<PAGE> 1
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- - THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- -- THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number 000-21629
THE O'GARA COMPANY
(Exact name of registrant as specified in its charter)
Ohio 31-1470817
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
9113 LeSaint Drive
Fairfield, Ohio 45014
(513) 874-2112
(Address, including zip code, and telephone number,
including area code of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
The number of shares of common stock outstanding on May 7, 1997 was 7,279,310
==============================================================================
<PAGE> 2
INDEX
PART I
FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) as of March 31, 1997
and December 31, 1996......................................1
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 1997 and 1996.................3
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 1997 and 1996.................4
Notes to Consolidated Unaudited Financial Statements...........5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................9
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.............................................13
Item 2. Changes in Securities.........................................13
Item 6. Exhibits and Reports on Form 8-K..............................14
Signatures..................................................................15
Exhibit 10.1 ...............................................................16
Exhibit 11..................................................................17
</TABLE>
<PAGE> 3
THE O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,916 $ 1,454
Trade accounts receivable, net of allowance for
doubtful accounts of $443 and $211 at March 31,
1997 and December 31, 1996, respectively 14,087 7,736
Other receivables
Advances to shareholders 108 249
Affiliates 477 250
Advances to vendors 922 664
Costs and estimated earnings in excess of
billings on uncompleted contracts 17,550 15,327
Inventories 14,998 8,734
Prepaid expenses 1,312 678
------- -------
Total current assets 54,370 35,092
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land 1,261 901
Buildings and improvements 5,514 3,772
Furniture and fixtures 2,286 1,744
Machinery and equipment 4,127 2,797
------- -------
13,188 9,214
Less: accumulated depreciation (4,571) (4,289)
------- -------
8,617 4,925
------- -------
Costs in excess of assets acquired, net of accumulated
amortization of $105 and $11 at March 31,
1997 and December 31, 1996, respectively 13,082 1,004
Other assets 5,956 2,917
------- -------
19,038 3,921
------- -------
$82,025 $43,938
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
1
<PAGE> 4
THE O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
CURRENT LIABILTIES:
Revolving lines of credit $11,600 $ 9,936
Current portion of long-term debt 4,476 1,836
Accounts payable
Trade 15,568 11,087
Affiliates 256 533
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,521 1,330
Accrued liabilities 7,776 3,972
Customer deposits 2,395 2,119
------- -------
Total current liabilities 43,592 30,813
LONG-TERM DEBT, net of current portion 18,504 469
MINORITY INTEREST 32 -
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 100,000 shares
authorized, none issued - -
Common stock, $.01 par value, 25,000,000
shares authorized, 7,279,310, and 6,659,846 shares
issued and outstanding in 1997 and 1996, respectively 73 67
Additional paid-in-capital 23,726 17,592
Retained deficit (3,731) (4,958)
Cumulative foreign currency translation adjustment (171) (45)
------- -------
Total shareholders' equity 19,897 12,656
------- -------
$82,025 $43,938
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
2
<PAGE> 5
THE O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1996
----------- ------------
<S> <C> <C>
NET SALES $ 23,817 $ 21,417
COST OF SALES 17,313 16,062
---------- ----------
Gross profit 6,504 5,355
OPERATING EXPENSES:
Selling and marketing 1,868 996
General and administrative 2,270 1,220
---------- ----------
Operating income 2,366 3,139
OTHER INCOME (EXPENSE):
Interest expense (519) (249)
Other, net 36 (54)
---------- ----------
Income before minority interest
and provision for income taxes 1,883 2,836
Minority interest 3 -
---------- ----------
Income before provision for income taxes 1,880 2,836
Provision for income taxes 653 -
---------- ----------
Net income $ 1,227 $ 2,836
========== ==========
Earnings per share $ 0.18
==========
Weighted average shares outstanding 7,005,261
==========
UNAUDITED PRO FORMA INFORMATION:
Gross profit $ 5,355
Selling and marketing expenses 996
General and administrative expenses 1,255
----------
Operating income 3,104
Interest expense (171)
Other, net (54)
----------
Income before provision for
income taxes 2,879
Provision for income taxes 1,152
----------
Net income $ 1,727
==========
Earnings per share $ 0.28
==========
Weighted average shares outstanding 6,173,728
==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 6
THE O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,227 $ 2,836
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization 440 246
Decrease (increase) in receivables 392 (344)
Decrease (increase) in advances to vendors (258) 2,498
Increase in costs and estimated earnings in excess
of billings on uncompleted contracts (1,491) (6,362)
