Share Conversion Multiplier. To the extent any
KHI Capital Stock issuable pursuant to a KHI Issuance Agreement was not included
in the denominator of the Share Conversion Multiplier, such KHI Issuance
Agreement shall automatically be cancelled at the Effective Time and neither KHI
Capital Stock nor O'Gara Common Stock shall thereafter be issued or issuable
with respect to such KHI Issuance Agreement.
2.05 Dissenters' Rights. Notwithstanding any provisions of this Agreement
to the contrary, any shares of KHI Capital Stock outstanding immediately prior
to the Effective Time held by a holder who has demanded and perfected the right,
if any, for appraisal of those shares in accordance with the provisions of
Section 262 of the Delaware Law and as of the Effective Time has not withdrawn
or lost such right to such appraisal ("Dissenting Shares") shall not be
converted into or represent a right to receive O'Gara Common Stock pursuant to
Section 2.01 hereof, but the holder shall only be entitled to such rights as are
granted by the Delaware Law. If a holder of shares of KHI Capital Stock who
demands appraisal of those shares under the Delaware Law shall effectively
withdraw or lose (through failure to perfect or otherwise) the right to
appraisal, then, as of the Effective Time or the occurrence of such event,
whichever last occurs, those shares shall be converted into and represent only
the right to receive O'Gara Common Stock as provided in Section 2.01 hereof,
without interest, upon compliance with the provisions, and subject to the
limitations, of Section 2.02 hereof. KHI shall give O'Gara (a) prompt notice of
any written demands for appraisal of any shares of KHI Capital Stock, attempted
withdrawals of such demands, and any other instruments served pursuant to the
Delaware Law and received by KHI relating to stockholders' rights of appraisal,
and (b) the opportunity to direct all negotiations and proceedings with respect
to any demands for appraisal under the Delaware Law. KHI shall not, except with
the prior written consent of O'Gara, voluntarily make any payment with respect
to any demands for appraisal of KHI Capital Stock, offer to settle or settle any
such demands or approve any withdrawals of any such demands.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF KHI AND THE KHI PRINCIPAL SHAREHOLDER
KHI and the KHI Principal Shareholder hereby jointly and severally
represent and warrant to each of O'Gara and NEWCO, as of the date hereof and as
of the Closing, as follows:
3.01 Organization and Capitalization. KHI is duly organized, validly
existing and in good standing under the laws of the State of Delaware. KHI has
authorized capital stock consisting of (i) 46,200 shares of KHI Class A Common
Stock with par value of one cent ($.01) per share, of which 23,100 shares have
been duly authorized, validly issued, and are outstanding and are fully paid and
non-assessable and held of record as of the date hereof as set forth in Schedule
3.01(i) of that certain Disclosure Schedule to Plan and Agreement to Merge of
even date herewith delivered by KHI to O'Gara (the "KHI Disclosure Schedule"),
and none of which shares are held by KHI as treasury stock, and (ii) 153,800
shares of KHI Common Stock with par value of one cent ($.01) per share, of which
76,624 shares have been duly authorized, validly issued, and are outstanding and
are fully paid and non-assessable and held of record as of the date hereof as
set forth in Schedule 3.01(ii) of the KHI Disclosure Schedule, of which 8,821
are covered by options to purchase and of which 2,699 shares are held by
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KHI as treasury stock. True and complete copies of the Certificate of
Incorporation and Bylaws of KHI have been delivered by KHI to O'Gara.
3.02 Power and Authority and Board and Shareholder Approval. KHI has the
corporate power and authority to own its properties and to carry on its business
as heretofore conducted and, subject to the approval and adoption of this
Agreement by its shareholders as required by law, to perform all of the
obligations to be performed by it hereunder. Each of KHI's Subsidiaries (as
defined below) has the corporate power and authority to own its properties and
to carry on its business as heretofore conducted. KHI and its Subsidiaries are
duly qualified as a foreign entity and in good standing in each jurisdiction
where the nature of their respective properties or the conduct of their
respective businesses makes such qualification necessary, except when the
failure to be so qualified would not reasonably be expected to have a Material
Adverse Effect. For purposes of this Agreement, "Material Adverse Effect" shall
mean, as to any Person, a material adverse effect on the business, operations,
properties or financial condition of such Person and its Subsidiaries taken as a
whole. This Agreement constitutes the valid and legally binding obligation of
KHI, enforceable against KHI in accordance with its terms subject to applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting the enforcement of creditors' rights generally and to applicable
equitable principles or public policy with respect to the indemnification
provisions hereof, and the execution and delivery hereof and consummation of the
Merger have been approved by the Board of Directors of KHI. For purposes of this
Agreement a "Subsidiary" of any Person (as defined below) means another Person,
an amount of the voting securities, other voting ownership or voting partnership
interests of which sufficient to elect at least a majority of its Board of
Directors or other governing body (or, if there are no such voting interests,
50% or more of the equity interests of which) is owned directly or indirectly by
such first Person. For purposes of this Agreement, "Person" means an individual,
corporation, partnership, joint venture, limited liability company, association,
trust, unincorporated organization or other entity of any type, including any
government, governmental agency or other governmental body.
3.03 Subsidiaries. Schedule 3.03 of the KHI Disclosure Schedule lists all
of the Subsidiaries of KHI together with an accurate description, with respect
to each such Subsidiary, of (i) the type of entity and its jurisdiction of
formation, (ii) the authorized, issued and outstanding capital or other
ownership interests, and (iii) the names and addresses of all Persons having an
interest therein and the amount and type of such interests. Each of KHI's
Subsidiaries is duly organized, validly existing and in good standing under the
laws of its jurisdiction of formation as set forth on Schedule 3.03 of the KHI
Disclosure Schedule. Schedule 3.03 of the KHI Disclosure Schedule also lists all
Persons in which KHI or any of its Subsidiaries has an equity or other ownership
interest which is material to the business, properties, operations or financial
condition of KHI and its Subsidiaries taken as a whole, or the right to acquire
any such interest, together with an accurate description, with respect to each
such Person, of (i) the type of entity and its jurisdiction of formation, (ii)
the authorized, issued and outstanding capital or other ownership interests, and
(iii) the names of all Persons having an interest therein and the amount and
type of such interests. All of the outstanding shares of capital stock or other
ownership interests of each of KHI's Subsidiaries which are owned by KHI or one
of its Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned beneficially and of record as set forth on
Schedule 3.03, free and clear of all liens, charges, claims or encumbrances.
True and complete copies of the charter documents of all entities listed on
Schedule 3.03 of the KHI Disclosure Schedule have been delivered by KHI to
O'Gara.
3.04 Stock Options and Other Arrangements. As of the date hereof, KHI has
outstanding options to purchase an aggregate of 8,821 shares of KHI Common
Stock. Except for such options or as set forth in Schedule 3.04 of the KHI
Disclosure Schedule (i) there are no outstanding subscriptions, options,
warrants, calls, rights, convertible securities or other agreements or
commitments of any character to which KHI or any of its Subsidiaries is a party
or by which KHI or any of its Subsidiaries is bound relating to the issued or
unissued capital stock or other ownership interests of KHI or any of KHI's
Subsidiaries or relating to securities convertible into, exchangeable for or
evidencing the right to subscribe for any such capital stock or other ownership
interests, (ii) there are no shareholders' agreements, partnership agreements,
registration rights agreements, voting trusts or other agreements or
understandings to which KHI or any of its Subsidiaries is a party or by which
KHI or any of its Subsidiaries is bound with respect to the voting of the
capital stock or other ownership interests of KHI or any
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of its Subsidiaries, or with respect to the registration of KHI Capital Stock of
any shareholder of KHI under the Securities Act of 1933, as amended (the "Act"),
and (iii) there are no stock options, stock bonus agreements, restricted stock
agreements or other agreements or obligations outstanding which commit KHI or
any of its Subsidiaries to issue, deliver, sell, repurchase or redeem shares of
stock or other ownership interests upon the fulfillment of specified conditions.
True and complete copies of all documents, agreements and other instruments
listed on Schedule 3.04 of the KHI Disclosure Schedule have been delivered by
KHI to O'Gara.
3.05 Financial Statements. The audited consolidated financial statements
of KHI and its Subsidiaries for the one-year periods ended December 31, 1994 and
December 31, 1995, including consolidated balance sheets, statements of income,
changes in shareholders' equity and cash flows for the years then ended (the
"KHI Audited Statements"), the draft financial statements of KHI and its
Subsidiaries for the one-year period ended December 31, 1996, including
consolidated balance sheet, statements of income, changes in shareholders'
equity and cash flows for the year then ended (the "Draft KHI Financials") and
the unaudited consolidated statements of financial position and related
consolidated statements of income and cash flows for the six-month interim
period ended June 30, 1997 (the "KHI Interim Statements"), all as previously
delivered to O'Gara (the KHI Audited Statements, the Draft KHI Financials and
the KHI Interim Statements are referred to herein collectively as the "KHI
Financial Statements"), have been prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis
throughout the periods covered and with prior periods (except as stated in the
footnotes thereto, and subject, with respect to such KHI Interim Statements, to
non-material year-end adjustments and the absence of footnotes), and fairly
present in all material respects the consolidated financial condition of KHI and
its Subsidiaries as of the dates thereof and the consolidated results of their
operations for the periods ended on such dates, except in each case, with
respect to the Draft KHI Financials, for changes described in the last sentence
of this Section 3.05. True and complete copies of the KHI Financial Statements
have been delivered by KHI to O'Gara. The audited consolidated financial
statements of KHI and its Subsidiaries for the one-year period ended December
31, 1996 (the "1996 Financials") shall be delivered by KHI to O'Gara within two
(2) weeks of the date of this Agreement and such 1996 Financials shall (i) be
the same as the Draft KHI Financials except that accounts receivable shall be
approximately $4,800,000 less than accounts receivable on the Draft KHI
Financials and there shall be such other changes as have been approved by O'Gara
in writing, (ii) have been prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis throughout the
periods covered and with prior periods (except as stated in the footnotes
thereto), and (iii) fairly present in all material respects the consolidated
financial condition of KHI and its Subsidiaries as of December 31, 1996 and the
consolidated results of their operations for the one-year period ended on
December 31, 1996.
3.06 Liabilities. Except to the extent reflected and reserved against in
the KHI Interim Statements or as disclosed in Schedule 3.06 of the KHI
Disclosure Schedule, and except for liabilities and obligations incurred in the
ordinary course of business consistent with prior practice since June 30, 1997,
none of which individually or in the aggregate would reasonably be expected to
have a Material Adverse Effect, neither KHI nor any of its Subsidiaries has any
liabilities or obligations of any nature, whether accrued, absolute, determined,
determinable, contingent or otherwise and whether due or to become due, which
individually or in the aggregate would reasonably be expected to have a Material
Adverse Effect.
3.07 Claims. There are no governmental proceedings or investigations or
any claims, suits or proceedings by any Person pending, asserted, or, to the
actual knowledge of KHI and its Subsidiaries, threatened against KHI or any of
its Subsidiaries, and to the actual knowledge of KHI and its Subsidiaries there
is no reasonable basis for any such investigations, claims, suits or proceedings
which, if determined adversely to KHI or any of its Subsidiaries, would
individually or in the aggregate reasonably be expected to have a Material
Adverse Effect, except in each case as disclosed on Schedule 3.07 of the KHI
Disclosure Schedule.
3.08 Assets. Schedule 3.08 of the KHI Disclosure Schedule lists all real
property now owned, leased, occupied or otherwise used by KHI or any of its
Subsidiaries and indicates with respect to each such parcel of real property
whether it is owned or leased and the name of the owner or lessee. With respect
to said leased property, Schedule 3.08 sets forth the base rent payable under
each lease, the amount and type of other expenses paid by the tenant under the
lease and the commencement and expiration dates of the lease. True and complete
copies of all of such leases have been delivered by KHI to O'Gara. Each of KHI
and its Subsidiaries has good and
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marketable title in fee simple to all real estate listed on such Schedule 3.08
as owned by it and valid leasehold title to all real estate listed on such
Schedule 3.08 as leased by it, in each case free and clear of all material
liens, mortgages, pledges, encumbrances and charges of every kind, except (i) as
reflected in Schedule 3.08 of the KHI Disclosure Schedule, (ii) for statutory
liens for taxes not yet due and payable, (iii) for inchoate liens for work
performed or materials delivered, payment for which is not yet due, and (iv) for
other immaterial covenants or restrictions which do not individually or in the
aggregate materially interfere with the use or value of any such property. KHI
and each of its Subsidiaries owns and has good and marketable title to all of
its properties and assets reflected on the KHI Interim Statements, or acquired
by it after the date thereof, free and clear of all material liens, mortgages,
pledges, encumbrances and charges of every kind, except for inventory sold in
the ordinary course of business after the date of the KHI Interim Statements and
except as set forth in Schedule 3.08 of the KHI Disclosure Schedule. All real
property owned or leased by KHI or its Subsidiaries and all tangible personal
property owned or leased by KHI or any of its Subsidiaries is in sufficient
condition to enable each of KHI and its Subsidiaries to conduct its business as
now being conducted. KHI and its Subsidiaries own or have a legal and valid
right to use all real and personal property necessary for, or used in, the
conduct of their respective businesses as heretofore conducted.
3.09 Operations Since December 31, 1996. Since December 31, 1996, except
as contained on Schedule 3.09 of the KHI Disclosure Schedule (the "KHI
Operations Schedule"), neither KHI nor any of its Subsidiaries has (i) incurred
any obligation or liability (absolute or contingent), except obligations and
liabilities incurred in the ordinary course of business consistent with prior
practice, none of which individually or in the aggregate would reasonably be
expected to have a Material Adverse Effect, except as permitted in Sections
9.02(b) and (c) hereof; (ii) discharged or satisfied any material lien or
encumbrance, or paid any obligation or liability (absolute or contingent), other
than current liabilities reflected in the KHI Financial Statements and current
liabilities incurred since the date of the KHI Interim Statements in the
ordinary course of business consistent with prior practice; (iii) declared or
made any payment or distribution of assets or dividends on its capital stock or
other ownership interests except those dividends normally paid by KHI's
Subsidiaries to KHI; (iv) purchased or redeemed any of its shares, or issued or
committed to issue any additional shares or any securities exercisable for or
convertible into shares except pursuant to stock options and restricted stock
plans described on Schedule 3.13 of the KHI Disclosure Schedule; (v) other than
as described in Section 9.02 or in the ordinary course of business consistent
with prior practice, made any general wage or salary increases or increased the
salary or other compensation of any officers; (vi) mortgaged, pledged or
subjected to material lien, or any other material encumbrance, any of its
material assets, tangible or intangible; (vii) sold, assigned or transferred any
of its tangible assets or canceled any debt or claim, other than the sale of
inventory for fair market value in the ordinary course of business consistent
with prior practice; (viii) sold, assigned or transferred any patent, trademark,
trade name, copyright, license or other intangible asset; (ix) suffered any net
operating loss or extraordinary loss, or waived any right of substantial value;
or (x) entered into any transaction other than in the ordinary course of
business consistent with prior practice, other than as permitted in Section 9.02
hereof.
3.10 Taxes. Except as disclosed in Schedule 3.10 of the KHI Disclosure
Schedule, reserves for taxes as shown on the KHI Interim Statements are
sufficient for the payment of all accrued but unpaid federal, state, county,
local and foreign taxes of KHI and each of its Subsidiaries, for all periods
ending on or prior to December 31, 1996, and are a reasonable estimate of all
such taxes for the period ending June 30, 1997. Except as disclosed on Schedule
3.10 of the KHI Disclosure Schedule, all tax returns required to be filed have
been filed by KHI and its Subsidiaries when due in accordance with all
applicable laws, all such returns were correct as filed in all material
respects, all taxes shown to be due on such returns have been timely paid,
withheld or remitted to the appropriate taxing authority and there is no audit,
dispute, claim, action, proceeding or investigation pending or, to the actual
knowledge of KHI and its Subsidiaries, threatened with respect to any such
returns or any taxes shown thereon. Except as disclosed on Schedule 3.10 of the
KHI Disclosure Schedule, neither KHI nor any of its Subsidiaries has received
any notice of any deficiency with respect to the payment of any federal, state,
county, local or foreign taxes.
3.11 Insurance. Schedule 3.11 of the KHI Disclosure Schedule lists all
property, liability, life and other insurance policies for the benefit of KHI
and its Subsidiaries. All such insurance is in full force and effect. Since
December 31, 1996 there has been no material loss or damage to the tangible
property of KHI or any of its
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Subsidiaries, whether or not insured, except as disclosed on Schedule 3.11 of
the KHI Disclosure Schedule, and neither KHI nor any of its Subsidiaries has
been refused any insurance coverage for which it has applied.
3.12 Contracts. Schedule 3.12 of the KHI Disclosure Schedule (the "KHI
Contract Schedule") lists all contracts, agreements, commitments and engagements
to which KHI or any of its Subsidiaries is a party, or by which their respective
assets are bound which (i) provide for the payment or receipt by KHI or any of
its Subsidiaries of $100,000 or more, other than contracts with customers
entered into in the ordinary course of business consistent with prior practices,
(ii) restrict in any manner the business activities of KHI or any of its
Subsidiaries, with the exception of non-competition covenants entered into with
customers of KHI or any of its Subsidiaries which would not be reasonably
expected to have a Material Adverse Effect on any of O'Gara, KHI or their
respective Subsidiaries, (iii) are partnership or joint venture agreements with
any other Person, or (iv) are union contracts, health and welfare plans, life or
hospitalization insurance plans, pension, profit sharing or other similar
benefit plans, deferred incentive compensation agreements or plans, lease
agreements, and material employment or consulting agreements (excluding
employment agreements with foreign employees mandated by law that do not contain
rights in excess of the minimum mandated by law). Each of such agreements is
legal, valid and binding against KHI or any of its Subsidiaries that is a party
thereto and, to the actual knowledge of KHI and its Subsidiaries, is legal,
valid and binding against any other Person who is a party thereto. Each of such
agreements is in full force and effect without any material default or breach
existing with respect thereto by KHI or any of its Subsidiaries or, to the
actual knowledge of KHI and its Subsidiaries, any other Person. True and
complete copies of all contracts, agreements, commitments and engagements listed
on the KHI Contract Schedule have been delivered by KHI to O'Gara. Except as
disclosed on the KHI Contract Schedule, the consummation of the Merger will not
result in the acceleration of, or any adverse change in the terms of, any
obligation of KHI or any of its Subsidiaries for borrowed money or any material
liability under any such contract, agreement, commitment or engagement. KHI and
its Subsidiaries may prepay without penalty or premium any indebtedness for
borrowed money incurred by them.
