<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 September 30, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number 000-21629
THE KROLL-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 November 2, 1998
was 17,752,269
===============================================================================
<PAGE> 2
THE KROLL-O'GARA COMPANY
INDEX
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets (unaudited) as of September 30, 1998
and December 31, 1997............................................................................1
Consolidated Statements of Operations (unaudited) for the Three and Nine Months
Ended September 30, 1998 and 1997................................................................3
Consolidated Statement of Shareholders' Equity (unaudited) for the Nine Months
Ended September 30, 1998.........................................................................4
Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended September 30, 1998 and 1997................................................................5
Notes to Consolidated Unaudited Financial Statements.................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................21
PART II
OTHER INFORMATION
Item 2. Changes in Securities................................................................................22
Item 4. Submission of Matters to a Vote of Security Holders..................................................22
Item 6. Exhibits and Reports on Form 8-K ....................................................................23
Signatures.........................................................................................................24
</TABLE>
<PAGE> 3
Item 1. FINANCIAL STATEMENTS
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 32,859 $ 6,899
Marketable securities -- 23
Trade accounts receivable, net of allowance for doubtful
accounts of $3,295 and $2,516 at September 30,
1998 and December 31, 1997, respectively 54,806 37,649
Unbilled revenues 7,753 3,082
Other receivables
Advances to shareholders 53 526
Affiliates 897 366
Employees 115 48
Costs and estimated earnings in excess of
billings on uncompleted contracts 21,625 12,078
Inventories 19,094 19,453
Prepaid expenses and other 5,490 6,455
Deferred tax asset 593 412
--------- ---------
Total current assets 143,285 86,991
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land 1,637 1,637
Buildings and improvements 6,367 6,223
Leasehold improvements 5,832 5,243
Furniture and fixtures 6,250 4,630
Machinery and equipment 16,910 11,290
Construction-in-progress 1,936 1,037
--------- ---------
38,932 30,060
Less: accumulated depreciation (20,543) (15,448)
--------- ---------
18,389 14,612
--------- ---------
DATABASES, net of accumulated amortization of $21,987
and $19,506 at September 30, 1998 and December 31,
1997, respectively 9,012 8,336
COSTS IN EXCESS OF ASSETS ACQUIRED, net of
accumulated amortization of $1,883 and $772 at
September 30, 1998 and December 31, 1997, respectively 39,629 17,852
OTHER ASSETS 7,947 6,180
--------- ---------
56,588 32,368
========= =========
$ 218,262 $ 133,971
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
1
<PAGE> 4
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Revolving lines of credit $ -- $ 559
Current portion of long-term debt 905 3,201
Shareholder payable 263 309
Accounts payable-
Trade 26,891 31,586
Affiliates 131 875
Billings in excess of costs and estimated
earnings on uncompleted contracts 155 320
Accrued liabilities 18,111 13,929
Income taxes currently payable 4,359 845
Customer deposits 3,949 3,840
--------- ---------
Total current liabilities 54,764 55,464
OTHER LONG-TERM LIABILITIES 2,958 1,533
DEFERRED INCOME TAXES 2,277 2,155
LONG-TERM DEBT, net of current portion 39,339 46,864
--------- ---------
Total liabilities 99,338 106,016
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 50,000,000
shares authorized, 17,751,569, and 13,590,525 shares
issued and outstanding in 1998 and 1997, respectively 178 136
Additional paid-in-capital 129,840 50,590
Retained deficit (10,827) (22,387)
Accumulated other comprehensive income (loss) (267) (384)
--------- ---------
Total shareholders' equity 118,924 27,955
--------- ---------
$ 218,262 $ 133,971
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 5