Increase in inventories (2,077) (4,112)
Increase in prepaid expenses (566) (1,457)
Increase in other assets (588) (1,848)
Increase (decrease) in accounts payable (2,458) 4,257
Increase (decrease) in billings in excess of costs an
estimated earnings on uncompleted contracts 191 (1,706)
Increase (decrease) in accrued liabilties (1,020) 1,134
Increase in customer deposits 276 2,133
-------- --------
Net cash used in operating activities (5,932) (2,725)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (321) (363)
Purchase of Labbe, net of cash acquired (7,229) 0
Purchase of ITI, net of cash acquired (477) 0
Investment in shareholder and affiliate notes 0 233
-------- --------
Net cash used in investing activities (8,027) (130)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving lines of credit 1,664 3,274
Proceeds from long-term debt 15,883 0
Payments of long-term debt 0 (45)
Distribution to shareholders 0 (230)
Foreign currency translation (126) 0
-------- --------
Net cash provided by financing activities 17,421 2,999
-------- --------
NET INCREASE IN CASH 3,462 144
-------- --------
CASH, beginning of period 1,454 324
-------- --------
CASH, end of period $ 4,916 $ 468
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $172,000 $160,000
======== ========
Cash paid for taxes $608,000 $106,000
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 7
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
O'Gara Security Associates and Palmer Associates divisions and its
International Training, Inc. ("ITI") subsidiary.
On November 15, 1996, the Company completed an initial public offering
of 2,048,000 shares of common stock at $9 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 month
period ended March 31, 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
5
<PAGE> 8
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.
(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 $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 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 $14,230,000 consisting of
$10.7 million in cash, financed through funds advanced under
the term loan portion of the new credit agreement, and
376,597 shares of the Company's common stock. 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 and will be amortized over 30 years.
(c) ITI Acquisition-On March 24, 1997, the Company acquired all
of the shares of ITI for $2,540,000, consisting of $0.5
million in cash, financed through the new credit agreement,
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.
6
<PAGE> 9
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.
(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):
7
<PAGE> 10
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------------- ---------------
(unaudited)
<S> <C> <C>
Raw materials. . . . . . . . . . . . $5,914 $4,782
Vehicle costs and work-in-process . . 9,084 3,952
-------- -------
$14,998 $8,734
======== =======
</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>
THREE MONTHS ENDED
MARCH 31, 1996
-----------------------
<S> <C>
Amortization on intangible assets resulting
from the purchase of Palmer Associates, S.C. . . . $ (35)
The elimination of interest expense relating
to the retirement of bank debt. . . . . . . . . . . 78
The provision for income taxes at an effective rate
of 40% as if OHE had been a C Corporation and as if
the Company had filed a consolidated U.S. Federal
tax return . . . . . . . . . . . . . . . . . . . . . (1,152)
--------
Total. . . . . . . . . . . . . . . . . . . . . . . . $ (1,109)
========
</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.
(9) SUPPLEMENTAL CASH FLOW DISCLOSURE
Non-cash activity (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<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 -
</TABLE>
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The O'Gara 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. 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, Next Destination Limited
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 O'Gara Security Associates and Palmer Associates divisions
and its International Training, Inc. subsidiary.
The Company's net sales of commercial armoring products for the three
months ended March 31, 1997 were $11.3 million, an increase of $4.4 million or
64%, compared to $6.9 million for the three months ended March 31, 1996.
Overall, the Company's net sales in the first quarter of 1997 increased to
$23.8 million, compared to $21.4 million for the first quarter of 1996, an
increase of 11%. The increase in revenue, both in commercial armoring and
overall, was due primarily to the inclusion of operating results from
acquisitions made by the Company in the first quarter of 1997 ( the
"Acquisitions"), along with continued growth in the Company'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 Company made the following acquisitions in the first
quarter of 1997 and the results of the acquired entities are included from the
dates of their respective acquisitions:
1) On February 5, 1997, the Company completed the acquisition of all
of the shares of Next Destination of Salisbury, UK, a distributor of
high technology products for the global positioning satellite and
satellite communication markets. Next Destination was the primary
source for the increase in net revenue reported by the Security
Systems Integration Group in 1997 compared to 1996.