3.13 Employee Benefit Plans. Schedule 3.13 of the KHI Disclosure Schedule
contains listings of each Plan (as hereinafter defined). True and complete
copies of all of such Plans (and if applicable related trust agreements)
together with the most recent annual reports (Form 5500 including, if
applicable, Schedule B thereto) and the most recent actuarial valuation report
prepared in connection with any Plan, have been delivered by KHI to O'Gara. No
Plan is maintained in connection with any trust described in Section 501(c)(9)
of the Code. Each Plan complies in all material respects with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), the Code and all
other applicable laws and administrative or governmental rules and regulations.
No Plan is subject to Title IV of ERISA. None of KHI or any of its Subsidiaries
or ERISA Affiliates, has withdrawn from any Plan subject to Title IV of ERISA or
Multiemployer Plan (as hereinafter defined) or has taken, or is currently
considering taking, any action to do so; and no action has been taken, or is
currently being considered, by KHI or any of its Subsidiaries or ERISA
Affiliates to terminate any Plan subject to Title IV of ERISA (other than
standard terminations previously effected under which KHI or any of its
Subsidiaries or ERISA Affiliates have no existing liability). None of KHI, or
any of its Subsidiaries or ERISA Affiliates has engaged in, or is a successor or
parent corporation to an entity that has engaged in, a transaction described in
Sections 4069 or 4212(c) of ERISA. The assets of KHI and its Subsidiaries are
not now, nor will they solely because of the mere passage of time be, subject to
any lien imposed under Code Section 412(n) by reason of a failure of KHI or any
of its Subsidiaries or ERISA Affiliates to make timely installments or other
payments required under Code Section 412. No Plan, nor any trust created
thereunder, has incurred any "accumulated funding deficiency" (as defined in
Section 412 of the Code or Section 302 of ERISA), whether or not waived. There
are no actions, suits or claims pending or, to KHI's and its Subsidiaries'
actual knowledge, threatened (other than routine claims for benefits) with
respect to any Plan which would reasonably be expected to have a Material
Adverse Effect. None of KHI or any of its Subsidiaries or ERISA Affiliates has
incurred or, to KHI's and its Subsidiaries' actual knowledge, would reasonably
be expected to incur any material liability under or pursuant to Section 4971 of
the Code. No prohibited transactions described in Section 406 of ERISA or
Section 4975 of the Code have occurred which would reasonably be expected to
result in a material liability. All Plans that are intended to be qualified
under Section 401(a) of the Code have received a favorable determination letter
as to such qualification from the Internal Revenue Service, and to KHI's and its
Subsidiaries actual knowledge, no event has occurred, either by reason of any
action or failure to act, which would cause the loss of any such
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qualification. To KHI's and its Subsidiaries' actual knowledge, there is no
reason why any Plan is not so qualified in operation. None of KHI or any of its
Subsidiaries or ERISA Affiliates is a party, contributes or within the past six
years has contributed, to a Multiemployer Plan (as defined below). None of KHI
or any of its Subsidiaries or ERISA Affiliates contributes to, or has within the
past six years contributed to a single-employer plan within the meaning of
Section 4001(a)(15) of ERISA which has two or more contributing sponsors, as
defined in Section 4001(a)(13) of ERISA, at least two of whom are not under
common control, within the meaning of ERISA. KHI and its Subsidiaries have
complied in all material respects with the health care continuation requirements
of Part 6 of Title I of ERISA to the extent applicable. Except as disclosed on
Schedule 3.13 of the KHI Disclosure Schedule, the execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
and compliance with the provisions hereof will not, result in an increase in the
amount of compensation or benefits or accelerate the vesting or timing of
payment of any compensation or benefits payable by KHI or any of its
Subsidiaries or ERISA Affiliates to any Plan, Benefit Arrangement (as defined
below), International Plan (as defined below) or to any employee of KHI or any
of its Subsidiaries or ERISA Affiliates. Schedule 3.13 of the KHI Disclosure
Schedule contains listings of each Benefit Arrangement. True and complete copies
or descriptions of each Benefit Arrangement (and, if applicable, related trust
agreements) and all amendments thereto have been delivered by KHI to O'Gara.
Each Benefit Arrangement has been maintained in substantial compliance with its
terms and with the requirements prescribed by any and all applicable statutes,
orders, rules and regulations and has been maintained in good standing with
applicable regulatory authorities. All contributions and payments accrued under
each Plan and Benefit Arrangement, determined in accordance with prior funding
and accrual practices, as adjusted to include proportional accruals for the
period ending on the Closing Date, have been discharged and paid when due. As
used in this Section 3.13: (i) "Plan" means an "employee benefit plan," as
defined in Section 3(3) of ERISA, (other than a Multiemployer Plan) which (a) is
subject to any provision of ERISA, (b) is established, administered, maintained
or contributed to by KHI or any Subsidiary or ERISA Affiliates of KHI and (c)
covers any employee or former employee of KHI or any of its Subsidiaries or
ERISA Affiliates in respect of service with KHI or any of its Subsidiaries or
ERISA Affiliates or to which KHI or any of its Subsidiaries or ERISA Affiliates
otherwise may have any liability; (ii) "Multiemployer Plan" means a
"multiemployer plan" (as defined in Section 3(37) or Section 4001(a)(3) of
ERISA) to which KHI or any of its Subsidiaries or ERISA Affiliates is or has
been obligated to contribute or otherwise may have any liability; and (iii) with
respect to any Person, "ERISA Affiliate" means any trade or business (whether or
not incorporated) which is under common control or would be considered a single
employer with such person pursuant to Section 414(b), (c), (m) or (o) of the
Code and the regulations promulgated thereunder or pursuant to Section 4001(b)
of ERISA and the regulations promulgated thereunder. "Benefit Arrangement" means
any employment, severance, change in control or similar contract or arrangement
or any plan, policy, fund, program or contract or arrangement providing for
bonus, profit-sharing, stock option, or other stock related rights or other
forms of incentive or deferred compensation, vacation benefits, workers'
compensation or severance benefits that (A) is not a Plan, (B) is entered into,
maintained, administered or contributed to, as the case may be, by KHI or any
Subsidiary or ERISA Affiliate of KHI and (C) covers in respect of service with
KHI or any of its Subsidiaries any current or former U.S. employee or U.S.
independent contractor of KHI or any of its Subsidiaries or ERISA Affiliates who
is or was employed in the United States. "International Plan" means (I) any
written employment agreement providing for annual salary in excess of U.S.
$100,000 (or its foreign equivalent) or any severance or similar contract or
arrangement providing for compensation (including retirement benefits) in excess
of U.S. $100,000 (or its foreign equivalent) that (A) is not a Plan or a Benefit
Arrangement and (B) is entered into between KHI or any of its Subsidiaries or
ERISA Affiliates and any current or former employee, agent or independent
contractor of KHI or any of its Subsidiaries or ERISA Affiliates who is or was
employed outside of the United States or (II) any written plan, policy, fund,
program, arrangement, or contract of or with KHI or any of its Subsidiaries or
ERISA Affiliates in respect of service with KHI or any of its Subsidiaries or
its ERISA Affiliates covering employees who are or were employed by KHI or any
of its Subsidiaries or its ERISA Affiliates outside of the United States;
providing for (A) retirement benefits (including pension, health, medical or
life insurance), but excluding any retirement scheme fund, plan or program (x)
sponsored by any government or (y) providing benefits statutorily mandated under
the laws of the applicable jurisdiction at the minimum level statutorily
mandated, or (B) bonus (including post-employment bonus), profit sharing, stock
option, or other stock related rights or other forms of incentive or deferred
compensation, vacation benefits, life insurance (including any self-insured
arrangements), health or medical benefits, disability benefits,
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supplemental unemployment benefits or severance benefits (cumulatively
"Benefits"), other than any plan, policy, fund, program, arrangement or contract
providing for Benefits statutorily mandated by the laws of the applicable
jurisdiction at the minimum level statutorily mandated that (I) is not a Plan or
a Benefit Arrangement and (II) is entered into, maintained, administered, or
contributed to by KHI or any of its Subsidiaries. Schedule 3.13 of the
Disclosure Schedule lists each International Plan. True and complete copies of
each International Plan and all amendments thereto have been made available by
KHI to O'Gara. Each International Plan has been maintained and operated in
substantial compliance with its terms and with the requirements prescribed by
any and all applicable statutes, orders, rules and regulations and has been
maintained in good standing with all applicable regulatory authorities. With
respect to each International Plan all necessary or appropriate approvals,
qualifications or certifications have been obtained and no event has occurred or
condition exists which would cause the loss of such approval, qualification or
certifications. All contributions and payments accrued under each International
Plan, determined in accordance with prior funding and accrual practices, have
been discharged and paid when due.
3.14 No Default. Except as disclosed on the KHI Contract Schedule, (i)
neither KHI nor any of its Subsidiaries is in material default under any
material contract, agreement, commitment or engagement of any kind; (ii) no
event of default or event that, but for the giving of notice or lapse of time,
or both, would constitute an event of default exists or, upon the Effective
Time, will exist under any loan or credit agreement, note, bond, mortgage,
indenture or guarantee of indebtedness for borrowed money or other material
instrument to which KHI or any of its Subsidiaries is a party; and (iii) the
execution and delivery of this Agreement and the consummation of the Merger will
not contravene or conflict with, or constitute a violation of, or result in a
default under, cancellation of, termination of, or acceleration of obligations
under, the Certificate or Articles of Incorporation, Articles of Association,
By-Laws or other organizational documents of KHI or any of its Subsidiaries or
any material contract, agreement, commitment, engagement, judgment, injunction,
order, decree or instrument to which KHI or any of its Subsidiaries is a party
or by which they or any of their assets are bound, which default, event of
default, contravention, conflict, violation, cancellation, termination or
acceleration would reasonably be expected to have a Material Adverse Effect, or
result in the incurrence by KHI or any of its Subsidiaries of any material
liability.
3.15 Joint Proxy Statement. When the Registration Statement on Form S-4
described in Article V hereof (the "Registration Statement") is filed with the
Securities and Exchange Commission (the "Commission") and the related
Prospectus/Proxy Statement to be distributed to KHI's and O'Gara's shareholders
(the "Joint Proxy Statement") in connection with the Merger shall first be
mailed to such shareholders, and at all times subsequent thereto up to and
including the Effective Time, the information with respect to KHI and its
Subsidiaries provided by KHI in writing for inclusion in the Registration
Statement and the Joint Proxy Statement, and any information with respect to KHI
and its Subsidiaries provided in writing by O'Gara to KHI at least two (2) days
prior to the date of mailing the Joint Proxy Statement to the shareholders with
respect to which information O'Gara has not received any written objection from
KHI (i) will comply in all material respects with the provisions of the Act and
of the Securities Exchange Act of 1934 (the "Exchange Act") and (ii) will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time, any event relating to
KHI or any of its Subsidiaries shall occur which, pursuant to the Act or the
Exchange Act or the rules and regulations thereunder, should be disclosed in the
Registration Statement or the Joint Proxy Statement and which is not so
disclosed, KHI shall promptly so inform O'Gara.
3.16 Compliance With Laws. KHI and its Subsidiaries (and each of them)
have complied and are currently in compliance in all material respects with all
applicable laws, and governmental rules (including rules related to governmental
contracts), regulations and orders (including zoning ordinances), except when
the failure to be in such compliance would not reasonably be expected to have a
Material Adverse Effect. Neither KHI nor any of its Subsidiaries is in material
default under, and no event has occurred which, with the lapse of time or action
by a third party, would be reasonably expected to result in a material default
under, the terms of any judgment, decree, order or writ, of any court, whether
federal, state or local, foreign or domestic, and whether at law or in equity.
Schedule 3.16 of the KHI Disclosure Schedule includes the policies of KHI and
its Subsidiaries regarding the Foreign Corrupt Practices Act (the "FCPA"),
including a description of the means by which information
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regarding such policies are disseminated to employees of KHI and its
Subsidiaries. Neither KHI nor any of its Subsidiaries has received written
notice of any violation of the FCPA by any employees of KHI or any of its
Subsidiaries.
3.17 Consents and Approvals. Except for the approval of KHI's
shareholders, the filing of the Certificate of Merger with respect to the Merger
with the Secretary of State of the State of Delaware, the filing of the
Registration Statement and any filings required under state "blue sky" laws, no
other corporate proceedings on the part of KHI or any of its Subsidiaries, and
no consent of or filing with any governmental agency or, except as set forth on
the KHI Contract Schedule, third party is required to be held, obtained or made
by KHI or any of its Subsidiaries in connection with the execution and delivery
of this Agreement and the consummation of the Merger. The ultimate parent entity
of KHI does not have $100,000,000 or more of assets as of its last regularly
prepared balance sheet or $100,000,000 or more of sales for its most recently
ended fiscal year for purposes of the Hart-Scott-Rodino Anti-Trust Improvements
of 1976, as amended (the "HSR Act").
3.18 Patents, Trademarks and Copyrights. Schedule 3.18 of the KHI
Disclosure Schedule contains a list of (a) all filed patents, patent and
trademark applications and registered trademarks, servicemarks and copyrights
(collectively the "KHI Registered Rights") owned by KHI or any of its
Subsidiaries, together with an indication as to the owner of such right and the
jurisdiction by or in which such right has been issued, registered or filed, (b)
all material license agreements (other than licenses for off-the-shelf software
programs) or other rights of use relating to intellectual property used by KHI
or its Subsidiaries (the "KHI Licensed Rights") and (c) all other intellectual
property (other than off-the-shelf software programs) owned or used by KHI or
its Subsidiaries (the "KHI Common Law Rights"). All of the KHI Registered Rights
are valid and in full force and effect. True and complete copies of all
agreements or licenses relating to the KHI Registered Rights, the KHI Licensed
Rights and the KHI Common Law Rights (collectively, the "KHI Rights") have been
delivered by KHI to O'Gara. Neither KHI nor any of its Subsidiaries has received
any notice with respect to any alleged infringement or unlawful use by KHI or
its Subsidiaries of any intangible property right owned or alleged to be owned
by others. Except as set forth in Schedule 3.18 of the KHI Disclosure Schedule,
the Merger will not adversely affect the use by KHI of any of the KHI Rights.
Schedule 3.18 of the KHI Disclosure Schedule contains a list of all licenses and
sublicenses granted by KHI and its Subsidiaries with respect to the KHI Rights.
Except as set forth on Schedule 3.18 of the KHI Disclosure Schedule (i) no
Person other than KHI and its Subsidiaries has any right to use the KHI
Registered Rights, and (ii) neither KHI nor any of its Subsidiaries has actual
knowledge of any infringement by any Person of any of the KHI Rights.
3.19 Environmental Matters. Except as set forth in Schedule 3.19 of the
KHI Disclosure Schedule, (i) there is no liability of KHI or any of its
Subsidiaries under any federal, state, local, or foreign laws, rules,
regulations, orders, judgments, decrees, permits or licenses relating to health,
safety or the environment (the "Environmental Requirements"), whether absolute,
determined, determinable or contingent, and (ii) the properties, assets and
operations of KHI and its Subsidiaries are in compliance with all applicable
Environmental Requirements, except for any such non-compliance that would not
reasonably be expected to have a Material Adverse Effect. No spill, release,
threatened release or discharge of Hazardous Substances (as defined below) into
the environment has occurred at any of the facilities owned, leased or operated
by KHI and its Subsidiaries (the "KHI Facilities") or, to KHI's and its
Subsidiaries' actual knowledge, on any real property adjacent thereto, and there
has been no corrective action, remediation or clean up required of KHI or any of
its Subsidiaries by applicable Environmental Requirements or by governmental
authorities as a consequence of any such spill, release, threatened release or
discharge of Hazardous Substances. All corrective action, remediation or other
clean up activities undertaken by KHI or any of its Subsidiaries has been
performed, or is being performed, in accordance in all material respects with
all applicable Environmental Requirements. KHI and its Subsidiaries have
discharged in all material respects any and all applicable record keeping and
reporting requirements pursuant to all applicable Environmental Requirements and
all such reports and records are complete and correct in all material respects
and have been retained for the length of time required by any applicable
Environmental Requirements setting forth document retention requirements. Except
as set forth in Schedule 3.19 of the KHI Disclosure Schedule, none of the KHI
Facilities or, to KHI's and its Subsidiaries' actual knowledge, any property
adjacent thereto, or, to KHI's and its Subsidiaries' actual knowledge, any sites
used for the disposal of wastes generated by KHI or its Subsidiaries have been
designated as a "Superfund Site" or are otherwise the subject of
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an order of removal or remedial action for which KHI or any of its Subsidiaries
has liability pursuant to the provisions of applicable Environmental
Requirements and there are no conditions or circumstances affecting the KHI
Facilities which, to KHI's and its Subsidiaries' actual knowledge, might
reasonably be expected to cause them to be designated as a "Superfund Site" or
render them subject to any such order of removal or remedial action for which
KHI or any of its Subsidiaries will have liability pursuant to the provisions of
applicable Environmental Requirements. Except as set forth in Schedule 3.19 of
the Disclosure Schedule, no unresolved written notice, notification, demand,
request for information, citation, summons or order has been issued, no pending
complaint has been filed, no unpaid penalty has been assessed and no action,
claim, suit or proceeding or, to the actual knowledge of KHI and its
Subsidiaries, investigation or review is pending or, to the actual knowledge of
KHI and its Subsidiaries, threatened by any governmental authority with respect
to KHI or any of its Subsidiaries and relating to or arising out of any
Environmental Requirements. To KHI's and its Subsidiaries' actual knowledge, no
Hazardous Substance is present at, on, in or under any of the KHI Facilities in
violation of applicable Environmental Requirements. All permits required by
applicable Environmental Requirements and necessary for the operation of the
businesses, or the use of the assets of KHI and its Subsidiaries have been
obtained, are identified in Schedule 3.19 of the KHI Disclosure Schedule, and
are in full force and effect. Except as set forth in Schedule 3.19 of the
Disclosure Schedule, KHI and its Subsidiaries are in material compliance with
the terms of such permits, no action or investigation has been taken, commenced
or, to KHI's actual knowledge, threatened by any governmental authority or any
other Person to revoke or modify such permits or to enforce the terms of or take
action for violation of such permits, and, to KHI's and its Subsidiaries' actual
knowledge, there is no reasonable basis for any such action or investigation.
KHI and its Subsidiaries do not own, lease or operate and have not within the
past four (4) years owned, leased or operated, any real property in New Jersey
or Connecticut that is subject to transfer act requirements of those states. For
purposes of this Agreement, the term "Hazardous Substances" shall mean any
materials defined or regulated as pollutants, contaminants, or hazardous or
toxic substances, materials or wastes in any way by any Environmental
Requirements and the term "Superfund Site" shall mean any location which is
listed or proposed for listing on the National Priorities List or on any similar
state list of sites requiring investigation or cleanup, or which is the subject
of any pending or threatened action, suit, proceeding or investigation or
cleanup related to or arising from any alleged violation of any Environmental
Requirement or the cleanup or threatened release of Hazardous Substances.