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1998 1997 1998 1997
---------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
NET SALES Security Products & Services $ 36,680 $ 26,530 $ 100,808 $ 72,970
Investigations & Intelligence 26,191 15,938 63,338 50,221
Voice & Data Communications 4,257 5,323 14,797 13,199
---------------- ------------- --------------- -------------
67,128 47,791 178,943 136,390
COST OF SALES Security Products & Services 26,603 18,654 72,457 51,434
Investigations & Intelligence 14,359 10,185 35,530 30,617
Voice & Data Communications 3,507 4,471 12,113 10,868
---------------- ------------- --------------- -------------
44,469 33,310 120,100 92,919
GROSS PROFIT Security Products & Services 10,077 7,876 28,351 21,536
Investigations & Intelligence 11,832 5,753 27,808 19,604
Voice & Data Communications 750 852 2,684 2,331
---------------- ------------- --------------- -------------
22,659 14,481 58,843 43,471
OPERATING EXPENSES
Selling and marketing 4,358 3,199 12,092 9,739
General and administrative 8,638 6,274 23,656 19,387
Amortization of costs
in excess of assets acquired 487 361 1,112 667
---------------- ------------- --------------- -------------
Operating income 9,176 4,647 21,983 13,678
OTHER INCOME (EXPENSE):
Interest expense (953) (1,274) (3,322) (3,387)
Interest income 445 98 759 259
Other, net 85 (184) (219) (226)
---------------- ------------- --------------- -------------
Income before minority interest, provision for income
taxes, and extraordinary item 8,753 3,287 19,201 10,324
Minority interest - 44 - 118
---------------- ------------- --------------- -------------
Income before provision for income taxes and
extraordinary item 8,753 3,243 19,201 10,206
Provision for income taxes 3,501 1,087 7,641 4,035
---------------- ------------- --------------- -------------
Income before extraordinary item, net 5,252 2,156 11,560 6,171
Extraordinary item, net - - - (194)
================ ============= =============== =============
Net income $ 5,252 $ 2,156 $ 11,560 $ 5,977
================ ============= =============== =============
Basic earnings per share $ 0.30 $ 0.17 $ 0.74 $ 0.46
================ ============= =============== =============
Basic weighted average shares outstanding 17,445 13,022 15,580 13,058
================ ============= =============== =============
Diluted earnings per share $ 0.30 $ 0.14 $ 0.72 $ 0.42
================ ============= =============== =============
Diluted weighted average shares outstanding 17,803 13,818 15,955 13,825
================ ============= =============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 6
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1998
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
COMPREHENSIVE COMMON PAID-IN RETAINED
SHARES INCOME STOCK CAPITAL DEFICIT
--------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 13,591 $ 136 $ 50,590 $ (22,387)
Issuance of stock in conjunction with the
acquisition of businesses 699 7 15,625 -
Public offering of common stock, net of
issuance costs of approximately $1,325 3,200 32 60,403 -
Issuance of stock bonus to certain
employees 2 - 48 -
Exercise of stock options, and related
income tax benefit 262 3 3,219 -
Purchase and retirement of treasury stock (2) - (45) -
Comprehensive income:
Net income $ 11,560 - - 11,560
---------
Other comprehensive income, net of tax:
Foreign currency translation
adjustments, net of $85 tax provision - 127 - - -
Reclassification adjustment for gain on
securities included in net income, net of
$4 tax benefit - (10) - - -
---------
Other comprehensive income - 117 - - -
=========
Comprehensive income $ 11,677 - - -
=========
=============== ============= ============= =============
BALANCE, September 30, 1998 17,752 $ 178 $129,840 $ (10,827)
=============== ============= ============= =============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
----------------- -----------
<S> <C> <C>
BALANCE, December 31, 1997 $ (384) $ 27,955
Issuance of stock in conjunction with the
acquisition of businesses - 15,632
Public offering of common stock, net of
issuance costs of approximately $1,325 - 60,435
Issuance of stock bonus to certain
employees - 48
Exercise of stock options, and related
income tax benefit - 3,222
Purchase and retirement of treasury stock - (45)
Comprehensive income:
Net income - 11,560