2) On February 12, 1997, the Company completed the acquisition of all
of the shares of Labbe, a leading armorer of commercial and private
vehicles headquartered in Lamballe, France. The acquisition of Labbe
had a substantial positive effect on the level of reported commercial
revenue generated by the Security Hardware Products Group.
3) On March 24, 1997, the Company completed the acquisition of all of
the shares of ITI, a provider of advanced security training
headquartered near Washington, D.C. ITI will report revenue through
the Company's Security Services Group.
9
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Security hardware products:
Military 39.7% 60.8%
Commercial 47.3 32.1
Security systems integration 11.7 7.1
Security services 1.3 -
------- -------
Total net sales 100.0% 100.0%
Cost of sales 72.7 75.0
------- -------
Gross profit 27.3 25.0
Operating expenses:
Selling and marketing 7.8 4.7
General and administrative 9.5 5.7
------- -------
Operating income 9.9 14.7
Other income (expense):
Interest expense (2.2) (1.2)
Other, net 0.1 (0.3)
------- -------
Income before minority
interest and provision
for income taxes 7.9 13.2
Minority interest - -
------- -------
Income before provision for
income taxes 7.9 13.2
Provision for income taxes 2.7 -
------- -------
Net income 5.2% 13.2%
======= =======
</TABLE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Net Sales. Net sales for the Security Hardware Products Group for the
three months ended March 31, 1997 were $20.7 million, an increase of $0.8
million or 4.1%, from $19.9 million in the same period in 1996. This increase
includes net sales of commercial armoring products, which increased $4.4
million or 64.1% from $6.9 million in 1996 to $11.3 million in 1997, and net
sales of military armoring products, which decreased $3.6 million or 27.6% from
$13.0 million in 1996 to $9.4 million in 1997. The 1996 net sales of military
products were favorably affected by a request by the U.S. Government to
accelerate the armoring of High Mobility Multi-Purpose Wheeled Vehicles
("HMMWVs") and the manufacture of HMMWV armor kits. HMMWV armoring by the
Company returned to a non-accelerated level in 1997. Net sales for the Security
Integration Group increased $1.3 million in the three months ended March 31,
1997, or 83.7%, from $1.5 million in the same period in 1996, to $2.8 million.
Net sales in the first quarter of 1997 for the Security Services Group were
$0.3 million. There were no net sales for the Security Services Group in the
first quarter of 1996.
Cost of Sales. Cost of sales for the three months ended March 31, 1997
increased $1.2 million or 7.8% to $17.3 million from $16.1 million in the same
period in 1996. The increase in cost of sales was due to increased activity
resulting from the Acquisitions. Gross profit as a percentage of net sales was
27.3% for the first quarter of 1997 as compared to 25.0% in the first quarter
of 1996. As contracts are completed
10
<PAGE> 13
under percentage of completion accounting, actual cost and gross profit may be
revised from previously estimated amounts as a result of the Company's
performance in completing the requirements of each contract. Gross profit was
favorably effected in the first quarter of 1997 by adjustments resulting from
contracts completed.
The Company 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 percent reached in the first
quarter of 1997.
Operating expenses. Operating expenses for the three months ended March
31, 1997 increased $1.9 million or 86.7% to $4.1 million, compared to $2.2
million in the same period in 1996. The dollar increase was primarily
attributable to an increased level of overhead expenses included in the
Company's operations resulting from the Acquisitions. Additionally, the Company
experienced an increase, from 10.3% in the first quarter of 1996 to 17.4% in
the first quarter of 1997, in the percentage of operating expenses compared to
net sales. This increase was primarily attributable to the full effect of
expenses incurred by start-up operations that were not in place in the first
quarter of 1996 along with increases in corporate overhead.
Interest expense. Interest expense for the three months ended March 31,
1997 increased $0.3 million or 108.4% to $0.5 million, compared to $0.2 million
in the same period in 1996. This increase was a result of the financing to fund
the Acquisitions. The Company expects interest expense will be significantly
higher in 1997 compared to 1996.