3.20 Pooling-of-Interests. Neither KHI nor any of its Subsidiaries or
shareholders has taken any action, or caused any event or condition to occur,
and there is no set of facts in existence relating to KHI or any of its
Subsidiaries or shareholders of which KHI has actual knowledge, which would be
reasonably expected to result in the failure of the Merger to constitute a
pooling-of-interests for accounting purposes, and, within ten (10) days after
the date hereof, KHI shall obtain a certificate to that effect from its
independent certified public accountants, Deloitte & Touche, and deliver a copy
of such certificate to O'Gara, which certificate shall be reasonably acceptable
in form and substance to O'Gara.
3.21 No Material Adverse Change. Since December 31, 1996, there has been
no material adverse change in the business, operations, properties or financial
condition of KHI and its Subsidiaries taken as a whole.
3.22 Licenses and Permits. KHI and its Subsidiaries have obtained all
permits, licenses, franchises and authorizations from any governmental authority
which are necessary in connection with the ownership, lease or operation of
their respective properties or the conduct of their respective businesses as
heretofore owned, leased and conducted, except for such permits or licenses, the
absence of which would not reasonably be expected to have a Material Adverse
Effect (collectively, the "KHI Licenses"). All of such KHI Licenses are in full
force and effect and are listed in Schedule 3.22 of the KHI Disclosure Schedule.
Except as disclosed on Schedule 3.22 of the KHI Disclosure Schedule, neither KHI
nor any of its Subsidiaries has received any notice that KHI or any of its
Subsidiaries is in violation of or default under any KHI License or that any KHI
License will be revoked, terminated or not renewed, except for any such
violation, default, revocation, termination or nonrenewal which would not
reasonably be expected to have a Material Adverse Effect. All private
investigators licenses of KHI and its Subsidiaries are listed in Schedule 3.22
of the KHI Disclosure Schedule and, except as disclosed in such Schedule 3.22,
neither KHI nor any of its Subsidiaries has received any notice that it is in
violation of or in default under any private investigators license, or that any
private investigators license will be revoked, terminated
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or not renewed. True and complete copies of all private investigators licenses
and all KHI Licenses have been delivered by KHI to O'Gara.
3.23 Orders, Actions, Etc. There are no outstanding orders, judgments,
injunctions, awards or decrees of any governmental authority against KHI or any
of its Subsidiaries or any of their properties, assets or businesses that would
reasonably be expected to have a Material Adverse Effect. There are no actions,
suits or claims or legal, administrative or arbitration proceedings or
investigations pending against or, to KHI's or any of its Subsidiaries' actual
knowledge, threatened against, any of KHI, its Subsidiaries, or any of their
properties, assets or businesses, that would reasonably be expected to have a
Material Adverse Effect, and neither KHI nor any of its Subsidiaries has
received any written notice of any actions, suits or claims or legal,
administrative or arbitration proceedings or investigations affecting any of
KHI, its Subsidiaries, or any of their properties, assets or businesses, that
would be reasonably expected to have a Material Adverse Effect.
3.24 Labor Matters. Except as set forth in Schedule 3.24 of the KHI
Disclosure Schedule, neither KHI nor any of its Subsidiaries has any labor
contracts, collective bargaining agreements or material employment or consulting
agreements with any persons employed by or otherwise performing services
primarily for KHI or any of its Subsidiaries (collectively, the "KHI Business
Personnel") or any representative of any KHI Business Personnel. True and
complete copies of all agreements listed on Schedule 3.24 of the KHI Disclosure
Schedule have been delivered by KHI to O'Gara. Neither KHI nor any of its
Subsidiaries has engaged in any unfair labor practice with respect to KHI
Business Personnel, and neither KHI nor any of its Subsidiaries has received
written notice that there is an unfair labor practice complaint pending against
KHI or any of its Subsidiaries with respect to KHI Business Personnel. There is
no labor strike, dispute, slowdown or stoppage pending against or, to KHI's
actual knowledge, threatened against KHI or any of its Subsidiaries that would
reasonably be expected to have a Material Adverse Effect, and neither KHI nor
any of its Subsidiaries has experienced any primary work stoppage or other
material labor difficulty involving its employees during the last three (3)
years that has had or would reasonably be expected to have a Material Adverse
Effect. KHI and its Subsidiaries are in material compliance with the
requirements of all applicable labor and employment laws, rules and regulations.
3.25 Brokers. No broker, investment banker or other person is entitled to
any broker's, finder's or other similar fee or commission in connection with the
execution and delivery of, or the consummation of the transactions contemplated
by, this Agreement based on agreements or arrangements made by KHI or any of its
Subsidiaries, except for Donaldson Lufkin & Jenrette, the fees and expenses of
which shall be paid by KHI.
3.26 Full Disclosure. The representations and warranties made by KHI in
this Agreement, the KHI Disclosure Schedules and certificates to be furnished by
KHI or any of its Subsidiaries at the Closing hereunder do not contain and will
not contain any untrue statement of a material fact, and do not omit and will
not omit any material fact necessary in order to make the statements contained
therein, in light of the circumstances under which they are made, not
misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF O'GARA AND NEWCO
O'Gara and NEWCO hereby jointly and severally represent and warrant to KHI
and the KHI Principal Shareholder, as of the date hereof and as of the date of
Closing, as follows:
4.01 Organization and Capitalization. O'Gara is duly organized, validly
existing and in good standing under the laws of the State of Ohio. As of the
date hereof, O'Gara has authorized capital stock consisting of (i) 25,000,000
shares of O'Gara Common Stock with par value of one cent ($.01) per share, of
which 7,279,310 shares have been duly authorized, validly issued, and are
outstanding and are fully paid and non-assessable, and no shares of which are
held by O'Gara as treasury stock, and (ii) 100,000 shares of O'Gara Preferred
Stock with par value of one cent ($.01) per share, of which no shares are
outstanding. NEWCO is duly organized, validly existing and in good standing
under the laws of the State of Delaware. NEWCO's authorized capital stock
consists of 100 shares of common stock without par value, all of which shares
have been duly authorized, validly issued and are outstanding and are fully paid
and non-assessable and held of record and beneficially by O'Gara.
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NEWCO was recently formed for the purpose of the transactions contemplated
hereby and has no material assets or liabilities. True and complete copies of
the Certificate of Incorporation and By-laws of O'Gara have been delivered by
O'Gara to KHI. The O'Gara Common Stock to be issued in the Merger will be duly
authorized, validly issued and outstanding, fully paid and non-assessable and
listed for trading on the NASDAQ National Market.
4.02 Power and Authority and Board Approval. O'Gara has the corporate
power and authority to own its properties and to carry on its business as
heretofore conducted and, subject to the approval and adoption of this Agreement
by its shareholders as required by law, to perform all of the obligations to be
performed by it hereunder. Each of O'Gara's Subsidiaries has the corporate power
and authority to own its properties and to carry on its business as heretofore
conducted. O'Gara and its Subsidiaries are duly qualified as a foreign entity
and in good standing in each jurisdiction where the nature of their respective
properties or the conduct of their respective businesses makes such
qualification necessary, except when the failure to be so qualified would not
reasonably be expected to have a Material Adverse Effect. This Agreement
constitutes the valid and legally binding obligation of O'Gara and NEWCO,
enforceable against O'Gara and NEWCO in accordance with its terms, subject to
applicable bankruptcy insolvency, reorganization, moratorium and other similar
laws affecting the enforcement of creditors' rights generally and to applicable
equitable principles or public policy with respect to the indemnification
provisions hereof, and the execution and delivery hereof and consummation of the
Merger have been approved by the Board of Directors of O'Gara and NEWCO.
4.03 Subsidiaries. Each of O'Gara's Subsidiaries is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
formation. Except as described in the SEC Filings or on Schedule 4.03 of that
certain Disclosure Schedule to this Plan and Agreement to Merge delivered by
O'Gara to KHI (the "O'Gara Disclosure Schedule"), O'Gara or its Subsidiaries
owns all issued and outstanding equity or other ownership interests in O'Gara's
Subsidiaries. Except as set forth on Schedule 4.03 of the O'Gara Disclosure
Schedule, all of the outstanding shares of capital stock or other ownership
interests of each of O'Gara's Subsidiaries which are owned by O'Gara or one of
its Subsidiaries have been duly authorized and validly issued, fully paid and
nonassessable and are owned beneficially and of record, free and clear of all
liens, charges, claims or encumbrances. Except as described in the SEC Filings
(as defined in Section 4.05(b)) and except for O'Gara's Subsidiaries, O'Gara and
its Subsidiaries have no equity or ownership interest or the right to acquire
any such interest in any Person, which interest is material to the business,
properties, operations or financial condition of O'Gara and its Subsidiaries
taken as a whole.
4.04 Stock Options and Other Arrangements. Except as disclosed in the SEC
Filings (as defined in Section 4.05 below) or set forth in Schedule 4.04 of the
O'Gara Disclosure Schedule, (i) there are no outstanding subscriptions, option
plans, warrants, calls, rights, convertible securities, preemptive rights or
other agreements or commitments of any character to which O'Gara or any of its
Subsidiaries is a party or by which O'Gara or any of its Subsidiaries is bound
relating to the issued or unissued capital stock or other ownership interests of
O'Gara or any of O'Gara's Subsidiaries or relating to securities convertible
into, exchangeable for or evidencing the right to subscribe for any such capital
stock or other ownership interests, (ii) there are no shareholders' agreements,
partnership agreements, registration rights agreements, voting trusts or other
agreements or understandings to which O'Gara or any of its Subsidiaries is a
party or by which O'Gara or any of its Subsidiaries is bound with respect to the
voting of the capital stock or other ownership interests of O'Gara or any of its
Subsidiaries or with respect to the registration of O'Gara Common Stock of any
shareholder of O'Gara under the Act, and (iii) there are no stock options, stock
bonus agreements, restricted stock agreements or other agreements or obligations
outstanding which commit O'Gara or any of its Subsidiaries to issue, deliver,
sell, repurchase or redeem shares of stock or other ownership interests upon the
fulfillment of specified conditions. True and complete copies of all documents,
agreements and other instruments listed in Schedule 4.04 of the O'Gara
Disclosure Schedule have been delivered by O'Gara to KHI.
4.05 SEC Filings and Financial Statements.
(a) O'Gara has timely filed with the Commission all documents and reports
required to be filed by it pursuant to the Exchange Act for the year ended
December 31, 1996, and has filed or will timely file all such required documents
and reports at all times subsequent thereto up to and including the Effective
Time.
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(b) O'Gara has delivered to KHI true and complete copies of: (i) its
Registration Statement on Form S-1 in the form in which it was declared
effective under the Act, including the Prospectus and all exhibits forming a
part thereof; (ii) its annual report on Form 10-K for the fiscal year ended
December 31, 1996; (iii) its quarterly report on Form 10-Q for the fiscal
quarter ending March 31, 1997; and (iv) all of its other reports, statements,
schedules and registration statements filed with the SEC since December 31,
1996, which if not yet filed shall be delivered promptly upon the filing thereof
as provided in Section 4.05(d) below (collectively, the "SEC Filings").
(c) The SEC Filings comply as to form in all material respects with the
requirements of the Act and the Exchange Act, as applicable, in effect on the
respective dates thereof. None of the SEC Filings, when filed pursuant to the
Act or the Exchange Act, contained any untrue statement of a material fact or
omitted to state any material fact necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
(d) From March 31, 1997 through the date hereof, O'Gara has not filed and
is not aware of any event which would require the filing with the Commission of
any report by it on Form 8-K except for this Agreement and the Merger. Promptly
upon the filing thereof with the Commission, O'Gara will deliver to KHI any
current reports on Form 8-K and any other SEC Filings filed with the Commission
from the date hereof until the Effective Time, all of which when filed under the
Exchange Act or declared effective under the Act, as applicable, will comply as
to form in all material respects with the requirements of the Act and the
Exchange Act, as applicable, in effect at the time of filing thereof and (with
the exception of any information provided by KHI for inclusion therein and any
information with respect to KHI and its Subsidiaries provided in writing by
O'Gara to KHI for inclusion therein, with respect to which O'Gara has not
received any written objection from KHI) none of which will contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
(e) The financial statements included in the SEC Filings (the "O'Gara
Financial Statements") comply as to form in all material respects with the
applicable accounting requirements of the Commission with respect thereto, were
prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis throughout the periods covered and with
prior periods (except as stated in the O'Gara Financial Statements, the
footnotes thereto or the SEC Filings, and subject, in the case of unaudited
interim financial, to year-end adjustments), and fairly present in all material
respects the consolidated financial condition of O'Gara and its Subsidiaries as
of the dates thereof and the consolidated results of their operations for the
periods ended on such dates.
4.06 Liabilities. Except to the extent reflected in the SEC Filings or
reflected and reserved against in the O'Gara Financial Statements, and except
for liabilities and obligations incurred in the ordinary course of business
consistent with prior practice since March 31, 1997, none of which individually
or in the aggregate would reasonably be expected to have a Material Adverse
Effect, neither O'Gara nor any of its Subsidiaries has any liabilities or
obligations of any nature, whether accrued, absolute, determined, determinable,
contingent or otherwise and whether due or to become due, which individually or
in the aggregate would reasonably be expected to have a Material Adverse Effect.
4.07 Claims. There are no governmental proceedings or investigations or
any claims, suits or proceedings by any Person pending, asserted, or, to the
actual knowledge of O'Gara and its Subsidiaries, threatened against O'Gara or
any of its Subsidiaries, and to the actual knowledge of O'Gara and its
Subsidiaries there is no reasonable basis for any such investigations, claims,
suits or proceedings, which if determined adversely to O'Gara or any of its
Subsidiaries would, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect, except in each case as disclosed in the SEC
Filings or on Schedule 4.07 of the O'Gara Disclosure Schedule.
4.08 Assets. All material real property owned or leased by O'Gara or its
Subsidiaries, as disclosed in the SEC Filings, and all tangible personal
property owned or leased by O'Gara or any of its Subsidiaries is in sufficient
condition to enable each of O'Gara and its Subsidiaries to conduct its business
as now being conducted. O'Gara and its Subsidiaries own or have a legal and
valid right to use all real and personal property necessary for, or used in, the
conduct of their respective businesses as heretofore conducted.
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4.09 Operations Since December 31, 1996. Since December 31, 1996, except
as disclosed in the SEC Filings or contained on Schedule 4.09 of the O'Gara
Disclosure Schedule (the "O'Gara Operations Schedule"), neither O'Gara nor any
of its Subsidiaries has (i) incurred any obligation or liability (absolute or
contingent), except obligations and liabilities incurred in the ordinary course
of business consistent with prior practice, none of which individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect; (ii)
discharged or satisfied any material lien or encumbrance, or paid any obligation
or liability (absolute or contingent), other than current liabilities reflected
in the O'Gara Financial Statements and current liabilities incurred since the
date of the latest O'Gara Financial Statements in the ordinary course of
business consistent with prior practice; (iii) declared or made any payment or
distribution of assets or dividends except those dividends normally paid by
O'Gara's Subsidiaries to O'Gara; (iv) purchased or redeemed any of its shares,
or issued or committed to issue any additional shares or any securities
exercisable for or convertible into shares except pursuant to stock options and
restricted stock plans described on Schedule 4.13 of the O'Gara Disclosure
Schedule and except as permitted in Section 10.02(k); (v) other than as
described in Section 10.02 or in the ordinary course of business consistent with
prior practice, made any general wage or salary increases or increased the
salary or other compensation of any officers; (vi) mortgaged, pledged or
subjected to material lien, or any other material encumbrance, any of its
material assets, tangible or intangible other than in connection with a
refinancing of an existing debt obligation and other than in connection with the
incurrence of up to $30,000,000 of additional indebtedness described in Section
10.02(b); (vii) sold, assigned or transferred any of its tangible assets or
canceled any debt or claim, other than the sale of inventory for fair market
value in the ordinary course of business consistent with prior practice; (viii)
sold, assigned or transferred any patent, trademark, trade name, copyright,
license or other intangible asset; (ix) suffered any net operating loss or
extraordinary loss, or waived any right of substantial value; or (x) entered
into any transaction other than in the ordinary course of business consistent
with prior practice and other than as permitted in Section 10.02.
4.10 Taxes. Except as described in the SEC Filings, reserves for taxes as
shown on the O'Gara Financial Statements are sufficient for the payment of all
accrued but unpaid federal, state, county, local and foreign taxes of O'Gara and
each of its Subsidiaries for all periods ending on or prior to December 31,
1996, and are a reasonable estimate of all such taxes for the period ended on
March 31, 1997. Except as disclosed in the SEC Filings or in documents delivered
pursuant to Section 10.05 below, all tax returns required to be filed have been
filed by O'Gara and its Subsidiaries when due in accordance with all applicable
laws, all such returns were correct as filed in all material respects, all taxes
shown to be due on such returns have been timely paid, withheld or remitted to
the appropriate taxing authority and there is no audit, dispute, claim, action,
proceeding or investigation pending or, to the actual knowledge of O'Gara and
its Subsidiaries, threatened with respect to any such returns or any taxes shown
thereon. Except as disclosed in the SEC Filings, neither O'Gara nor any of its
Subsidiaries has received any notice of any deficiency with respect to the
payment of any federal, state, county, local or foreign taxes.
4.11 Insurance. O'Gara and its Subsidiaries have obtained all property,
liability, life and other insurance policies for the benefit of O'Gara and its
Subsidiaries which are reasonable and necessary in connection with the
ownership, lease or operation of their respective properties or the conduct of
their respective businesses as heretofore owned, leased and operated, and all
such insurance is in full force and effect. Since December 31, 1996 there has
been no material loss or damage to the tangible property of O'Gara or any of its
Subsidiaries, whether or not insured, except as disclosed in the SEC Filings or
on Schedule 4.11 of the O'Gara Disclosure Schedule, and neither O'Gara nor any
of its Subsidiaries has been refused any insurance coverage for which it has
applied.
4.12 Contracts. All contracts, agreements, commitments and engagements
which are material to the business, properties, operations or financial
condition of O'Gara and its Subsidiaries, taken as a whole, are disclosed in the
SEC Filings, and each such agreement is a legal and binding contract against
O'Gara or any of its Subsidiaries and, to the actual knowledge of O'Gara and its
Subsidiaries, is legal, valid and binding against any other Person who is a
party thereto. Each of such agreements is in full force and effect without any
default or breach existing with respect thereto by O'Gara or any of its
Subsidiaries or to the best of O'Gara's and its Subsidiaries' actual knowledge,
any other Person. The copies of such contracts, agreements, commitments and
engagements that have been filed with the Commission are true and complete in
all material respects. Except as
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disclosed on Schedule 4.12 of the O'Gara Disclosure Schedule (the "O'Gara
Contract Schedule"), the consummation of the Merger will not result in the
acceleration of, or any adverse change in the terms of, any obligation of O'Gara
or any of its Subsidiaries for borrowed money or any material liability under
any such material contract, agreement, commitment or engagement. A true and
complete copy of the contract with the U.S. Army Tank-Automotive Command with
respect to providing armoring systems for HMMWVs (the "HMMWV Contract") has been
delivered to KHI. O'Gara is in compliance in all material respects with the
terms and provisions of that contract, and as of the date hereof O'Gara has not
received notice of the termination of, or intent to terminate such HMMWV
Contract.