Other comprehensive income, net of tax:
Foreign currency translation
adjustments, net of $85 tax provision - -
Reclassification adjustment for gain on
securities included in net income, net of
$4 tax benefit - -
Other comprehensive income 117 117
Comprehensive income - -
============== ==============
BALANCE, September 30, 1998 $ (267) $118,924
============== ==============
</TABLE>
4
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
THE KROLL O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Sep 30 Sep 30
1998 1997
-----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,560 $ 5,978
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation and amortization 1,770 1,506
Amortization of databases 2,397 2,245
Amortization of costs in excess of assets acquired 1,112 667
Bad debt expense 1,180 948
(Gain) on sale of marketable securities (7) --
Minority Interest -- 44
Share in net (income) loss of joint ventures -- (149)
Change in assets and liabilities, net of effects of acquisitions-
Receivables (16,315) (6,812)
Other receivables 283 --
Unbilled revenues (4,264) (118)
Costs in excess of billings on uncompleted contracts (9,546) 794
Inventories 703 (4,035)
Prepaid expenses and other assets (366) (2,906)
Accounts payable and income taxes currently payable (2,406) (2,163)
Affiliate payable (744) --
Notes payable - shareholders (58) 107
Billings in excess of costs and estimated earnings on
uncompleted contracts (165) (199)
Customer deposits 110 (788)
Deferred income taxes payable (45) 811
Accrued liabilities 1,654 (912)
Long term liabilities 1,427 106
-------- --------
Net cash used in operating activities (11,720) (4,877)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (3,454) (3,124)
Additions to databases (3,074) (3,036)
Acquisitions, net of cash acquired (8,262) (7,606)
Sale (purchase) of marketable securities 20 (3,768)
Other -- (15)
-------- --------
Net cash used in investing activities (14,770) (17,549)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of credit (1,096) (7,626)
Proceeds from long-term debt -- 34,951
Payments of long-term debt (10,193) --
Repayment of shareholder notes -- (186)
Net proceeds from public offering of common stock 60,435 --
Proceeds from exercise of stock options
including related tax benefits 3,222 140
Purchase and retirement of common stock (45) (2,693)
Foreign currency translation 50 (529)
-------- --------
Net cash provided by financing activities 52,373 24,057
-------- --------
NET INCREASE IN CASH AND EQUIVALENTS 25,883 1,631
Effects of foreign currency exchange rates on cash 77 (64)
-------- --------
CASH AND EQUIVALENTS, beginning of period 6,899 4,761
-------- --------
CASH AND EQUIVALENTS, end of period $ 32,859 $ 6,328
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,466 $ 2,019
======== ========
Cash paid for taxes $ 1,733 $ 2,386
======== ========
</TABLE>
5
<PAGE> 8
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively the "Company"), is a leading global provider of a
broad range of specialized products and services that are designed to provide
solutions to a variety of security needs. The Company's Security Products and
Services Group markets ballistic and blast protected vehicles to businesses,
individuals and governments. It also offers security services such as training,
risk and crisis management services, and site security systems. The
Investigations and Intelligence Group offers business intelligence and
investigation services to clients worldwide. The Voice and Data Security Group
offers secure satellite communication equipment, satellite navigation systems
and computer hardware and software security.
In December 1997, a wholly owned subsidiary of The O'Gara Company
("O'Gara") was merged (the "Merger") into Kroll Holdings, Inc. ("Kroll"). At the
time of the Merger, the Company's name was changed from The O'Gara Company to
The Kroll-O'Gara Company.
Effective upon the consummation of the Merger, each then issued and
outstanding share of Kroll common stock (including those issued under the Kroll
restricted stock plan) was converted into 62.52 shares of Common Stock of the
Company or 6,098,561 shares of Company Common Stock in total. Outstanding
employee stock options were converted at the same exchange factor into options
to purchase 551,492 shares of Company Common Stock.
The Merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests. Accordingly, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows of Kroll as though it
had always been a part of the Company.
On May 5, 1998, the Company completed a public offering of 3,200,000
shares of its Common Stock at $20.50 per share (the "Offering"), resulting in
net proceeds to the Company of $60.4 million. A portion of the net proceeds was
used to pay off $14.8 million of indebtedness of the Company, with the balance
invested in short-term instruments and available for potential acquisitions,
working capital and other general corporate purposes. In addition to the shares
sold by the Company, certain shareholders sold 1,860,000 shares of Common Stock
in conjunction with the Offering. The Offering followed the Company's initial
public offering, which was completed on November 15, 1996 and resulted in the
issuance of 2,048,000 shares of Common Stock.
The consolidated financial statements include the accounts of O'Gara
and Kroll and all their majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. Investments in 20% to 50% owned
entities are accounted for on the cost method. Affiliated entities are not
included in the accompanying consolidated financial statements.
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 nine month periods ended
September 30, 1998, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. The accompanying consolidated
financial statements should be read in
6
<PAGE> 9
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, 1997.
(2) REVENUE RECOGNITION
Revenue related to contracts for security products (both government and
commercial) results principally from long-term, fixed price contracts and is
recognized using the percentage-of-completion method calculated utilizing the
cost-to-cost approach. The percent deemed to be complete is determined by
comparing the costs incurred to date with 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 from investigations, intelligence and security services is
recognized as the services are performed. The Company records either billed or
unbilled accounts receivable based on a case-by-case invoice determination.
Revenue related to voice and data security equipment are recognized as
equipment is shipped. 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 nine
months of 1998, all of which were accounted for as purchases. The allocation of
purchase price was based on estimates and may be revised at a later date pending
the completion of certain appraisals and other analyses.
(a) On March 16, 1998, the Company acquired all of the shares of
Corplex, Inc. ("Corplex"), a provider of investigative and
executive protection services based in New York, New York. The
purchase price consisted of 29,207 shares of Common Stock
(valued at approximately $0.5 million or $17.98 per share).
For accounting purposes, the acquisition was effective March
1, 1998, and the results of operations of Corplex are included
in the consolidated results of the Company from that date
forward. The former shareholder of Corplex, who was employed
by Corplex prior to the acquisition, continues in his formerly
held capacity. Cost in excess of assets acquired is expected
to be $0.4 million and will be amortized over 15 years.
(b) On June 15, 1998 the Company completed the acquisition of
Lindquist Avey MacDonald Baskerville Inc. ("Lindquist Avey"),
a provider of forensic and investigative accounting services
headquartered in Toronto, Canada. The purchase price for the
acquisition was $10.7 million consisting of $4.7 million in
cash and 278,340 shares of Common Stock (valued at
approximately $6.0 million or $21.52 per share). For
accounting purposes, the acquisition was effective June 1,
1998, and the results of operations of Lindquist Avey are
included in the consolidated results of the Company from that
date forward. Cost in excess of assets acquired is expected to
be $10.7 million and will be amortized over 25 years.
7
<PAGE> 10
(c) On September 1, 1998, The Company completed the acquisition of
all of the capital stock of Kizorek, Inc., now renamed InPhoto
Surveillance, Inc. ("InPhoto"). InPhoto, headquartered in
Naperville, Illinois, is a leading claims investigation agency
which primarily provides video surveillance services to
insurance companies, corporations and government agencies in
connection with investigating exaggerated disability claims
and other fraud. The purchase price consisted of $0.8 million
in cash and 352,381 shares of Common Stock (valued at
approximately $8.2 million or $23.35 per share). For
accounting purposes, the acquisition was effective July 1,
1998, and the results of operations of InPhoto are included in
the consolidated results of the Company from that date
forward. Cost in excess of assets is expected to be $8.1
million and will be amortized over 25 years.