Income before provision for income taxes. Income before provision for
income taxes for the three months ended March 31, 1997 decreased to $1.9
million, a change of 33.7%, compared to $2.8 million for same period in 1996.
As previously noted, the Company's 1996 results were positively affected by a
U.S. Government request to accelerate the armoring of HMMWVs and the purchase
of HMMWV kits. The Company was able to administer the requested production
schedule without a corresponding increase in its overhead expenses. This
resulted in a higher level of profitability in the first quarter of 1996
compared to the same period in 1997. Additionally, with the increase in
revenues in the first quarter of 1997 primarily attributable to commercial
customers, the operations put in place by the Company necessary to attain that
revenue growth required a more overhead intensive structure, including
requirements for personnel and facilities, than experienced in 1996. While
total operating expenses will show an increase in 1997 in comparison with 1996,
the Company currently expects to experience a reduction in the percentage of
operating expense to net revenue in 1997 compared with 1996, as a result of an
increased level of business activity.
Provision for income taxes. The provision for income taxes was $0.7
million for the three months ended March 31, 1997. There was no provision for
income taxes recorded for the period ending March 31, 1996 due to the Company's
S Corporation status which was terminated on October 28, 1996 in conjunction
with the Reorganization.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company historically has met its operating cash needs by
utilizing borrowings under its credit arrangements to supplement cash provided
by net income and depreciation and amortization.
Credit Facility. On February 11, 1997, the Company entered into a new
credit agreement with The Fifth Third Bank of Cincinnati, Ohio, and LaSalle
National Bank of Chicago, Illinois (the "Banks"). The facility provides for (i)
a one-year revolving line of credit of $12,000,000, (ii) a five-year term loan
in the amount of $16,000,000, the principal of which is payable to the Banks in
twenty quarterly installments beginning July 1,
11
<PAGE> 14
1997, and (iii) a $5,500,000 letter of credit facility. Both loans bear
interest at the prime rate plus a percentage of up to 1.25% over the prime
rate, or, at the Company's option, the LIBOR Rate plus a percentage ranging
from 2.25% to 3.5%. The applicable percentage for any period is based on the
Company's cash flow coverage and leverage ratio as defined in the agreement.
The agreement provides the Banks with a security interest in the Company's
assets. The agreement also imposes, among other covenants, a prohibition on
cash dividends and distributions, limitations on foreign investment and capital
expenditures, requirements on the Company's financial performance and limits on
additional funded debt. Bank approval of all acquisitions is also required.
On May 7, 1997, there was $16.0 million outstanding on the term loan, and
$11.6 million outstanding on the revolving credit agreement associated with the
credit facility. The Company believes that borrowings from the credit facility
along with cash provided by net income and depreciation and amortization will
be sufficient to fund the Company's cash requirements through 1997, without
taking into consideration significant expansion of operations or additional
acquisitions, both of which would require additional working capital. The
Company continues to review strategic opportunities and other sources of
working capital.
Cash flows from operating activities. Net cash used in operating
activities was $5.9 million and $2.7 million for the three months ended March
31, 1997 and 1996, respectively. This change was primarily due to a decrease in
the level of outstanding accounts payable from the end of the year. The
additional borrowing capacity gained as part of the new credit agreement
allowed the Company to reduce the amount of outstanding payables during the
first quarter of 1997. Additionally, there were continued increases in
inventory levels and costs and estimated earnings in excess of billings on
uncompleted contracts due to the increase in business activity.
Capital expenditures. Historically, the Company has limited its capital
expenditure requirements by leasing certain facilities and equipment. Capital
expenditures totaled $0.3 million for the three months ended March 31, 1997,
and $0.4 million for the same period in 1996. The credit facility currently in
place contains a requirement that the Company not exceed $1.5 million in
capital expenditures in 1997, exclusive of assets associated with acquisitions.
In addition to capital expenditures, the Company used $7.7 million in
net cash in connection with the acquisitions of Labbe and ITI in the first
quarter of 1997.
Cash flows from financing activities. Net cash provided by financing
activities was $17.4 million and $3.0 million for the three months ended March
31, 1997 and 1996, respectively. The increase in 1997 was due primarily to the
term loan executed as part of the credit agreement completed in the first
quarter of 1997, the substantial portion of which was used to fund the
acquisitions of Labbe and ITI.