4.13 Employee Benefit Plans. Schedule 4.13 of the O'Gara Disclosure
Schedule contains listings of each Plan (as hereinafter defined). True and
complete copies of all of such Plans (and if applicable related trust
agreements) together with the most recent annual reports (Form 5500 including,
if applicable, Schedule B thereto) and the most recent actuarial valuation
report prepared in connection with any Plan, have been delivered by O'Gara to
KHI. No Plan (as hereinafter defined) is maintained in connection with any trust
described in Section 501(c)(9) of the Code. Each Plan complies in all material
respects with the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), the Code and all other applicable laws and administrative or
governmental rules and regulations. No Plan is subject to Title IV of ERISA or
Section 412 of the Code. None of O'Gara or any of its Subsidiaries or ERISA
Affiliates, has withdrawn from any Plan subject to Title IV of ERISA or
Multiemployer Plan (as hereinafter defined) or has taken, or is currently
considering taking, any action to do so; and no action has been taken, or is
currently being considered, by O'Gara or any of its Subsidiaries or ERISA
Affiliates to terminate any Plan subject to Title IV of ERISA (other than
standard terminations previously effected under which O'Gara or any of its
Subsidiaries or ERISA Affiliates have no existing liability). None of O'Gara or
any of its Subsidiaries or ERISA Affiliates has engaged in, or is a successor or
parent corporation to an entity that has engaged in, a transaction described in
Sections 4069 or 4212(c) of ERISA. There are no actions, suits or claims pending
or, to O'Gara's and its Subsidiaries' actual knowledge, threatened (other than
routine claims for benefits) with respect to any Plan which would reasonably be
expected to have a Material Adverse Effect. No prohibited transactions described
in Section 406 of ERISA or Section 4975 of the Code have occurred which would
reasonably be expected to result in a material liability. All Plans that are
intended to be qualified under Section 401(a) of the Code have received a
favorable determination letter as to such qualification from the Internal
Revenue Service, and to O'Gara's and its Subsidiaries' actual knowledge, no
event has occurred, either by reason of any action or failure to act, which
would cause the loss of any such qualification. To O'Gara's and its
Subsidiaries' actual knowledge, there is no reason why any Plan is not so
qualified in operation. None of O'Gara or any of its Subsidiaries or ERISA
Affiliates is a party, contributes or within the past six years has contributed,
to a Multiemployer Plan (as defined below). None of O'Gara or any of its
Subsidiaries or ERISA Affiliates contributes to, or has within the past six
years contributed to a single-employer plan within the meaning of Section
4001(a)(15) of ERISA which has two or more contributing sponsors, as defined in
Section 4001(a)(13) of ERISA, at least two of whom are not under common control,
within the meaning of ERISA. O'Gara and its Subsidiaries have complied in all
material respects with the health care continuation requirements of Part 6 of
Title I of ERISA to the extent applicable. Except as disclosed on Schedule 4.13
of the O'Gara Disclosure Schedule, the execution and delivery of this Agreement
do not, and the consummation of the transactions contemplated hereby and
compliance with the provisions hereof will not, result in an increase in the
amount of compensation or benefits or accelerate the vesting or timing of
payment of any compensation or benefit payable by O'Gara or any of its
Subsidiaries or ERISA Affiliates to any Plan, Benefit Arrangement (as defined
below), International Plan (as defined below) or to any employee of O'Gara or
any of its Subsidiaries or ERISA Affiliates. Schedule 4.13 of the O'Gara
Disclosure Schedule contains listings of each Benefit Arrangement. True and
complete copies or descriptions of each Benefit Arrangement (and, if applicable,
related trust agreements) and all amendments thereto have been delivered by
O'Gara to KHI. Each Benefit Arrangement (as hereinafter defined) has been
maintained in substantial compliance with its terms and with the requirements
prescribed by any and all applicable statutes, orders, rules and regulations and
has been maintained in good standing with applicable regulatory authorities. All
contributions and payments accrued under each Plan and Benefit Arrangement,
determined in accordance with prior funding and accrual practices, as adjusted
to include proportional accruals for the period ending on the Closing Date, have
been discharged and paid when due. As used in this Section 4.13: (i) "Plan"
means an "employee benefit plan," as defined in Section 3(3) of ERISA, (other
than a Multiemployer
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Plan) which (a) is subject to any provision of ERISA, (b) is established,
administered, maintained or contributed to by O'Gara or any Subsidiary or ERISA
Affiliates of O'Gara and (c) covers any employee or former employee of O'Gara or
any of its Subsidiaries or ERISA Affiliates in respect of service with O'Gara or
any of its Subsidiaries or ERISA Affiliates or to which O'Gara or any of its
Subsidiaries or ERISA Affiliates otherwise may have any liability; (ii)
"Multiemployer Plan" means a "multiemployer plan" (as defined in Section 3(37)
or Section 4001(a)(3) of ERISA) to which O'Gara or any of its Subsidiaries or
ERISA Affiliates is or has been obligated to contribute or otherwise may have
any liability; and (iii) with respect to any Person, "ERISA Affiliate" means any
trade or business (whether or not incorporated) which is under common control or
would be considered a single employer with such person pursuant to Section
414(b), (c), (m) or (o) of the Code and the regulations promulgated thereunder
or pursuant to Section 4001(b) of ERISA and the regulations promulgated
thereunder. "Benefit Arrangement" means any employment, severance, change in
control or similar contract or arrangement or any plan, policy, fund, program or
contract or arrangement providing for bonus, profit-sharing, stock option, or
other stock related rights or other forms of incentive or deferred compensation,
vacation benefits, workers' compensation or severance benefits that (A) is not a
Plan, (B) is entered into, maintained, administered or contributed to, as the
case may be, by O'Gara or any Subsidiary or ERISA Affiliate of O'Gara and (C)
covers in respect of service with O'Gara or any of its Subsidiaries any current
or former U.S. employee or U.S. independent contractor of O'Gara or any of its
Subsidiaries or ERISA Affiliates who is or was employed in the United States.
"International Plan" means (I) any written employment agreement providing for
annual salary in excess of U.S. $100,000 (or its foreign equivalent) or any
severance or similar contract or arrangement providing for compensation
(including retirement benefits) in excess of U.S. $100,000 (or its foreign
equivalent) that (A) is not a Plan or a Benefit Arrangement and (B) is entered
into between O'Gara or any of its Subsidiaries or ERISA Affiliates and any
current or former employee, agent or independent contractor of O'Gara or any of
its Subsidiaries or ERISA Affiliates who is or was employed outside of the
United States or (II) any written plan, policy, fund, program, arrangement, or
contract of or with O'Gara or any of its Subsidiaries or ERISA Affiliates in
respect of service with O'Gara or any of its Subsidiaries or any of its ERISA
Affiliates covering employees who are or were employed by O'Gara or any of its
Subsidiaries or ERISA Affiliates outside of the United States; providing for (A)
retirement benefits (including pension, health, medical or life insurance), but
excluding any retirement scheme fund, plan or program (x) sponsored by any
government or (y) providing benefits statutorily mandated under the laws of the
applicable jurisdiction at the minimum level statutorily mandated, or (B) bonus
(including post-employment bonus), profit sharing, stock option, or other stock
related rights or other forms of incentive or deferred compensation, vacation
benefits, life insurance (including any self-insured arrangements), health or
medical benefits, disability benefits, supplemental unemployment benefits or
severance benefits (cumulatively "Benefits"), other than any plan, policy, fund,
program, arrangement or contract providing for Benefits statutorily mandated by
the laws of the applicable jurisdiction at the minimum level statutorily
mandated that (I) is not a Plan or a Benefit Arrangement and (II) is entered
into, maintained, administered, or contributed to by O'Gara or any of its
Subsidiaries. Schedule 4.13 of the Disclosure Schedule lists each International
Plan. True and complete copies of each International Plan and all amendments
thereto have been made available by O'Gara to KHI. Each International Plan has
been maintained and operated in substantial compliance with its terms and with
the requirements prescribed by any and all applicable statutes, orders, rules
and regulations and has been maintained in good standing with all applicable
regulatory authorities. With respect to each International Plan all necessary or
appropriate approvals, qualifications or certifications have been obtained and
no event has occurred or condition exists which would cause the loss of such
approval, qualification or certifications. All contributions and payments
accrued under each International Plan, determined in accordance with prior
funding and accrual practices, have been discharged and paid when due. O'Gara
represents that there has been and continues to be in full force and effect
insurance, commonly known as "stop-loss insurance", during all periods that the
O'Gara Companies Employee Benefit Plan has been in existence (other than any
periods during which the plan was fully insured), sufficient to reimburse the
plan or O'Gara, as the case may be, for any claims properly covered under the
terms of the plan: (a) for a covered individual after the plan or O'Gara, as the
case may be, has paid out $35,000 under the terms of the plan with respect to
that individual for a given plan year and (b) after the plan or O'Gara, as the
case may be, has paid out $600,000 under the terms of the plan with respect to
all covered individuals for a given plan year.
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4.14 No Default. Except as disclosed in the SEC Filings or on the O'Gara
Contract Schedule, (i) neither O'Gara nor any of its Subsidiaries is in material
default under any material contract, agreement, commitment or engagement of any
kind; (ii) no event of default or event that, but for the giving of notice or
lapse of time, or both, would constitute an event of default exists or, upon the
Effective Time, will exist under any loan or credit agreement, note, bond,
mortgage, indenture or guarantee of indebtedness for borrowed money or other
material instrument to which O'Gara or any of its Subsidiaries is a party; and
(iii) the execution and delivery of this Agreement and the consummation of the
Merger will not contravene or conflict with or constitute a violation of, or
result in a default under, cancellation of, termination of, or acceleration of
obligations under, the Certificate or Articles of Incorporation, Articles of
Association, By-Laws or other organizational documents of O'Gara or any of its
Subsidiaries or any material contract, agreement, commitment, engagement,
judgment, injunction, order, decree or instrument to which O'Gara or any of its
Subsidiaries is a party or by which it or any of its assets are bound, which
default, event of default, contravention, conflict, violation, cancellation,
termination or acceleration would reasonably be expected to have a Material
Adverse Effect, or result in the incurrence by O'Gara or any of its Subsidiaries
of any material liability.
4.15 Joint Proxy Statement. When the Registration Statement is filed with
the Commission and the Joint Proxy Statement in connection with the Merger shall
first be mailed to O'Gara's and KHI's shareholders, and at all times subsequent
thereto up to and including the Effective Time, the information with respect to
O'Gara and its Subsidiaries set forth in the Registration Statement and the
Joint Proxy Statement (i) will comply in all material respects with the
provisions of the Act and of the Exchange Act and the requirements of any
applicable state "blue sky" laws and (ii) will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements contained therein, in light of the
circumstances under which they are made, not misleading. If at any time prior to
the Effective Time, any event relating to O'Gara or any of its Subsidiaries
shall occur which, pursuant to the Act or the Exchange Act or the rules and
regulations thereunder, should be disclosed in the Registration Statement or the
Joint Proxy Statement and which is not so disclosed, O'Gara shall promptly so
inform KHI.
4.16 Compliance with Laws. O'Gara and its Subsidiaries (and each of them)
have complied and are currently in compliance in all material respects with all
applicable laws and governmental rules (including rules related to governmental
contracts), regulations and orders (including zoning ordinances), except when
the failure to be in such compliance would not reasonably be expected to have a
Material Adverse Effect. Except as disclosed in the SEC Filings, neither O'Gara
nor any of its Subsidiaries is in material default under, and no event has
occurred which, with the lapse of time or action by a third party, would be
reasonably expected to result in a material default under, the terms of any
judgment, decree, order or writ of any court, whether federal, state or local,
foreign or domestic, and whether at law or in equity. O'Gara has delivered to
KHI a true and complete copy of and description of its policies, and the
policies of its Subsidiaries, regarding the FCPA. Neither O'Gara nor any of its
Subsidiaries has received written notice of any violation of the FCPA by any
employees of O'Gara or any of its Subsidiaries.
4.17 Consents and Approvals. Except for the approval of O'Gara's
shareholders, the filing of the Certificate of Merger with respect to the Merger
with the Secretary of State of the State of Delaware, the filing of the
Registration Statement and any filings required under state "blue sky" laws, no
other corporate proceedings on the part of O'Gara or any of its Subsidiaries,
and no consent of or filing with any governmental agency or, except as set forth
on the O'Gara Contract Schedule, third party is required to be held, obtained or
made by O'Gara or any of its Subsidiaries in connection with the execution and
delivery of this Agreement and the consummation of the Merger. The ultimate
parent entity of O'Gara does not have $100,000,000 or more of assets as of its
last regularly prepared balance sheet or $100,000,000 or more of sales for its
most recently ended fiscal year for purposes of the HSR Act.
4.18 Patents, Trademarks and Copyrights. O'Gara and its Subsidiaries own
or have the right to use all material patents, trademarks, servicemarks,
tradenames, copyrights and other proprietary intellectual property necessary for
the conduct of their respective businesses as currently conducted (collectively,
the "O'Gara Intellectual Property"). Except as disclosed in the SEC Filings,
neither O'Gara nor any of its Subsidiaries has received any notice with respect
to any alleged infringement or unlawful use by O'Gara or its Subsidiaries of any
intangible property right owned or alleged to be owned by others. Except as set
forth in Schedule 4.18 of the
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O'Gara Disclosure Schedule, the Merger will not adversely affect the use by
O'Gara of any of the O'Gara Intellectual Property. Each of the unexpired filed
patents owned by O'Gara and its Subsidiaries is in full force and effect,
neither O'Gara nor any of its Subsidiaries has received any notice that such
filed patents infringe upon the rights of any Person, and, to the actual
knowledge of O'Gara and its Subsidiaries, no Person is infringing upon the
rights of O'Gara or its Subsidiaries under any such patent.
4.19 Environmental Matters. Except as disclosed in the SEC Filings (i)
there is no liability of O'Gara or any of its Subsidiaries under any
Environmental Requirement, whether absolute, determined, determinable or
contingent, and (ii) the properties, assets and operations of O'Gara and its
Subsidiaries are in compliance with all applicable Environmental Requirements,
except for any such liability or non-compliance that would not reasonably be
expected to have a Material Adverse Effect. Except as disclosed in the SEC
Filings, (i) no spill, release, threatened release or discharge of Hazardous
Substances into the environment has occurred at any of the facilities owned,
leased or operated by O'Gara and its Subsidiaries (the "O'Gara Facilities") or,
to O'Gara's and its Subsidiaries' actual knowledge, on any real property
adjacent thereto that would reasonably be expected to have a Material Adverse
Effect, and (ii) there has been no corrective action, remediation or clean up
required of O'Gara or any of its Subsidiaries by applicable Environmental
Requirements or by governmental authorities as a consequence of any such spill,
release, threatened release or discharge of Hazardous Substances. All corrective
action, remediation or other clean up activities undertaken by O'Gara or any of
its Subsidiaries has been performed, or is being performed, in accordance in all
material respects with all applicable Environmental Requirements. O'Gara and its
Subsidiaries have discharged in all material respects any and all applicable
record keeping and reporting requirements pursuant to all applicable
Environmental Requirements and all such reports and records are complete and
correct in all material respects and have been retained for the length of time
required by any applicable Environmental Requirements setting forth document
retention requirements. Except as disclosed in the SEC Filings or set forth in
Schedule 4.19 of the O'Gara Disclosure Schedule, none of the O'Gara Facilities
or, to O'Gara's and its Subsidiaries' actual knowledge, any property adjacent
thereto, or, to O'Gara's and its Subsidiaries' actual knowledge, any sites used
for the disposal of wastes generated by O'Gara or its Subsidiaries have been
designated as a "Superfund Site" or are otherwise the subject of an order of
removal or remedial action for which O'Gara or any of its Subsidiaries has
liability pursuant to the provisions of applicable Environmental Requirements
and there are no conditions or circumstances affecting the O'Gara Facilities or
any property adjacent thereto which, to O'Gara's and its Subsidiaries' actual
knowledge, might reasonably be expected to cause them to be designated as a
"Superfund Site" or render them subject to any such order of removal or remedial
action for which O'Gara or any of its Subsidiaries will have liability pursuant
to the provisions of applicable Environmental Requirements. Except as disclosed
in the SEC Filings or set forth in Schedule 4.19 of the O'Gara Disclosure
Schedule, no unresolved written notice, notification, demand, request for
information, citation, summons or order has been issued, no pending complaint
has been filed, no unpaid penalty has been assessed and no action, claim, suit
or proceeding or, to the actual knowledge of O'Gara and its Subsidiaries, no
investigation or review is pending or, to the actual knowledge of O'Gara and its
Subsidiaries, threatened by any governmental authority with respect to O'Gara or
any of its Subsidiaries and relating to or arising out of any Environmental
Requirements. To the actual knowledge of O'Gara and its Subsidiaries, no
Hazardous Substance is present at, on, in or under any of the O'Gara Facilities
in violation of applicable Environmental Requirements. All permits required by
applicable Environmental Requirements and necessary for the operation of the
businesses, or the use of the assets of O'Gara and its Subsidiaries have been
obtained and are in full force and effect. Except as disclosed in the SEC
Filings or set forth in Schedule 4.19 of the Disclosure Schedule, O'Gara and its
Subsidiaries are in material compliance with the terms of such permits, no
action or investigation has been taken, commenced or, to O'Gara's actual
knowledge, threatened by any governmental authority or any other Person to
revoke or modify such permits or to enforce the terms of or take action for
violation of such permits, and, to O'Gara's and its Subsidiaries' actual
knowledge, there is no reasonable basis for any such action or investigation.
O'Gara and its Subsidiaries do not own, lease or operate and have not within the
past four (4) years owned, leased or operated any property in New Jersey or
Connecticut that is subject to transfer act requirements of those states.
Neither O'Gara nor any of its Subsidiaries is, based upon actual knowledge,
required to incur now or within twelve (12) months after the Effective Time
capital expenditures for compliance with Environmental Requirements that would
reasonably be expected to have a Material Adverse Effect.