(d) On September 22, 1998, the Company completed, through its
wholly owned subsidiary, O'Gara-Hess & Eisenhardt de Colombia,
Inc. ("OHE Colombia"), the acquisition of the assets and
technology of Protec S.A. ("Protec") of Bogota, Colombia.
Protec was a leading manufacturer of armored vehicles and
bullet-and smash- resistant glass for the Colombian market.
The purchase price consisted of $3.2 million in cash and
38,788 shares of Common Stock (valued at approximately $0.9
million or $22.95 per share). For accounting purposes, the
acquisition was effective September 30, 1998, and the results
of operations of OHE Colombia are included in the consolidated
results of the Company from that date forward. Cost in excess
of assets acquired is expected to be $3.6 million and will be
amortized over 20 years.
In connection with the 1998 acquisitions, assets were acquired
and liabilities were assumed as follows (dollars in thousands):
<TABLE>
<CAPTION>
Lindquist
Protec InPhoto Avey Corplex
------------- ------------- ------------- --------------
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
<S> <C> <C> <C> <C>
Cash $ -- $ 192 $ 257 $ 16
Accounts receivable -- 1,743 -- 96
Unbilled revenue -- 269 339 69
Other current assets 75 448 577 --
Property, plant and equipment 311 955 628 4
Other non-current assets -- -- 116 15
Intangible assets 200 700 -- --
Goodwill 3,602 8,076 10,716 384
-------- -------- -------- --------
$ 4,188 $ 12,383 $ 12,633 $ 584
Less: Cash paid for net assets (3,200) (800) (4,727) --
Fair value of stock issued (890) (8,228) (5,989) (525)
======== ======== ======== ========
$ 98 $ 3,355 $ 1,917 $ 59
======== ======== ======== ========
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition $ 98 $ 3,155 $ 1,917 $ 46
costs
Debt -- 200 -- 13
======== ======== ======== ========
$ 98 $ 3,355 $ 1,917 $ 59
======== ======== ======== ========
</TABLE>
(4) EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). In accordance with
SFAS No. 128, basic earnings per share are computed by
8
<PAGE> 11
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per share are computed by dividing
net income by the weighted average number of shares of common stock and
equivalents outstanding during the year. Dilutive common stock equivalents
represent shares issuable upon assumed exercise of stock options and upon
assumed issuance of restricted stock. The following is a reconciliation of the
numerator and denominator for basic and diluted earnings per share for the three
and nine months ended September 30, 1998 and 1997 (in thousands except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- ----------------- -----------
<S> <C> <C> <C>
Basic EPS $5,252 17,445 $0.30
===========
Effect of dilutive securities:
Options - 358
----------------- -----------------
Diluted EPS $5,252 17,803 $0.30
================= ================= ===========
THREE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- -------------------- -----------
Basic EPS $2,156 13,022 $0.17
Effect of dilutive securities:
Options - 225
Restricted stock (188) 571
----------------- --------------------
Diluted EPS $1,968 13,818 $0.14
================= ==================== ===========
NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------- -------------------- -----------
Basic EPS $11,560 15,580 $0.74
===========
Effect of dilutive securities:
Options - 375
-------------------- --------------------
Diluted EPS $11,560 15,955 $0.72
==================== ==================== ===========
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------- -------------------- ------------
Basic EPS $5,977 13,058 $0.46
===========
Effect of dilutive securities:
Options - 182
Restricted stock (227) 585
-------------------- --------------------
Diluted EPS $5,750 13,825 $0.42
==================== ==================== ===========
</TABLE>
Diluted earnings per share calculations for each of the quarters of
fiscal 1997 cannot be added together to arrive at the diluted earnings per share
amount for the nine months ended September 30, 1997 due to the effects of
rounding and the dilutive impact of the restricted stock to net income.