Foreign operations. The Company 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.
Quarterly fluctuations. The Company's operations are not seasonal, but may
fluctuate on a quarterly basis as a result of the timing of contract costs. The
incurrence of contract costs and related production scheduling must be
responsive to specific customer delivery requirements which may involve the
acceleration of deliveries under a contract at a customer's request, such as
occurred with the HMMWV contract in 1996. The Company's liquidity may be
affected by the payment terms of its Department of Defense and certain foreign
government contracts.
12
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain of the services offered by the Company's Security Services Group
are similar to activities carried on by O'Gara Protective Services, Inc.
("OPS"), in which certain shareholders of the Company have approximately a 47%
interest, but which is controlled by Edward F. O'Gara III, the brother of
Thomas M. O'Gara and Wilfred T. O'Gara, the Company's Chairman of the Board and
Chief Executive Officer, respectively. On October 9, 1996, OPS and Edward F.
O'Gara III filed a complaint against the Company, O'Gara-Hess & Eisenhardt
Armoring Company ("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 alleges: that Thomas M.
O'Gara and OHE agreed not to compete with OPS and that the Company's plan to
enter the security services market constitutes a breach of the agreement; that
Thomas M. O'Gara breached unspecified fiduciary duties which he owed to OPS by
virtue of his status as a director and significant shareholder of OPS; and that
the Company's plan to enter the security services market constitutes a
violation of the Lanham Act, which prohibits false advertising and use of an
established corporate name in such a manner as to confuse consumers, as well as
unfair competition in violation of the Ohio Deceptive Trade Practices Act and
common law. The plaintiffs are seeking a preliminary and permanent injunction
prohibiting OHE and Thomas M. O'Gara from using the name O'Gara "in connection
with the provision of security services, or from otherwise competing with OPS
in the market for security services" and an award to OPS of any profits earned
by OHE in connection with the provision of such services, as well as costs,
punitive damages and attorneys' fees. The Company denies the assertions made by
OPS in the complaint. The Company believes it has strong defenses to this
action and will continue to contest the matter vigorously.
Other than as set forth above, the Company is not involved in any
litigation or legal proceedings at this time and is not aware of any material
litigation or proceeding threatened against it.
ITEM 2. CHANGES IN SECURITIES
On February 5, 1997, the Company issued 170,234 shares of its common stock
to three shareholders of Next Destination in connection with the acquisition of
all of Next Destination's common stock.
On February 12, 1997, the Company issued 376,597 shares of its common
stock to Alian S.A.R.L., one of the shareholders of Labbe, in connection with
the acquisition of all of Labbe's common stock.
On March 24, 1997, the Company issued 68,086 shares of its common stock to
the four shareholders of ITI in connection with the acquisition of all of ITI's
common stock.
On March 24, 1997, the Company issued 4,547 shares of its common stock to
certain officers of the Company in connection with the annual bonus program.
All of the share issuances described above were made without registration
under the Securities Act of 1933 in reliance on the exemption provided by
Section 4(2) of that Act.
13
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Second Lease Amendment dated March 31, 1997 between OLG Limited
and O'Gara-Hess & Eisenhardt Armoring Company.
11 Computation of Earnings Per Common Share and Pro Forma Earnings
Per Common Share
27 Financial Data Schedule (Edgar version only)
(b) Reports on Form 8-K.
During the quarter ended March 31, 1997, the Company filed the
following current reports on Form 8-K:
-Date of Report: January 23, 1997; Items 5 and 7(c), reporting a
definitive agreement to acquire Labbe S.A.
-Date of Report: February 5, 1997; Items 5 and 7(c), reporting
the completion of the acquisition of Next Destination, Limited.
-Date of Report: February 12, 1997; Items 2 and 7(c), reporting
the completion of the acquisition of Labbe S.A. This report
subsequently was amended, on April 30, 1997, to file the
consolidated financial statements of Labbe S.A. as of and for
the years ended December 31, 1995 and 1996 and pro forma
financial information for the Company, as required by Items
7(a) and (b).
-Date of Report: March 31, 1997; Item 5, reporting the award of
a contract to Up-Armor HMMWVs for the U.S Military.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 15th day of May, 1997.