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4.20 No Material Adverse Change. Since the date of the latest O'Gara
Financial Statements, except as disclosed in the SEC Filings, there has been no
material adverse change in the business, properties, operations or financial
condition of O'Gara and its Subsidiaries taken as a whole.
4.21 Licenses and Permits. O'Gara and its Subsidiaries have obtained all
permits, licenses, franchises and authorizations from any governmental authority
which are necessary in connection with the ownership, lease or operation of
their respective properties or the conduct of their respective businesses as
heretofore and presently owned, leased and conducted, except for such permits or
licenses, the absence of which would not reasonably be expected to have a
Material Adverse Effect (collectively, the "O'Gara Licenses"). All of such
O'Gara Licenses are in full force and effect. Neither O'Gara nor any of its
Subsidiaries has received any notice that O'Gara or any of its Subsidiaries is
in violation of or default under any O'Gara License or that any O'Gara License
will be revoked, terminated or not renewed, except for any such violation,
default, revocation, termination or nonrenewal which would not reasonably be
expected to have a Material Adverse Effect.
4.22 Orders, Actions, Etc. Except as disclosed in the SEC Filings, there
are no outstanding orders, judgments, injunctions, awards or decrees of any
governmental authority against O'Gara or any of its Subsidiaries or any of their
properties, assets or businesses that would reasonably be expected to have a
Material Adverse Effect. Except as disclosed in the SEC Filings, there are no
actions, suits or claims or legal, administrative or arbitration proceedings or
investigations pending against or, to O'Gara's or any of its Subsidiaries'
actual knowledge, threatened against any of O'Gara, its Subsidiaries, or any of
their properties, assets or businesses that would reasonably be expected to have
a Material Adverse Effect, and neither O'Gara nor any of its Subsidiaries has
received any written notice of any actions, suits or claims or legal,
administrative or arbitration proceedings or investigations affecting O'Gara,
its Subsidiaries or any of their properties, assets or businesses that would be
reasonably expected to have a Material Adverse Effect.
4.23 Labor Matters. Except as disclosed in the SEC Filings or set forth in
Schedule 4.23 of the O'Gara Disclosure Schedule, neither O'Gara nor any of its
Subsidiaries has engaged in any unfair labor practice with respect to persons
employed by or otherwise performing services primarily for O'Gara or any of its
Subsidiaries (the "O'Gara Business Personnel") or any representative of any
O'Gara Business Personnel, and neither O'Gara nor any of its Subsidiaries has
received written notice that there is an unfair labor practice complaint pending
against O'Gara or any of its Subsidiaries with respect to O'Gara Business
Personnel. There is no labor strike, dispute, slowdown or stoppage pending
against or, to O'Gara's actual knowledge, threatened against or affecting,
O'Gara or any of its Subsidiaries that would reasonably be expected to have a
Material Adverse Effect, and neither O'Gara nor any of its Subsidiaries has
experienced any primary work stoppage or other material labor difficulty
involving its employees during the last three (3) years that has had or would
reasonably be expected to have a Material Adverse Effect. O'Gara and its
Subsidiaries are in material compliance with the requirements of all applicable
labor and employment laws, rules and regulations.
4.24 Brokers. No broker, investment banker or other person is entitled to
any broker's, finder's or other similar fee or commission in connection with the
execution and delivery of, or the consummation of the transactions contemplated
by, this Agreement based on agreements or arrangements made by O'Gara or any of
its Subsidiaries, except for Dillon Read & Co., Inc. ("Dillon Read") and J.
Jeffrey Brausch & Company, the fees and expenses of which shall be paid by
O'Gara.
4.25 Pooling-of-Interests. Neither O'Gara nor any of its Subsidiaries or
shareholders has taken any action, or caused any event or condition to occur,
and there is no set of facts in existence relating to O'Gara or any of its
Subsidiaries or shareholders of which O'Gara has actual knowledge, which would
be reasonably expected to result in the failure of the Merger to constitute a
pooling-of-interests for accounting purposes, and, within ten (10) days after
the date hereof, O'Gara shall obtain a certificate to that effect from its
independent certified public accountants, Arthur Andersen LLP, and deliver a
copy of such certificate to KHI, which certificate shall be reasonably
acceptable in form and substance to KHI.
4.26 Full Disclosure. The representations and warranties made by O'Gara in
this Agreement, the O'Gara Disclosure Schedule and certificates to be furnished
by O'Gara or any of its Subsidiaries at the Closing hereunder do not contain and
will not contain any untrue statement of a material fact, and do not omit and
will not omit any
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material fact necessary in order to make the statements contained therein, in
light of the circumstances under which they are made, not misleading.
ARTICLE V
REGISTRATION OF O'GARA COMMON STOCK
Subject to the provisions of this Article V, as promptly as practicable
after execution of this Agreement, and in no event later than September 30,
1997, O'Gara shall prepare (with the assistance of KHI as described below) and
file with the Commission a Registration Statement on Form S-4 under the Act for
the registration of the O'Gara Common Stock to be delivered as a result of the
Merger. In connection with the preparation of the Registration Statement and the
related Joint Proxy Statement forming a part of the Registration Statement to be
mailed to the shareholders of O'Gara and KHI in connection with the meeting of
shareholders of O'Gara and KHI referred to in Article XI hereof, KHI and O'Gara
will cooperate with each other and will furnish the information relating to KHI,
O'Gara and NEWCO, as the case may be, required by the Act and the Exchange Act
to be set forth in the Registration Statement (including the Joint Proxy
Statement), in each case, within the time period necessary to permit O'Gara to
file such Registration Statement with the Commission no later than September 30,
1997, and also, in each case, in a timely fashion to enable O'Gara to respond to
any comments received from the Commission with respect thereto. O'Gara shall use
its commercially reasonable best efforts to cause such Registration Statement to
be declared effective under the Act as soon as may be practicable and to
distribute the Joint Proxy Statement contained therein to the O'Gara and KHI
shareholders as soon as practicable thereafter but not less than twenty (20)
business days prior to the date of the special meetings at which this Agreement
and the transactions contemplated hereby are submitted to O'Gara's and KHI's
shareholders for approval and adoption. O'Gara and KHI shall postpone the
special meetings of their respective shareholders in the event the twenty (20)
business day requirement would not be fulfilled. Except to the extent permitted
by Rule 145(b) promulgated by the Commission under the Act and except as
otherwise required by law or the rules of the National Association of Securities
Dealers, Inc., the NASDAQ National Market, none of O'Gara, NEWCO or KHI shall
publish any communication (including any press release) other than the
Registration Statement or notices and proxy materials accompanied by the Joint
Proxy Statement with respect to the Merger without first consulting with the
other parties and obtaining their approval, which shall not be unreasonably
withheld. O'Gara shall submit to KHI and its counsel the Registration Statement
and all proxy soliciting material for its review prior to the use thereof.
O'Gara shall use its commercially reasonable best efforts to maintain the
effectiveness of the Registration Statement by the preparation and filing of
amendments and/or supplements thereto from the original effective date through
the Effective Time. O'Gara shall not be required to maintain the effectiveness
of the Registration Statement or the Joint Proxy Statement for the purpose of
resales by affiliates of KHI.
ARTICLE VI
CONDITIONS TO OBLIGATIONS
OF O'GARA, NEWCO, KHI AND THE KHI PRINCIPAL SHAREHOLDER
The obligations of O'Gara, NEWCO, KHI and the KHI Principal Shareholder
under this Agreement are subject to the following conditions:
6.01 Necessary Governmental Approvals. All necessary governmental
approvals shall have been received from any required governmental authority, and
all necessary waiting periods shall have expired. Each party shall cooperate
fully with the other in applying for such approvals and in prosecuting
applications, including the execution of supplemental agreements and other
documents consistent with the terms of this Agreement.
6.02 Effectiveness of Registration Statement. The Registration Statement
shall have become effective pursuant to an order of the Commission, and there
shall have been no stop order issued or threatened by the Commission suspending
the effectiveness of the Registration Statement.
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6.03 No Injunction. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Merger shall be in effect.
6.04 AIG Director. If requested by AIG, an individual nominated by AIG and
reasonably acceptable to O'Gara shall have been elected a director of O'Gara.
ARTICLE VII
CONDITIONS TO OBLIGATIONS
OF O'GARA AND NEWCO
The obligations of O'Gara and NEWCO under this Agreement are subject to the
following conditions:
7.01 Representations and Warranties True; Covenants and Obligations
Performed. All of the representations and warranties of KHI and the KHI
Principal Shareholder herein shall have been true and complete when made and
shall be true and complete in all material respects as of the Effective Time,
with the same force and effect as though such representations and warranties had
been made at the Effective Time. KHI shall have performed in all material
respects all covenants, agreements and obligations to be performed by it
hereunder prior to or at the Effective Time. KHI shall have delivered to O'Gara
certificates of its officers to such effect.
7.02 Opinion of Counsel. O'Gara shall have received an opinion of Kramer,
Levin, Naftalis & Frankel, counsel for KHI, dated the Effective Date of the
Merger, substantially in the form contained at Exhibit 7.02 attached hereto.
7.03 Auditor's Comfort Letter. If the Registration Statement and/or the
Proxy Statement shall contain any unaudited interim financial statements of KHI,
O'Gara shall have received, if requested, "comfort" letters from KHI's
independent certified public accountants, Deloitte & Touche, dated (i) the
effective date of the Registration Statement and (ii) the date of the Closing,
in each case substantially to the effect that:
(a) They are a firm of independent public accountants with respect to
KHI within the meaning of the Act and the rules and regulations of the
Commission thereunder;
(b) In their opinion the audited financial statements of KHI examined
by them and included in the Registration Statement comply as to form in all
material respects with the applicable requirements of the Act and the
applicable published rules and regulations of the Commission thereunder
with respect to registration statements on Form S-4; and
(c) On the basis of specified procedures (which do not constitute an
examination in accordance with generally accepted auditing standards),
consisting of a reading of the unaudited financial statements of KHI
included in the Registration Statement and of the latest available
unaudited financial statements of KHI, inquiries of officers of KHI
responsible for financial and accounting matters and a reading of the
minutes of meetings of shareholders and the Board of Directors of KHI,
nothing has come to their attention which causes them to believe: (i) that
the unaudited financial statements of KHI included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the published rules and
regulations thereunder, (ii) that any such unaudited financial statements
are not, or any unaudited financial statements of KHI from which unaudited
quarterly financial information set forth in such Registration Statement
has been derived are not, fairly presented in all material respects in
conformity with United States generally accepted accounting principles
consistently applied and on a basis substantially consistent with that of
the audited financial statements or (iii) that during the period from
December 31, 1996 to a date five business days prior to the date of such
letter there was any change in the capital stock or any increase in long
term debt of KHI as compared to the amounts shown in the balance sheet as
of December 31, 1996 included in the KHI Financial Statements, except for
any acquisition publicly announced by KHI, or that during the period from
the date of said balance sheet to the most recent month-end for which
financial statements are available there was any material decrease in net
assets or any material decrease, as compared with the corresponding period
in the preceding year, in net income of KHI, except in
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all instances for changes or decreases which are set forth in such letter
or which the Registration Statement and/or the Proxy Statement discloses
have occurred.
7.04 Pooling-of-Interests. The Merger shall constitute a
pooling-of-interests for financial accounting purposes and O'Gara, at its
option, shall have received an opinion to that effect from Arthur Andersen LLP.
7.05 Opinion of Financial Advisor. The Board of Directors of O'Gara shall
have received an opinion from Dillon Read, dated the date of this Agreement, to
the effect that the consideration to be received in the Merger by O'Gara is fair
to O'Gara from a financial point of view, and such opinion shall not have been
withdrawn.
7.06 Shareholder Approval. The shareholders of O'Gara shall have approved
the Merger at the meeting of shareholders of O'Gara called pursuant to Article
XI.
7.07 Required Consents. All necessary consents (the "Required Consents")
under the Contracts identified in Schedule 7.07 of the KHI Disclosure Schedule
as requiring consents prior to consummation of the Merger shall have been
received.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS
OF KHI AND THE KHI PRINCIPAL SHAREHOLDER
The obligations of KHI and the KHI Principal Shareholder under this
Agreement are subject to the following conditions:
8.01 Representations and Warranties True; Covenants and Obligations
Performed. All of the representations and warranties of O'Gara and NEWCO herein
shall have been true and complete when made and shall be true and complete in
all material respects as of the Effective Time, with the same force and effect
as though such representations and warranties had been made at the Effective
Time. O'Gara and NEWCO each shall have performed in all material respects all
covenants, agreements and obligations to be performed by it hereunder prior to
or at the Effective Time. O'Gara and NEWCO shall have delivered to KHI
certificates of its officers to such effect.
8.02 Opinion of Counsel. KHI shall have received an opinion of Taft,
Stettinius & Hollister, counsel for O'Gara and NEWCO, dated the effective date
of the Merger, substantially in the form contained at Exhibit 8.02 attached
hereto.
8.03 Auditor's Comfort Letter. If the Registration Statement and/or the
Joint Proxy Statement shall contain any unaudited interim financial statements
of O'Gara, KHI shall have received, if requested, "comfort" letters from
O'Gara's independent certified public accountants, dated (i) the effective date
of the Registration Statement and (ii) the date of the Closing, in each case
substantially to the effect that:
(a) They are a firm of independent public accountants with respect to
O'Gara within the meaning of the Act and the rules and regulations of the
Commission thereunder;
(b) In their opinion the audited financial statements of O'Gara
examined by them and included in the Registration Statement comply as to
form in all material respects with the applicable requirements of the Act
and the applicable published rules and regulations of the Commission
thereunder with respect to registration statements on Form S-4; and
(c) On the basis of specified procedures (which do not constitute an
examination in accordance with generally accepted auditing standards),
consisting of a reading of the unaudited financial statements of O'Gara
included in the Registration Statement and of the latest available
unaudited financial statements of O'Gara, inquiries of officers of O'Gara
responsible for financial and accounting matters and a reading of the
minutes of meetings of shareholders and the Board of Directors of O'Gara,
nothing has come to their attention which causes them to believe: (i) that
the unaudited financial statements of O'Gara included in the Registration
Statement do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the published rules and
regulations thereunder, (ii) that any such unaudited
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financial statements are not, or any unaudited financial statements of
O'Gara from which unaudited quarterly financial information set forth in
the Registration Statement has been derived are not, fairly presented in
all material respects in conformity with United States generally accepted
accounting principles consistently applied and on a basis substantially
consistent with that of the audited financial statements or (iii) that
during the period from December 31, 1996 to a date five business days prior
to the date of such letter there was any change in the capital stock or any
increase in long term debt of O'Gara as compared to the amounts shown in
the balance sheet as of December 31, 1996 included in the O'Gara Financial
Statements, except for any acquisition publicly announced by O'Gara, or
that during the period from the date of said balance sheet to the most
recent month-end for which financial statements are available there was any
material decrease in net assets or any material decrease, as compared with
the corresponding period in the preceding year, in net income of O'Gara,
except in all instances for changes or decreases which are set forth in
such letter or which the Registration Statement and/or the Proxy Statement
disclosures have occurred.
8.04 Required Consents. All necessary consents under the contracts
identified on Schedule 7.07 of the KHI Disclosure Schedules as requiring
consents prior to consummation of the Merger have been received.
8.05 Election of Principal Shareholder. The KHI Principal Shareholder
shall have been elected a director and the Chairman and CEO of O'Gara effective
as of the Effective Time.
8.06 No Labor Strikes. As of the date of consummation of the Merger, there
shall not be in existence any strike involving in excess of twenty percent (20%)
of the United States workforce of O'Gara.
8.07 HMMWV Contract. O'Gara shall not have received notice of the
termination of, or intent to terminate, the HMMWV contract.
ARTICLE IX
COVENANTS OF KHI AND KHI PRINCIPAL SHAREHOLDER
From the date hereof through the Effective Time, KHI and the KHI Principal
Shareholder jointly and severally covenant and agree as follows:
9.01 Access to Properties and Records. O'Gara's officers, employees,
attorneys, accountants and other authorized agents shall be given access to all
of the offices, properties and records of KHI and its Subsidiaries on reasonable
notice to allow O'Gara to make an investigation of KHI's and its Subsidiaries'
businesses, assets and affairs. O'Gara shall be permitted to make such extracts
or copies of such documents, books or records of KHI and its Subsidiaries as
O'Gara may desire and KHI shall furnish to O'Gara such financial and operating
data and other information concerning the business, assets and affairs of KHI
and its Subsidiaries as O'Gara may reasonably request. KHI shall instruct its
accountants and attorneys to disclose to O'Gara any and all non-privileged
information they may have with respect to the business, assets and affairs of
KHI and its Subsidiaries. O'Gara shall treat all information it receives
concerning KHI and its Subsidiaries during the course of its investigation as
confidential (subject to such disclosure as may be required by applicable law
with prompt notice thereof to be given to KHI) and shall return to KHI or
destroy all extracts and copies of documents, books and records which it has
received if the Merger is not consummated, pursuant to the terms of that certain
Confidentiality Agreement dated July 16, 1997 which shall survive the execution
and delivery of this Agreement.
9.02 Operations Pending Merger. KHI and its Subsidiaries will be operated
in all material respects in the ordinary course of business consistent with
prior practice without substantial change in current operational policy or
plans, and in compliance in all material respects with applicable laws,
including Environmental Requirements, and KHI will use commercially reasonable
best efforts to maintain KHI's and each of its Subsidiaries' properties and
facilities in their present condition, reasonable use and ordinary wear and tear
excepted, to retain KHI's and each of its Subsidiaries' key employees, and to
maintain KHI's and each of its Subsidiaries' material assets and KHI's and each
of its Subsidiaries' relationships with its customers and others having business
relations with
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KHI or any of its Subsidiaries. KHI further agrees that from the date hereof to
the Effective Time, neither it nor any of its Subsidiaries will, without the
prior written consent of O'Gara:
(a) Declare any dividends, make any distribution of assets to its
shareholders or purchase any shares of KHI Capital Stock or any stock
option;
(b) Create or incur any indebtedness for money borrowed except
indebtedness of up to $1,000,000 to the KHI Principal Shareholder or create
or incur any liability except in the ordinary course of business;
(c) Except for committed expenditures set forth on the Schedule 9.02
of the KHI Disclosure Schedule, make any capital expenditure in excess of
$750,000 in the aggregate or enter into any lease with an annual cost in
excess of $250,000;
(d) Increase the rate of compensation of any of its officers or
employees other than in the ordinary course of business consistent with
prior practice;
(e) Cancel any of the insurance existing at the date hereof or permit
any of its insurance to lapse or terminate unless it is replaced with
insurance with substantially the same coverage, limits and deductibles and
with no gap in coverage;
(f) Make any material contract not in the ordinary course of business;
(g) Default in any material respect under any material contract,
agreement, commitment or engagement of any kind, including those described
on the KHI Contract Schedule;
(h) Except as may be required by law, enter into, adopt, amend or
terminate any employee benefit or welfare trust, plan or arrangement,
except for stay bonuses provided to key employees of KHI and its
Subsidiaries with the prior written consent of O'Gara, which consent shall
not be unreasonably withheld or delayed;
(i) Acquire, sell, lease or dispose of any material assets, other than
the sale of inventory in the ordinary course of business consistent with
past practice;
(j) Except as may be required to conform with United States generally
accepted accounting principles, change any of the accounting principles
used by it;
(k) Make any material tax election or compromise relating to any tax
liability;
(l) Pay, discharge or satisfy any material claims or obligations
(whether absolute, asserted, unasserted, contingent or otherwise) other
than in the ordinary course of business consistent with prior practice;
(m) Take or agree to take any action which would result in any of the
conditions set forth in Articles VI, VII or VIII hereof not being satisfied
at or prior to the Closing; or
(n) Write off any material assets other than in the ordinary course of
business consistent with prior practices.
9.03 Best Efforts to Expedite Closing. From the date hereof through the
Effective Time, KHI shall exert its commercially reasonable best efforts and
cooperate with O'Gara to accomplish by the earliest practicable date all those
things within its control necessary to cause this Agreement to be carried out,
including but not limited to the making of applications to, and the obtaining of
approvals from, the appropriate regulatory agencies for the accomplishment of
the Merger. KHI shall cooperate with O'Gara in order to accomplish the
registration of the O'Gara Common Stock by the earliest practicable date.
9.04 No Solicitation. Neither KHI nor the KHI Principal Shareholder shall,
directly or indirectly, furnish information or access in response to requests
from any Person, or participate in discussions or negotiate with any such Person
concerning any proposal for a merger or other business combination involving KHI
or any of its Subsidiaries or any proposal or offer to acquire in any manner,
directly or indirectly, an equity interest in any voting securities of, or a
substantial portion of the assets of, KHI or any of its Subsidiaries, other than
pursuant to the Merger.
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9.05 Tax Information. Within 30 days after the date hereof, KHI shall
deliver to O'Gara a list of (i) all United States federal income tax returns of
KHI and its Subsidiaries which have not been audited by the Internal Revenue
Service or are not closed by the applicable statute of limitations, (ii) all
jurisdictions, foreign or domestic, federal, state, provincial or local, to
which any tax is payable, or in which any tax return is required to be filed, by
KHI and its Subsidiaries, and (iii) all waivers or extensions granted by KHI,
its Subsidiaries or any member of any affiliate, consolidated, combined or
unitary group of which KHI or any of its Subsidiaries has been a member of any
statute of limitations in respect of taxes or tax returns.
ARTICLE X
COVENANTS OF O'GARA AND NEWCO
From the date hereof through the Effective Time, O'Gara and NEWCO jointly
and severally covenant and agree as follows:
10.01 Access to Properties and Records. KHI's officers, employees,
attorneys, accountants and other authorized agents shall be given free and full
access to all of the offices, properties and records of O'Gara and its
Subsidiaries on reasonable notice to allow KHI to make an investigation of
O'Gara's and its subsidiaries' businesses, assets and affairs. KHI shall be
permitted to make such extracts or copies of such documents, books or records of
O'Gara and its Subsidiaries as KHI may desire and O'Gara shall furnish to KHI
such financial and operating data and other information concerning the business,
assets and affairs of KHI and its Subsidiaries as KHI may reasonably request.
O'Gara shall instruct its accountants and attorneys to disclose to KHI any and
all non-privileged information they may have with respect to the business,
assets and affairs of O'Gara and its Subsidiaries. KHI shall treat all
information it receives concerning O'Gara and its Subsidiaries during the course
of its investigation as confidential (subject to such disclosures as may be
required by applicable law with prompt notice thereof to be given to O'Gara) and
shall return to O'Gara or destroy all extracts and copies of documents, books
and records which it has received if the Merger is not consummated, pursuant to
the terms of the Confidentiality Agreement referred to in Section 9.01 hereof.
10.02 Operations Pending Merger. O'Gara and its Subsidiaries will be
operated in all material respects in the ordinary course of business consistent
with prior practice without substantial change in current operational policy or
plans, and in compliance in all material respects with applicable laws,
including Environmental Requirements, and O'Gara will use commercially
reasonable best efforts to maintain O'Gara's and each of its Subsidiaries'
properties and facilities in their present condition, reasonable use and
ordinary wear and tear excepted, to retain O'Gara's and each of its
Subsidiaries' employees, and to maintain O'Gara's and each of its Subsidiaries'
assets and O'Gara's and each of its Subsidiaries' relationships with its
customers and others having business relations with O'Gara or any of its
Subsidiaries. O'Gara further agrees that from the date hereof to the Effective
Time, neither it nor any of its Subsidiaries will, without the prior written
consent of KHI:
(a) Declare any dividends, make any distribution of assets to its
shareholders or purchase any shares of O'Gara Common Stock or any stock
option (except for dividends paid by O'Gara's Subsidiaries to O'Gara or
another O'Gara Subsidiary and except as contemplated by Section 1.06);
(b) Create or incur any liability except in the ordinary course of
business or increase its indebtedness by more than $30,000,000, which
increase shall be for the purposes listed on Schedule 10.02 of the O'Gara
Disclosure Schedule;
(c) Increase the rate of compensation of any of its officers or
employees other than in the ordinary course of business consistent with
prior practice;
(d) Cancel any of the insurance existing at the date hereof or permit
any of its insurance to lapse or terminate unless it is replaced with
insurance with substantially the same coverage, limits and deductibles and
with no gap in coverage;
(e) Default in any material respect under any material contract,
agreement, commitment or engagement of any kind, including those described
on the O'Gara Contract Schedule;
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(f) Except as may be required by law or pursuant to plans or
arrangements described in the SEC Filings, enter into, adopt, amend or
terminate any employee benefit or welfare trust, plan or arrangement which
would reasonably be expected to have a material adverse effect on the value
of the shares of O'Gara Common Stock to be issued in connection with the
Merger, except as contemplated by Section 4.04;
(g) Sell, lease or dispose of any material assets, other than the sale
of inventory in the ordinary course of business consistent with past
practice;
(h) Except as may be required to conform with United States generally
accepted accounting principles, change any of the accounting principles
used by it;
(i) Make any tax election or compromise relating to any tax liability
in either case which would reasonably be expected to have a Material
Adverse Effect;
(j) Take or agree to take any action which would result in any of the
conditions set forth in Articles VI, VII or VIII hereof not being satisfied
at or prior to the Closing;
(k) Make any material contract not in the ordinary course of business
except for agreements entered into in connection with indebtedness
permitted by paragraph 10.02(b), acquisitions of assets or stock consented
to in writing by KHI (which consent shall not be unreasonably withheld or
delayed), capital expenditures or improvements involving not more than
$750,000 in the aggregate and acquisitions of assets or stock involving the
issuance by O'Gara of O'Gara Common Stock consented to in writing by KHI
(which consent shall not be unreasonably withheld or delayed); or
(l) Write off any material assets except in the ordinary course of
business consistent with prior practices.
(m) Issue O'Gara Common Stock except as permitted in Section 10.02(k)
and except pursuant to option plans and options described in Schedule 4.04
of the O'Gara Disclosure Schedule or in the SEC Filings.
10.03 Best Efforts to Expedite Closing. From the date hereof through the
Effective Time, O'Gara and NEWCO shall exert their commercially reasonable best
efforts and cooperate with KHI to accomplish by the earliest practical date all
those things within its control necessary to cause this Agreement to be carried
out, including but not limited to, the making of applications to, and the
obtaining of approvals from, the appropriate regulatory agencies for the
accomplishment of the Merger, including the registration of the O'Gara Common
Stock, the compliance with applicable state "blue sky" laws, and calling and
holding a special meeting of O'Gara shareholders at which the O'Gara Board of
Directors will present and recommend this Agreement to such shareholders for
their approval.
10.04 Repayment of KHI Shareholder Debt. Subject to confirmation by Arthur
Andersen LLP that the repayments contemplated in this Section 10.04 will not
adversely affect the pooling accounting treatment for the Merger, promptly
following the Effective Time, O'Gara shall cause KHI and its Subsidiaries to pay
(i) to AIG an amount not in excess of $2,000,000 principal amount, plus accrued
and unpaid interest thereon, in repayment of all indebtedness owing by KHI and
its Subsidiaries to AIG, and (ii) to the KHI Principal Shareholder an amount in
repayment of all amounts reflected in an advance account as owing to the KHI
Principal Shareholder by KHI and its Subsidiaries. In no event shall the total
amount of indebtedness paid to AIG and the KHI Principal Shareholder pursuant to
this Section 10.04 exceed $7,500,000. The parties acknowledge and agree that
certain other indebtedness, evidenced by various promissory notes, of KHI and
its Subsidiaries to the KHI Principal Shareholder in the approximate amount of
$310,000 (which amount is net of all liabilities or other amounts payable by the
KHI Principal Shareholder to KHI and its Subsidiaries) shall remain outstanding
following the Effective Time.
10.05 Tax Information. Within 30 days after the date hereof, O'Gara shall
deliver to KHI a list of (i) all United States federal income tax returns of
O'Gara and its Subsidiaries which have not been audited by the Internal Revenue
Service or are not closed by the applicable statute of limitations, and (ii) all
waivers or extensions granted by O'Gara, its Subsidiaries or any member of any
affiliate, consolidated, combined or unitary
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group of which O'Gara or any of its Subsidiaries has been a member of any
statute of limitations in respect of taxes or tax returns.
ARTICLE XI
SHAREHOLDERS' MEETINGS
Prior to the Closing, as soon as practicable after the effective date of
the Registration Statement, and in accordance with its Regulations and
applicable law, O'Gara shall duly call and hold a special meeting of its
shareholders at which it will present this Agreement for, and will recommend,
the approval of its shareholders. Prior to the Closing, as soon as practicable
after the effective date of the Registration Statement, and in accordance with
the By-laws and applicable law, KHI shall duly call and hold a special meeting
of its shareholders at which it will present this Agreement for, and will
recommend, the approval of its shareholders. Notwithstanding the foregoing, the
special meetings of shareholders shall not be held less than twenty (20)
business days after the distribution of the Joint Proxy Statement.
ARTICLE XII
TERMINATION OF MERGER AGREEMENT
This Agreement and the transactions contemplated herein may be terminated,
notwithstanding approval thereof by the shareholders of KHI, the shareholders of
O'Gara or by O'Gara as the sole shareholder of NEWCO, at any time prior to the
Effective Time (i) if consummation of the Merger has not occurred on or prior to
January 31, 1998; (ii) by agreement of each of the parties to this Agreement;
(iii) by the Board of Directors of O'Gara if any of the conditions precedent set
forth in Article VI or VII of this Agreement have not been satisfied on or
before the Closing; or (iv) by the Board of Directors of KHI if any of the
conditions precedent of Article VI or VIII of this Agreement have not been
satisfied on or before the Closing.
ARTICLE XIII
MUTUAL COVENANTS
13.01 Satisfaction of Conditions. From and after the date hereof, each of
the parties hereto shall use their commercially reasonable best efforts
(individually or jointly, as the case may be) to cause all conditions precedent
set forth in Articles VI, VII and VIII of this Agreement to be satisfied and
fulfilled at the earliest practicable date, to the extent the satisfaction or
fulfillment thereof is its responsibility hereunder or within its reasonable
control. If any event should occur, either within or without the control of any
party hereto, which would prevent fulfillment of the conditions precedent to the
obligations of any party to consummate the transactions contemplated by this
Agreement, all parties shall use their respective commercially reasonable best
efforts to cure or remove the effect of the event as expeditiously as possible.
13.02 Further Assurances. After the Closing, each of the parties shall,
from time to time upon any other party's request, execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered, all such further
assignments, documents, instruments, transfers, conveyances, discharges,
releases, assurances and consents, and shall take or cause to be taken such
further actions, as such other party may reasonably request to further evidence
or carry out the transactions contemplated by, and the purposes of, this
Agreement.
ARTICLE XIV
INDEMNIFICATION
14.01 Pre-closing Indemnification by KHI and the KHI Principal
Shareholder. Prior to the Effective Time, KHI and the KHI Principal Shareholder
shall jointly and severally indemnify and hold O'Gara and NEWCO harmless from
any and all losses, costs, expenses (including reasonable attorneys' fees) and
liabilities arising from any (i) breach of any representation or warranty of KHI
or the KHI Principal Shareholder set forth in this
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Agreement, (ii) breach or nonfulfillment of any covenant, agreement or
obligation of KHI or the KHI Principal Shareholder in this Agreement, (iii)
misrepresentation in the KHI Disclosure Schedule or any certificate furnished by
KHI or the KHI Principal Shareholder to O'Gara or NEWCO at the Closing under
this Agreement, and (iv) omission from the KHI Disclosure Schedule or any
certificate furnished by KHI or the KHI Principal Shareholder to O'Gara or NEWCO
at the Closing under this Agreement of a fact required to be stated therein or
necessary to make the information set forth therein, in light of the
circumstances under which they are made, not misleading.
14.02 Pre-closing Indemnification by O'GARA. Prior to the Effective Time,
O'Gara shall indemnify and hold KHI and the KHI Shareholder harmless from any
and all losses, costs, expenses (including reasonable attorneys' fees) and
liabilities arising from any (i) breach of any representation or warranty of
O'Gara or NEWCO set forth in this Agreement, (ii) breach or nonfulfillment of
any covenant, agreement or obligation of O'Gara or NEWCO in this Agreement,
(iii) misrepresentation in the O'Gara Disclosure Schedule or any certificate
furnished by O'Gara or NEWCO to KHI or the KHI Principal Shareholder at the
Closing under this Agreement, and (iv) omission from the O'Gara Disclosure
Statement or any certificate furnished by O'Gara or NEWCO to KHI or the KHI
Principal Shareholder at the Closing under this Agreement of a fact required to
be stated therein or necessary to make the information set forth therein, in
light of the circumstances under which they are made, not misleading.
14.03 Post-closing Indemnification by the KHI Principal Shareholder. The
parties acknowledge and agree that (i) O'Gara is entitled to rely upon, and
shall rely upon, facts and statements regarding KHI Matters (as hereinafter
defined) set forth in (or omitted from) the Registration Statement and the Joint
Proxy Statement, (ii) such facts and statements shall be deemed to be
representations and warranties made to O'Gara by the Principal Shareholder in
order to induce O'Gara to consummate the Merger, and (iii) the indemnification
in this Section 14.03 is made to provide a contract remedy to O'Gara for factual
misrepresentations or omissions notwithstanding the expiration of the
representations and warranties contained in Article III hereof at the Effective
Time. Accordingly, after the Effective Time, the KHI Principal Shareholder shall
indemnify and hold O'Gara and KHI harmless from any and all damages, losses and
liabilities arising from:
(a) any part of the Registration Statement, when such part became
effective, containing an untrue statement of a material fact regarding any
KHI Matters or omitting to state a material fact regarding any KHI Matters
required to be stated therein or necessary to make the statements regarding
KHI Matters therein not misleading;
(b) written or oral communications by representatives of KHI or any
Subsidiaries of KHI (the "KHI Representatives") to any Person that was a
holder of KHI Capital Stock and will hold (or have the right to receive
pursuant to the Merger) O'Gara Common Stock immediately after the Effective
Time, which communications include an untrue statement of a material fact
regarding any KHI Matters or omit to state a material fact necessary in
order to make the statements regarding any KHI Matters, in light of the
circumstances under which they were made, not misleading if the KHI
Principal Shareholder is unable to sustain the burden of proof that the KHI
Representatives did not know, and in the exercise of reasonable care could
not have known, of such untruth or omission; or
(c) the Joint Proxy Statement including an untrue statement of a
material fact regarding any KHI Matters or omitting to state a material
fact necessary in order to make the statements regarding any KHI Matters,
in light of the circumstances under which they were made, not misleading if
the KHI Principal Shareholder is unable to sustain the burden of proof that
the KHI Representative did not know, and in the exercise of reasonable care
could not have known, of such untruth or omission;
provided, that (x) all facts and statements regarding KHI Matters set forth in
the Registration Statement and the Joint Proxy Statement shall have been
approved in advance by KHI or its counsel, or such facts and statements
regarding KHI Matters shall have been provided to KHI and its counsel at least
two (2) days prior to the date of mailing the Joint Proxy Statement to the
shareholders and neither KHI nor its counsel shall have objected in writing
thereto, and (y) the Registration Statement and Joint Proxy Statement contains
all facts and statements regarding KHI Matters reasonably requested to be
included therein by KHI or its counsel. No claim for indemnification shall be
maintained pursuant to this Section 14.03 unless brought within one (1) year
after the
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discovery of such claim, or after discovery of such claim should have been made
by the exercise of reasonable diligence. In no event shall any claim be brought
under this Section 14.03 more than three (3) years after the Effective Time. For
purposes of this Section 14.03, the term "KHI Matters" shall mean KHI, any
Subsidiary of KHI, any owner, officer, director or employee of KHI or any of its
Subsidiaries, the business, operations, properties, assets, prospects, financial
condition, results of operations and liabilities of KHI or any of its
Subsidiaries and any information required by the Act or the Exchange Act to be
included in the Registration Statement or the Joint Proxy Statement concerning
or relating to any of the foregoing.
14.04 Survival. The representations and warranties of KHI and the KHI
Principal Shareholder contained in Article III and the representations and
warranties of O'Gara and NEWCO contained in Article IV shall survive until the
Effective Time, at which time all such representations shall expire and be of no
further force and effect, and no claim based upon the breach of any such
representation or warranty shall survive the Effective Time, regardless of
whether asserted prior to the Effective Time. Claims based upon a breach of the
representations and warranties contained in Articles III and IV may be brought
and maintained at any time prior to the Effective Time, shall be indemnified as
provided in Sections 14.01 and 14.02 and shall survive the termination of this
Agreement. As between and among the parties to this Agreement, the directors and
officers of O'Gara, NEWCO and KHI (other than the KHI Principal Shareholder)
shall have no personal liability for any misrepresentation, warranty or breach
of this Agreement, caused either by action or inaction.
14.05 Survives Termination. The indemnification obligations of the parties
under this Article XIV shall survive the termination of this Agreement for any
reason.
ARTICLE XV
FEES AND EXPENSES
Whether or not the Merger is consummated, each party hereto shall bear its
own expenses in connection with this Agreement and the transactions contemplated
hereby.
ARTICLE XVI
NOTICES
All notices, consents, waivers or other communications between the parties
hereto shall be in writing and shall be deemed given or delivered on the date
actually received by personal delivery, facsimile, overnight courier, ordinary
mail or other such means, or five (5) days after being mailed by United States
certified or registered mail, return receipt requested, with postage prepaid, in
each case addressed as follows:
(a) If to KHI:
Kroll Holdings, Inc.