THE O'GARA COMPANY
By /s/ NICHOLAS P. CARPINELLO
---------------------------
Nicholas P. Carpinello
Executive Vice President, and
Chief Financial Officer
15
<PAGE> 1
EXHIBIT 10.1
SECOND LEASE AMENDMENT
This Lease Amendment ("Amendment") is made and entered into as of the
31st day of March, 1997, by and between OLG, Limited, an Ohio limited liability
company ("Owner"), and O'Gara-Hess & Eisenhardt Armoring Company, a Delaware
corporation ("Tenant").
W I T N E S S E T H
WHEREAS, Owner and Tenant as parties to a certain Lease, dated as of
March 12, 1997, as amended by an Amendment to Lease, dated August 20, 1997 (the
Lease as amended by the Amendment to Lease, the "Lease"), relating to certain
property located at 4175 Mulhauser Road, Fairfield, Ohio 45014 ("Property");
and
WHEREAS, the initial term of this Lease expires on March 31, 1997, and
Tenant desires to exercise its option to extend the term of the Lease;
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. The term of the Lease is hereby extended through 11:59 p.m. on July
31, 1997. The base rental rate for the period from April 1, 1997, through July
31, 1997, shall be $21,000.00 per month, payable on the first day of each month
commencing on April 1, 1997.
2. Upon the sale of the Property by Owner, Tenant shall have the
option of terminating this Lease upon five (5) days notice to Owner.
3. All of the terms of the Lease not amended hereby shall remain in
full force and effect.
The undersigned have executed this Amendment as of the date first
above written.
OLG, Limited
By: /s/ NICHOLAS P. CARPINELLO
---------------------------------
Nicholas P. Carpinello, Manager
O'Gara-Hess & Eisenhardt Armoring Company
By: /s/ ABRAM S. GORDON
---------------------------------
Abram S. Gordon, Vice President
16
<PAGE> 1
EXHIBIT 11
THE O'GARA COMPANY
COMPUTATION OF EARNINGS PER COMMON SHARE AND
PRO FORMA EARNINGS PER COMMON SHARE
For the Three Months Ended March 31, 1997 and 1996
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Weighted Average
Number of Common Earnings per
Shares Outstanding Net Income Common Share
------------------ ---------- ------------
<S> <C> <C> <C>
Three Months Ended March 31, 1997:
Shares outstanding December 31, 1996 6,659,846 $ - $ -
Weighted average shares issued in conjunction
with the acquisitions (614,917 shares issued) 310,936 - -
Weighted average shares resulting from stock
issued compensation 404
Dilutive stock options outstanding 34,075 - -
Net income - 1,227 -
---------- --------- ------------
7,005,261 $ 1,227 $ 0.18
========== ========= ============
Weighted Average Pro Forma
Number of Common Pro Forma Earnings per
Shares Outstanding Net Income Common Share
------------------ ---------- ------------
Three Months Ended March 31, 1996:
Shares outstanding December 31, 1995 4,490,383 $ - $ -
Dilutive stock options outstanding prior
to exercise 121,463 - -
Newly issued shares necessary to fund payment
of certain indebtedness and AAA distributions
(1,809,015 shares at $7.29 per share estimated
net proceeds to fund $13,181,658) 1,561,882 - -
Pro forma net income - 1,727 -
---------- --------- ------------
6,173,728 $ 1,727 $ 0.28
========== ========= ============
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED STATEMENTS OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR
THE PERIOD ENDING MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,916
<SECURITIES> 0
<RECEIVABLES> 32,665
<ALLOWANCES> 443
<INVENTORY> 14,998
<CURRENT-ASSETS> 54,370
<PP&E> 13,188
<DEPRECIATION> 4,571
<TOTAL-ASSETS> 82,025
<CURRENT-LIABILITIES> 43,592
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 19,824
<TOTAL-LIABILITY-AND-EQUITY> 82,025
<SALES> 23,817
<TOTAL-REVENUES> 23,817
<CGS> 17,313
<TOTAL-COSTS> 17,313
<OTHER-EXPENSES> 4,138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 519
<INCOME-PRETAX> 1,880
<INCOME-TAX> 653
<INCOME-CONTINUING> 1,227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,227
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.00
</TABLE>