900 Third Avenue
New York, New York 10027
Attention: General Counsel
Fax: 212-750-6194
Phone: 212-833-3221
with a copy to:
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Thomas E. Constance, Esq.
Fax: 212-715-8000
Phone: 212-715-9236
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(b) If to O'Gara or NEWCO:
The O'Gara Company
9113 LeSaint Drive
Fairfield, Ohio 45014
Attention: Wilfred T. O'Gara
Fax: 513-874-1262
Phone: 513-881-5440
with copies to:
The O'Gara Company
9113 LeSaint Drive
Fairfield, Ohio 45014
Attention: Abram S. Gordon, Esq.
Fax: 513-874-1262
Phone: 513-881-5481
and
Taft, Stettinius & Hollister
1800 Star Bank Center
Cincinnati, Ohio 45202
Attention: Thomas D. Heekin, Esq.
Fax: 513-381-0205
Phone: 513-381-2838
(c) If to Kroll:
Kroll Holdings, Inc.
900 Third Avenue
New York, New York 10022
Attention: Jules Kroll
Fax: 212-750-6194
Phone: 212-833-3221
with a copy to:
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
Attention: Thomas E. Constance, Esq.
Fax: 212-715-8000
Phone: 212-715-9236
or to such other addresses, and to the attention of such other Persons, as any
party hereto may specify in a notice given pursuant to this Article XVI.
ARTICLE XVII
PUBLIC ANNOUNCEMENT
All parties shall consult with each other before issuing any press releases
or otherwise making any public statements with respect to this Agreement or the
Merger and shall not issue any such press release or make any such public
statement prior to such consultation.
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ARTICLE XVIII
GOVERNING LAW
Except for the application of the Delaware Law to the Merger, this
Agreement shall be construed in accordance with the laws of the State of New
York, applicable to agreements made and to be performed therein.
ARTICLE XIX
CAPTIONS; COUNTERPARTS
The captions in this Agreement are for convenience purposes only and shall
not be considered a part of or affect the construction or interpretation of any
provision of this Agreement. This Agreement may be executed in counterparts by
the parties and any such counterpart shall be deemed an original hereof.
ARTICLE XX
ENTIRE AGREEMENT
This Agreement is binding upon and is for the benefit of the parties hereto
and their respective successors, legal representatives and assigns. This
Agreement supersedes any other agreement, whether written or oral, that may have
been made or entered into by O'Gara, NEWCO, KHI or the KHI Principal Shareholder
or by any officer or officers of such parties relating to the Merger. This
Agreement constitutes the entire agreement of the parties with respect to the
subject matter hereof, and there are no agreements or commitments with respect
thereto except as set forth herein.
ARTICLE XXI
WAIVER; MODIFICATION; ASSIGNMENT
No delay on the part of any party hereto in the exercise of any right,
power or remedy arising hereunder shall operate as a waiver thereof. No waiver
shall be effective unless in writing and signed by the party granting the
waiver. This Agreement may be amended by agreement of the Boards of Directors of
the parties hereto at any time prior to the filing of the Certificate of Merger
with respect to the Merger except as otherwise provided under applicable law. No
amendment or modification of this Agreement shall be effective unless in writing
and signed by all parties hereto. No assignment of this Agreement or any rights
or obligations hereunder shall be effective without the prior written consent of
all parties hereto.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly exercised as of the date and year first above written.
ATTEST:
/s/ DAVID L. DICK
- ---------------------------------------------------
Assistant Secretary
ATTEST:
/s/ ABRAM S. GORDON
- ---------------------------------------------------
Secretary
ATTEST:
/s/ ABRAM S. GORDON
- ---------------------------------------------------
Secretary
KROLL HOLDINGS, INC.
By: /s/ JULES KROLL
--------------------------------------------------
Jules Kroll, Chairman
THE O'GARA COMPANY
By: /s/ THOMAS M. O'GARA
--------------------------------------------------
Thomas M. O'Gara, Chairman
VDE, INC.
By: /s/ WILFRED T. O'GARA
--------------------------------------------------
Wilfred T. O'Gara
President
/s/ JULES KROLL
- ---------------------------------------------------
Jules Kroll
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EXHIBIT 7.02
FORM OF OPINION OF COUNSEL TO
KHI AND THE KHI PRINCIPAL SHAREHOLDER
1. KHI is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and has all requisite corporate
power and authority to carry on its business as now being conducted. KHI is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the nature of its properties or the conduct of its
business makes such qualification necessary, except where the failure to be so
qualified would not reasonably be expected to have a Material Adverse Effect on
KHI.
2. The execution, delivery and performance by KHI of the Merger Agreement
and the consummation by KHI of the Merger and the other transactions
contemplated by the Merger Agreement are within the corporate power and
authority of KHI and have been duly authorized by all necessary corporate action
of KHI. The Merger Agreement has been duly authorized, executed and delivered by
each of KHI and the KHI Principal Shareholder and constitutes the valid and
binding obligation of KHI and the KHI Principal Shareholder, enforceable against
each of them, as applicable, in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or transfer, or similar laws affecting the
rights of creditors generally, subject to general principles of public policy,
limited by the unavailability of remedies of specific performance or injunctive
relief without appropriate judicial process, and subject to general principles
of equity, regardless of whether such enforceability is considered in a
proceeding in equity or at law.
3. Other than as set forth in Schedule 3.17 of the KHI Disclosure Schedule,
the execution, delivery and performance by KHI and the KHI Principal Shareholder
of the Merger Agreement and the consummation by KHI of the Merger and by KHI and
the KHI Principal Shareholder of the other transactions contemplated by the
Merger Agreement do not, to our knowledge, require any consent, approval or
action by or in respect of, or any declaration, filing or registration by KHI or
any of its Subsidiaries with, a governmental or regulatory authority of the
United States, other than (i) a routine filing with the Secretary of State of
the State of Delaware necessary to consummate the Merger, (ii) the filing of the
Registration Statement and the Joint Proxy Statement with the Commission, and
(iii) such filings or notifications which would not prevent or delay
consummation of any of the transactions contemplated by the Merger Agreement in
any material respect, or otherwise prevent KHI or the KHI Principal Shareholder
from performing their respective obligations under the Merger Agreement in any
material respect.
4. The execution, delivery and performance by KHI and the KHI Principal
Shareholder of the Merger Agreement, and the consummation by KHI of the Merger
and by KHI and the KHI Principal Shareholder of the other transactions
contemplated by the Merger Agreement, do not contravene or conflict with or
constitute a violation of the Certificate of Incorporation or By-Laws of KHI or
any of its Subsidiaries or any judgment, injunction, order or decree of any
United States court or government regulatory authority of which we have
knowledge to which KHI or any of its Subsidiaries is a party or by which it or
any of its assets are bound, which contravention, conflict or violation would
reasonably be expected to have a Material Adverse Effect on KHI.
5. The authorized capital stock of KHI consists of 46,200 Class A shares of
common stock, $.01 par value per share ("KHI Class A Stock"), of which 23,100
shares are issued and outstanding as of the date hereof, and 153,800 shares of
common stock, $.01 par value per share ("KHI Common Stock"), of which 76,624
shares are issued and outstanding as of the date hereof. All issued and
outstanding shares of KHI Capital Stock are duly authorized, validly issued,
fully paid and nonassessable, and have not been issued in violation of any
preemptive rights of any shareholder of KHI or any other Person provided by
statute or the Certificate of Incorporation of KHI. Except for options to
purchase an aggregate of 8,821 shares of KHI Common Stock or as set forth in
Schedule 3.04 of the KHI Disclosure Schedule, there are no outstanding (i)
shares of KHI Capital Stock or other voting securities of KHI, (ii) securities
of KHI convertible into or exchangeable for shares of KHI Capital Stock or other
voting securities of KHI, (iii) options, warrants, exchange rights, subscription
rights or other agreements, commitments or rights to purchase or otherwise
acquire KHI Capital Stock or other voting securities from KHI, or (iv)
agreements, commitments or obligations of KHI to issue, sell, redeem, repurchase
or otherwise acquire, any KHI Capital Stock or securities convertible into or
exchangeable for KHI Capital Stock or other voting securities of KHI.
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EXHIBIT 8.02
FORM OF OPINION OF COUNSEL
TO O'GARA AND NEWCO
1. O'Gara is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Ohio and has all requisite corporate
power and authority to carry on its business as now being conducted, and is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the nature of its properties or the conduct of its
business makes such qualification necessary, except where the failure to be so
qualified would not be reasonably expected to have a Material Adverse Effect on
O'Gara.
2. NEWCO is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Delaware and has all requisite corporate
power and authority to carry on its business as now being conducted, and is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction where the nature of its properties or the conduct of its
business makes such qualification necessary.
3. The execution, delivery and performance by each of O'Gara and NEWCO of
the Merger Agreement and the consummation by each of O'Gara and NEWCO of the
Merger and the other transactions contemplated by the Merger Agreement are
within each of O'Gara and NEWCO's corporate power and authority and have been
duly authorized by all necessary corporate action of each of O'Gara and NEWCO.
The Merger Agreement has been duly authorized, executed and delivered by each of
O'Gara and NEWCO and constitutes the valid and binding obligation of each of
O'Gara and NEWCO, enforceable against each of them in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or transfer, or similar laws
affecting the rights of creditors generally, subject to general principles of
public policy, limited by the unavailability of remedies of specific performance
or injunctive relief without appropriate judicial process, and subject to
general principles of equity, regardless of whether such enforceability is
considered in a proceeding in equity or at law. [O'Gara's counsel is not
licensed to practice in New York and an appropriate qualification will be added
to the opinion.]
4. Other than as set forth in Schedule 4.17 of the O'Gara Disclosure
Schedule, the execution, delivery and performance by each of O'Gara and NEWCO of
the Merger Agreement and the consummation by each of O'Gara and NEWCO of the
Merger and the other transactions contemplated by the Merger Agreement do not,
to our knowledge, require any consent, approval or action by or in respect of,
or any declaration, filing or registration with, any governmental or regulatory
authority of the United States other than (i) a routine filing with the
Secretary of the State of Delaware necessary to consummate the Merger, (ii)
compliance with the applicable requirements of the Securities Act, the Exchange
Act and any applicable state securities laws in connection with the offering,
sale and delivery of the shares of O'Gara Common Stock to be issued in the
Merger and filings with the NASD and the NASDAQ National Market in connection
with listing the shares of O'Gara Common Stock to be issued in the Merger on the
Nasdaq National Market, and (iii) such filings or notifications which would not
prevent or delay consummation of any of the transactions contemplated by the
Merger Agreement in any material respect, or otherwise prevent O'Gara or NEWCO
from performing their respective obligations under the Merger Agreement in any
material respect.
5. The execution, delivery and performance by each of O'Gara and NEWCO of
the Merger Agreement and the consummation by each of O'Gara and NEWCO of the
Merger and the other transactions contemplated by the Merger Agreement do not
contravene or conflict with the Articles of Incorporation or Regulations of
O'Gara or the Certificate of Incorporation or By-laws of NEWCO or any judgment,
injunction, order or decree of any United States court or government regulatory
authority of which we have knowledge to which O'Gara or any of its Subsidiaries
is a party or by which it or any of its assets are bound, or which violation,
contravention or conflict would reasonably be expected to have a Material
Adverse Effect on O'Gara.
6. Immediately prior to the Effective Time, the authorized capital stock of
O'Gara consists of (i) 25,000,000 shares of common stock, $.01 par value per
share ("O'Gara Common Stock"), of which 7,279,310 shares are issued and
outstanding as of the date hereof, and 100,000 shares of preferred stock, $.01
par value per share, none of which is issued and outstanding as of the date
hereof. All such issued and outstanding shares of O'Gara Common Stock are duly
authorized, validly issued, fully paid and nonassessable, and have not been
issued in
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violation of any preemptive right of any shareholder of O'Gara or any other
Person provided by statute or the Articles of Incorporation of O'Gara. Except as
set forth in the SEC Filings or Schedule 4.04 of the O'Gara Disclosure Schedule,
to our knowledge, there are no outstanding (i) securities of O'Gara convertible
into or exchangeable for shares of capital stock or voting securities of O'Gara
or (ii) options, warrants, exchange rights, subscription rights or other
agreements, commitments or rights to purchase or otherwise acquire from O'Gara,
or (iii) agreements, commitments or obligations of O'Gara to issue, sell,
redeem, repurchase or otherwise acquire any capital stock or securities
convertible into or exchangeable for capital stock of O'Gara.
7. Immediately prior to the Effective Time, the authorized capital stock of
NEWCO consists of (i) 100 shares of common stock, $.01 par value per share
("NEWCO Common Stock"), all of which are issued and outstanding and owned by
O'Gara as of the date hereof. All such issued and outstanding shares of NEWCO
Common Stock are duly authorized, validly issued, fully paid and nonassessable,
and have not been issued in violation of any preemptive rights of any
shareholder of NEWCO or any other Person provided by statute or the Certificate
of Incorporation of NEWCO. To our knowledge, there are no outstanding (i)
securities of NEWCO convertible into or exchangeable for shares of capital stock
or voting securities of NEWCO, (ii) options, warrants, exchange rights,
subscription rights or other agreements, commitments or rights to purchase or
otherwise acquire from NEWCO, or (iii) agreements, commitments or obligations of
NEWCO to issue, sell, redeem, repurchase or otherwise acquire any capital stock
or securities convertible into or exchangeable for capital stock of NEWCO.
8. The shares of O'Gara Common Stock to be issued and exchanged for shares
of KHI Capital Stock in the Merger pursuant to the Merger Agreement will, at the
Effective Time, be duly authorized and, upon issuance of such shares at and
after the Effective Time pursuant to and in compliance with the provisions of
Article II of the Merger Agreement, will be validly issued, fully paid and
nonassessable and will not be subject to preemptive rights. The shares of O'Gara
Common Stock issuable pursuant to Section 2.01 of the Merger Agreement have been
duly listed for trading on the NASDAQ National Market.
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APPENDIX B
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
THE O'GARA COMPANY
FIRST. The name of the corporation is THE KROLL-O'GARA COMPANY (the
"Corporation").
SECOND. The place in the State of Ohio where the Corporation's principal
office is to be located is the City of Fairfield in Butler County, Ohio.
THIRD. The purpose for which the Corporation is organized shall be to
engage in any lawful act or activity for which corporations may be formed under
the Ohio General Corporation Law, Ohio Revised Code sec.sec.1701.01 et seq.
FOURTH. The aggregate number of shares of stock which the Corporation
shall have authority to issue is Fifty-One Million (51,000,000) shares, which
shall be divided into two classes, consisting of:
(a) Fifty Million (50,000,000) shares of common stock ("Common Stock")
with a par value of $.01 per share.
(b) One Million (1,000,000) shares of preferred stock ("Preferred
Stock") with a par value of $.01 per share.
PART ONE: COMMON STOCK
The shares of Common Stock may be issued at any time or from time to time
for such amount of lawful consideration as may be fixed by the Board of
Directors. Each holder of Common Stock shall be entitled to one (1) vote for
each share of Common Stock held by such holder.
PART TWO: PREFERRED STOCK
Clause 1. Except as otherwise provided by this Article Fourth or by the
amendment or amendments adopted by the Board of Directors providing for the
issue of any series of Preferred Stock, the Preferred Stock may be issued at any
time or from time to time in any amount, not exceeding in the aggregate,
including all shares of any and all series thereof theretofore issued, the One
Million (1,000,000) shares of Preferred Stock hereinabove authorized, as
Preferred Stock of one or more series, as hereinafter provided, and for such
lawful consideration as shall be fixed from time to time by the Board of
Directors.
Clause 2. Authority is hereby expressly granted to the Board of Directors
from time to time to adopt amendments to these Articles of Incorporation
providing for the issue in one or more series of any unissued or treasury shares
of the Preferred Stock, and providing, to the fullest extent now or hereafter
permitted by the laws of the State of Ohio and notwithstanding the provisions of
any other Article of these Articles of Incorporation of the Corporation, in
respect of the matters set forth in the following subdivisions (i) to (ix),
inclusive, as well as any other rights or matters pertaining to such series:
(i) The designation and number of shares of such series;
(ii) Voting rights (to the fullest extent now or hereafter permitted
by the laws of the State of Ohio);
(iii) The dividend rate or rates of such series (which may be a
variable rate and which may be cumulative);
(iv) The dividend payment date or dates of such series;
(v) Redemption rights (to the fullest extent now or hereafter
permitted by the laws of the State of Ohio), including the price or prices
at which shares of such series may be redeemed;
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(vi) The amount of the sinking fund, if any, to be applied to the
purchase or redemption of shares of such series and the manner of its
application;
(vii) The liquidation price or prices of such series;
(viii) Whether or not the shares of such series shall be made
convertible into, or exchangeable for, shares of any other class or classes
or of any other series of the same class of stock of the Corporation or any
other property, and if made so convertible or exchangeable, the conversion
price or prices, or the rates of exchange at which such conversion or
exchange may be made and the adjustments thereto, if any; and,
(ix) Whether or not the issue of any additional shares of such series
or any future series in addition to such series shall be subject to any
restrictions and, if so, the nature of such restrictions.
Any of the voting rights, dividend rate or rates, dividend payment date or
dates, redemption rights and price or prices, sinking fund requirements,
liquidation price or prices, conversion or exchange rights and restrictions on
issuance of shares of any such series of Preferred Stock may, to the fullest
extent now or hereafter permitted by the laws of the State of Ohio, be made
dependent upon facts ascertainable outside these Articles of Incorporation or
outside the amendment or amendments providing for the issue of such Preferred
Stock adopted by the Board of Directors pursuant to authority expressly vested
in it by this Article Fourth. If the then-applicable laws of the State of Ohio
do not permit the Board of Directors to fix, by the amendment creating a series
of Preferred Stock, the voting rights of shares of such series, each holder of a
share of such series of Preferred Stock shall, except as may be otherwise
provided by law, be entitled to one (1) vote for each share of Preferred Stock
of such series held by such holder.
Clause 3. Before any dividends shall be declared or paid upon or set apart
for, or distribution made on, the Common Stock and before any sum shall be paid
or set apart for the purchase or redemption of Preferred Stock of any series or
for the purchase of the Common Stock, the holders of Preferred Stock of each
series shall be entitled to receive accrued dividends declared by the Board of
Directors, payable at the rate or rates fixed for such series in accordance with
the provisions of this Article Fourth, and no more, from the dividend payment
date thereof, or preceding dividend payment date or dates fixed from time to
time by the Board of Directors.
Clause 4. If upon any dissolution, liquidation or winding up of the
Corporation or reduction of its capital stock, the assets so to be distributed
among the holders of the Preferred Stock pursuant to the provisions of this
Article Fourth or of the amendment or amendments providing for the issue of such
Preferred Stock adopted by the Board of Directors pursuant to authority
expressly vested in it by this Article Fourth shall be insufficient to permit
the payment to such holders of the full preferential amounts aforesaid, then the
entire assets of the Corporation shall be distributed ratably among the holders
of the Preferred Stock in proportion to the full preferential amounts to which
they are respectively entitled as aforesaid.
Clause 5. The term "accrued dividends", whenever used herein with respect
to the Preferred Stock of any series, shall be deemed to mean that amount which
would have been paid as dividends declared on the Preferred Stock of such series
to date had full dividends been paid thereon at the rate fixed for such series
in accordance with the provisions of this Article Fourth, less in each case the
amount of all dividends declared paid upon the shares of such series.
FIFTH. The Corporation shall have the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation or any
provision that may be added or inserted in these Articles of Incorporation,
provided that:
(a) Such amendment, alteration, change, repeal, addition or insertion
is consistent with law and is accomplished in the manner now or hereafter
prescribed by statute or these Articles; and
(b) Any provision of these Articles of Incorporation which requires,
or the change of which requires, the vote or consent of all or a specific
number or percentage of the holders of shares of any class or series shall
not be amended, altered, changed or repealed by any lesser amount, number
or percentage of votes or consents of such class or series. Any rights at
any time conferred upon the shareholders of the Corporation are granted
subject to the provisions of this Article.
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SIXTH. Subject to the provisions of Article Fifth hereof, the affirmative
vote of shareholders entitled to exercise a majority of the voting power of the
Corporation shall be required to amend these Articles of Incorporation, approve
mergers and to take any other action which by law must be approved by a
specified percentage of the voting power of the Corporation or of all
outstanding shares entitled to vote.
SEVENTH. No holder of any shares of the Corporation shall have any
preemptive rights to subscribe for or to purchase any shares of the Corporation
of any class, whether such shares or such class be now or hereafter authorized,
or to purchase or subscribe for any security convertible into, or exchangeable
for, shares of any class or to which shall be attached or appertained any
warrants or rights entitling the holder thereof to purchase or subscribe for
shares of any class.
EIGHTH. Subject to the provisions of Article Fourth hereof, the
Corporation, through its Board of Directors, shall have the right and power to
purchase any of its outstanding shares at such price and upon such terms as may
be agreed upon between the Corporation and any selling shareholder.
NINTH. No shareholder shall have the right to vote cumulatively in the
election of directors.
TENTH. These Amended and Restated Articles of Incorporation shall take the
place of and supersede the existing Amended and Restated Articles of
Incorporation.
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APPENDIX C
LOGO
September 12, 1997
The Board of Directors
The O'Gara Company
9113 Le Saint Drive
Fairfield, Ohio 45014
Gentlemen:
We understand that The O'Gara Company (the "Company") and Kroll Holdings,
Inc. ("Kroll") have entered into a Plan and Agreement to Merge dated as of
August 8, 1997 (the "Agreement") pursuant to which a wholly owned subsidiary of
the Company will be merged with and into Kroll (the "Merger") as a result of
which Kroll will become a wholly owned subsidiary of the Company. Pursuant to
the Agreement, all shares of Class A Common Stock and Common Stock of Kroll,
including shares subject to outstanding warrants, options or other stock
issuance agreements, will be converted into an aggregate 6,650,000 shares of
Common Stock of the Company (the "Consideration").
You have requested our opinion as to whether the Consideration to be paid
by the Company, as set forth in the Agreement, is fair to the Company, from a
financial point of view.
SBC Warburg Dillon Read Inc. ("Dillon Read"), as part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Dillon Read has performed and continues to perform investment banking services
for the Company. For such services, Dillon Read has received customary fees. In
addition, in the ordinary course of business, we have traded securities of the
Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
In arriving at our opinion, we have, among other things: (i) reviewed the
Agreement and the exhibits thereto, (ii) reviewed certain publicly available
business and financial information relating to the Company; (iii) reviewed the
reported price and trading activity for the Common Stock of the Company; (iv)
reviewed certain internal financial information and other data provided to us by
each of the Company and Kroll relating to the business and prospects of the
Company and Kroll, respectively, including financial projections prepared by the
management of the Company and Kroll, respectively, and the Consolidated
Financial Statements for the Year Ended December 31, 1996 and other audited
financial statements for Kroll, (v) conducted discussions with members of the
senior management of the Company and Kroll, (vi) reviewed the financial terms,
to the extent publicly available, of certain acquisition transactions which we
believed to be generally comparable to the Merger; (vii) reviewed publicly
available financial and securities market data pertaining to certain publicly
held companies in lines of business which we believed to be generally comparable
to Kroll; and (viii) conducted such other financial studies, analyses and
investigations, an considered such other information as we deemed necessary and
appropriate.
In connection with our review, with your consent, we have not assumed any
responsibility for independent verification of any of the foregoing information
and have relied upon its being complete and accurate in all material respects.
We have not been requested to and have not made an independent evaluation or
appraisal of any assets or liabilities (contingent or otherwise) of Kroll, nor
have we been furnished with any such evaluation or appraisal. Further, we have
assumed, with your consent, that all of the information, including the
projections, provided to us by management of the Company and Kroll was prepared
in good faith and was reasonably
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LOGO
September 12, 1997
The Board of Directors
The O'Gara Company
September 12, 1997
Page Two
prepared on a basis reflecting the best currently available estimates and
judgments of the management of the Company and Kroll as to the future financial
performance of Kroll, and was based upon the historical performance of Kroll and
certain estimates and assumptions which were reasonable at the time made. With
your consent, we have assumed that the Merger will be treated as a pooling of
interests. In addition, our opinion is based on economic, monetary and market
conditions existing and that could be evaluated on the date hereof.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Consideration to be paid by the Company in connection with
the Merger is fair to the Company from a financial point of view.
Very truly yours,
SBC WARBURG DILLION READ INC.
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APPENDIX D
SEC. 1701.84. DISSENTS IN CASE OF A MERGER, CONSOLIDATION, COMBINATION, OR
MAJORITY SHARE ACQUISITION.
The following are entitled to relief as dissenting shareholders under
section 1701.85 of the Revised Code:
(A) Shareholders of a domestic corporation that is being merged or
consolidated into a surviving or new entity, domestic or foreign, pursuant
to section 1701.78, 1701.781, 1701.79, 1701.791, or 1701.801 of the Revised
Code;
(B) In the case of a merger into a domestic corporation, shareholders
of the surviving corporation who under section 1701.78 or 1701.781 of the
Revised Code are entitled to vote on the adoption of an agreement of
merger, but only as to the shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation that is being merged into the domestic or foreign
parent corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the
shares so entitling them to vote;
(E) Shareholders of a domestic subsidiary corporation into which one
or more domestic or foreign corporations are being merged pursuant to
section 1701.801 of the Revised Code.
SEC. 1701.85. PROCEDURE IN CASE OF DISSENTS.
(A) (1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 of the Revised Code shall be a record holder
of the shares of the corporation as to which he seeks relief as of the date on
which the agreement of merger was adopted by the directors of that corporation.
Within twenty days after he has been sent the notice provided in section 1701.80
or 1701.801 of the Revised Code, the dissenting shareholder shall deliver to the
corporation a written demand for payment with the same information as that
provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the address
specified in his demand, a request for the certificates representing the shares
as to which he seeks relief, the dissenting shareholder, within fifteen days
from the date of the sending of such request, shall deliver to the corporation
the certificates requested so that the corporation may forthwith endorse on them
a legend to the effect that demand for the fair cash value of such shares has
been made. The corporation promptly shall return such endorsed certificates to
the dissenting shareholder. A dissenting shareholder's failure to deliver such
certificates terminates his rights as a dissenting
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shareholder, at the option of the corporation, exercised by written notice sent
to the dissenting shareholder within twenty days after the lapse of the
fifteen-day period, unless a court for good cause shown otherwise directs. If
shares represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the record
holder of uncertificated securities, the corporation shall make an appropriate
notation of the demand for payment in its shareholder records. If uncertificated
shares for which payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend required for
certificated securities as provided in this paragraph. A transferee of the
shares so endorsed, or of uncertificated securities where such notation has been
made, acquires only such rights in the corporation as the original dissenting
holder of such shares had immediately after the service of a demand for payment
of the fair cash value of the shares. A request under this paragraph by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a compliant in the court of common pleas of the
county in which the principal office of the corporation that issued the shares
is located or was located when the proposal was adopted by the shareholders of
the corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders,
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceedings, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for hearing on the complaint or any adjournment of it, the court shall determine
from the complaint and from such evidence as is submitted by either party
whether the dissenting shareholder is entitled to be paid the fair cash value of
any shares and, if so, the number and class of such shares. If the court finds
that the dissenting shareholder is so entitled, the court may appoint one or
more persons as appraisers to receive evidence and to recommend a decision on
the amount of the fair cash value. The appraisers have such power and authority
as is specified in the order of their appointment. The court thereupon shall
make a finding as to the fair cash value of a share and shall render judgment
against the corporation for the payment of it, with interest at such rate and
from such date as the court considers equitable. The costs of the proceeding,
including reasonable compensation to the appraisers to be fixed by the court,
shall be assessed or apportioned as the court considers equitable. The
proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505. of the
Revised Code. If, during the pendency of any proceeding instituted under this
section, a suit or proceeding is or has been instituted to enjoin or otherwise
to prevent the carrying out of the action as to which the shareholder has
dissented, the proceeding instituted under this section shall be stayed until
the final determination of the other suit or proceeding. Unless any provision in
division (D) of this section is applicable, the fair cash value of the shares
that is agreed upon by the parties or as fixed under this section shall be paid
within thirty days after the date of final determination of such value under
this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken, and,
in the case of a merger pursuant to section 1701.80 or 1701.801 of the Revised
Code, fair cash value as to shareholders of a constituent subsidiary corporation
shall be determined as of the day before the adoption of
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the agreement of merger by the directors of the particular subsidiary
corporation. The fair cash value of a share for the purposes of this section is
the amount that a willing seller who is under no compulsion to sell would be
willing to accept and that a willing buyer who is under no compulsion to
purchase would be willing to pay, but in no event shall the fair cash value of a
share exceed the amount specified in the demand of the particular shareholder.
In computing such fair cash value, any appreciation or depreciation in market
value resulting from the proposal submitted to the directors or to the
shareholders shall be excluded.
(D) (1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind
their adoption of the action involved;
(c) The dissenting shareholder withdraws his demand, with the consent
of the corporation by its directors;
(d) The corporation and the dissenting shareholder have not come to an
agreement as to the fair cash value per share, and neither the shareholder
nor the corporation has filed or joined in a complaint under division (B)
of this section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend, distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
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APPENDIX E
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section the word "stockholder" means a holder of record of stock in a stock
corporation and also a member of record of a nonstock corporation; the words
"stock" and "share" mean and include what is ordinarily meant by those words and
also membership or membership interest of a member of a nonstock corporation;
and the words "depository receipt" mean a receipt or other instrument issued by
a depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251, sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the
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procedures of this section, including those set forth in subsections (d) and (e)
of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall also notify such stockholders of
the effective date of the merger or consolidation. Any stockholder entitled
to appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the effective
date of the merger or consolidation notifying each of the holders of any
class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be
sent to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice
that such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10 days prior to the date the notice is given, provided, that if the notice
is given on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the notice
is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and
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to accept the terms offered upon the merger of consolidation. Within 120 days
after the effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving the merger
or resulting from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trail upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
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<PAGE> 245
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
299, L. '96, eff. 2-1-96 and Ch. 349, L. '96, eff. 7-1-96.)
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LOGO
LOGO
November 7, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
The O'Gara Company ("O'Gara") at 9:00 a.m., local time, on November 21, 1997, at
The Omni Netherland Plaza Hotel, Fifth and Race Streets, Cincinnati, Ohio.
At the Special Meeting, you will be asked to consider and vote upon a
proposal (the "Merger Proposal") to approve a merger of VDE, Inc., a wholly
owned subsidiary of O'Gara, into Kroll Holdings, Inc. ("Kroll") (the "Merger").
In the proposed merger, Kroll would become a wholly owned subsidiary of O'Gara
and holders of Kroll Class A common stock and Kroll common stock would receive
(and options to purchase Kroll common stock would be converted into options to
purchase) an aggregate of 6,650,000 shares of O'Gara common stock. Based on the
number of shares of Kroll common stock and the number of options to purchase
Kroll common stock outstanding as of the date hereof, if the merger had been
consummated on the date of this letter, holders of Kroll Class A common stock or
Kroll common stock would have been entitled to receive 62.52 shares of O'Gara
common stock for each share of Kroll Class A common stock or Kroll common stock
held by them.
The Merger Proposal also provides for the change of O'Gara's corporate name
from "The O'Gara Company" to "The Kroll-O'Gara Company" and the election of four
additional members to the O'Gara Board of Directors, as more fully described in
the accompanying Proxy Statement/Prospectus.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER AGREEMENT, WHICH WAS
APPROVED UNANIMOUSLY BY THE BOARD, IS IN THE BEST INTEREST OF THE SHAREHOLDERS
OF O'GARA AND RECOMMENDS THAT YOU VOTE FOR THE MERGER PROPOSAL. THE O'GARA BOARD
OF DIRECTORS HAS RECEIVED THE OPINION (THE "DILLON READ OPINION") OF SBC WARBURG
DILLON READ INC. ("DILLON READ"), AN ADVISOR TO O'GARA, THAT THE CONSIDERATION
TO BE PAID BY O'GARA IN THE MERGER IS FAIR TO O'GARA FROM A FINANCIAL POINT OF
VIEW. A COPY OF THE DILLON READ OPINION IS INCLUDED IN THE PROXY
STATEMENT/PROSPECTUS AS APPENDIX C THERETO.
Consistent with the engagement letter between O'Gara and Dillon Read, the
Dillon Read Opinion does not address the fairness of the Merger to the
shareholders of O'Gara, nor does it constitute a recommendation regarding
whether or not it is advisable for such shareholders to vote in favor of the
Merger. The O'Gara Board of Directors recognizes that conflicts of interest
might be deemed to exist between certain members of the Board and executive
officers of O'Gara and the O'Gara Shareholders and, as more fully described in
the Proxy Statement/Prospectus, the Merger will have a pro forma dilutive impact
upon book value and earnings per share. However, after consideration of these
points, and for the reasons discussed in the Proxy Statement/Prospectus, the
O'Gara Board of Directors believes that the interests of the O'Gara Shareholders
are aligned with those of O'Gara. Accordingly, the O'Gara Board of Directors did
not request that the Dillon Read Opinion address the fairness of the Merger to
the O'Gara shareholders individually.
At the Special Meeting, O'Gara shareholders also will be asked to (i)
approve amendments to the O'Gara 1996 Stock Option Plan (the "Option Plan") to
increase the maximum number of shares available for issuance under the Option
Plan from 400,000 to 836,000 and to increase the maximum number of shares which
may be subject to options issued under the Option Plan to any one person in any
twelve-month period from 50,000 to 125,000 and (ii) approve a proposal to amend
and restate O'Gara's existing Amended and Restated Articles of Incorporation to
increase the number of shares of O'Gara's Preferred Stock, par value $0.01 per
share, and the
<PAGE> 247
number of shares of O'Gara's Common Stock, par value $0.01 per share, which
O'Gara is authorized to issue to 1,000,000 and 50,000,000, respectively.
Approval of the Merger Proposal and the amendment and restatement of
O'Gara's Amended and Restated Articles of Incorporation, requires the
affirmative vote of the holders of a majority of the outstanding shares of
O'Gara common stock. Approval of the amendments to the Option Plan requires the
affirmative vote of a majority of the shares of O'Gara common stock present at
the Special Meeting. Your Chairman has agreed to vote all of his shares of
O'Gara common stock, constituting approximately 55.5% of those outstanding, in
favor of the Merger Proposal.
The enclosed Proxy Statement/Prospectus provides a detailed description of
the matters to be considered at the Special Meeting and extensive information
concerning O'Gara and Kroll. Please carefully review and consider all of this
information.
ALL HOLDERS OF O'GARA COMMON STOCK ARE INVITED TO ATTEND THE SPECIAL
MEETING IN PERSON. WHETHER OR NOT YOU ARE ABLE TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE.
THIS ACTION WILL NOT LIMIT YOUR RIGHT TO VOTE IN PERSON AT THE SPECIAL MEETING
IF YOU WISH TO DO SO.
On behalf of the Board of Directors,
LOGO
Thomas M. O'Gara
Chairman
<PAGE> 248
LOGO
LOGO
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 21, 1997
To the Shareholders of
The O'Gara Company:
Notice is hereby given that a Special Meeting of Shareholders of The O'Gara
Company, an Ohio corporation ("O'Gara"), will be held on November 21, 1997,
beginning at 9:00 a.m., local time, at The Omni Netherland Plaza Hotel, Fifth
and Race Streets, Cincinnati, Ohio, for the following purposes:
1. To consider and vote upon a proposal to (a)(i) approve and adopt a
Plan and Agreement to Merge, dated as of August 8, 1997, among O'Gara, VDE,
Inc., Kroll Holdings, Inc. ("Kroll") and Jules B. Kroll, providing for the
merger of VDE, Inc. into Kroll and (ii) amend and restate the Amended and
Restated Articles of Incorporation of O'Gara to change the name of O'Gara
to "The Kroll-O'Gara Company" and (b) increase the number of directors of
O'Gara to eleven and elect Jules B. Kroll, Howard I. Smith, Michael G.
Cherkasky and Marshall S. Cogan as directors of O'Gara;
2. To consider and act upon proposed amendments to the 1996 O'Gara
Stock Option Plan (the "Option Plan") to increase the number of shares of
O'Gara Common Stock issuable upon exercise of stock options under the
Option Plan from 400,000 to 836,000 and to increase the maximum number of
shares of O'Gara Common Stock which may be subject to options issued under
the Option Plan to any one person in any twelve-month period from 50,000 to
125,000;
3. To consider and act upon a proposal to amend and restate the
existing Amended and Restated Articles of Incorporation of O'Gara to
increase the number of shares of O'Gara's Preferred Stock, $0.01 par value
per share, and the number of shares of O'Gara's Common Stock, $0.01 par
value per share, which O'Gara is authorized to issue to 1,000,000 and
50,000,000, respectively; and
4. To transact any other business as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on October 15, 1997, are
entitled to notice of and to vote at the meeting or any adjournment thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE MARK, SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE
PAID ENVELOPE. YOU MAY REVOKE SUCH PROXY AT ANY TIME PRIOR TO ITS EXERCISE IN
THE MANNER PROVIDED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
By Order of the Board of Directors
LOGO
Thomas M. O'Gara
Chairman
November 7, 1997