9
<PAGE> 12
(5) NEW PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
established standards for reporting and displaying comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. The Company has chosen to disclose comprehensive
income, which encompasses net income, foreign currency translation adjustments
and unrealized holding gains of marketable securities, in the Consolidated
Statement of Shareholder's Equity. Prior years have been restated to conform to
the SFAS No. 130 requirements. The Accumulated Other Comprehensive Income
balance of $0.1 million at September 30, 1998 consists entirely of foreign
currency translation adjustments.
Total comprehensive income for the nine-month period ended September
30, 1997 is as follows (in thousands):
Net income $5,977
-------------
Other comprehensive income, net of tax:
Foreign currency translation adjustments,
net of $390 tax benefit (585)
-------------
Other comprehensive income (585)
-------------
Comprehensive income $5,392
=============
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"), effective for fiscal years beginning after
December 15, 1997. This statement requires disclosure for each segment into
which a company is organized by the chief operating decision maker for the
purposes of making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure and any manner in which management disaggregates a company.
The Company intends to adopt SFAS No. 131 during fiscal 1998. This statement,
which requires expansion or modification to existing disclosures, will have no
impact on the Company's reported financial position, results of operations or
cash flows.
In April 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-5 "Reporting on the Cost of Start-Up
Activities." The SOP requires costs of start-up activities, including
preoperating costs, organization costs and other start-up costs, to be expensed
as incurred. The Company's current practice is to capitalize these expenses and
amortize them over periods ranging from one to five years. The Company is
required to adopt the provisions of this statement no later than the first
quarter of fiscal 1999. Included in the accompanying September 30, 1998
Consolidated Balance Sheet are approximately $0.7 million of preoperating,
organization and start-up costs which would have been expensed had this
statement already been implemented.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
The Company currently has several forward contracts in place in association with
demand notes from certain subsidiaries. These instruments qualify for hedge
accounting. The Company has not yet quantified the impact of adopting SFAS No.
133 on its financial statements and has not determined the timing of or method
of adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.
10
<PAGE> 13
(6) 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 in 1998. These securities are valued at current market value, which
approximates cost. Non-cash activity for the nine months ended September 30,
1998 and 1997 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Fair value of stock issued in connection with
acquisition of ITI ........................................ - $800
Notes issued in connection with acquisition
of ITI....................................................... - $1,232
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......................................... - $3,431
Fair value of stock issued in connection with
acquisition of Corplex....................................... $525 -
Fair value of stock issued in connection with
acquisition of Lindquist Avey................................ $5,989 -
Fair value of stock issued in connection with
acquisition of InPhoto....................................... $8,228 -
Fair value of stock issued in connection with
acquisition of Protec........................................ $890 -
Fair value of stock issued in connection with employee
stock bonus paid............................................. $48 -
</TABLE>
(7) INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and include the following (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials $10,728 $9,441
Vehicle costs and
work-in-process 8,366 10,012
----------------- -----------------
$19,094 $19,453
================= =================
</TABLE>
(8) DERIVATIVE FINANCIAL INSTRUMENTS
Financial instruments in the form of foreign currency exchange
contracts are utilized by the Company to hedge its exposure to movements in
foreign currency exchange rates. The Company does not hold or issue derivative
financial instruments for trading purposes. Gains and losses on foreign exchange
contracts are deferred and amortized as an adjustment to the cumulative foreign
currency translation adjustment component of equity over the terms of the
agreements in accordance with hedge accounting standards. The fair value of
foreign currency exchange contracts is not recognized in the consolidated
financial statements since they are accounted for as hedges.
11
<PAGE> 14
The Company has entered into five foreign currency exchange contracts
to effectively hedge its exposure to certain foreign currency rate fluctuations
on demand loans to subsidiaries which are denominated in the foreign currency.
By virtue of these contracts, the Company has fixed the total dollar amount
which it will receive under the aforementioned subsidiary loans through the
maturity dates of the contracts regardless of the fluctuations in the exchange
rate. The total notional amount and fair market value of the contracts, which
mature between January 1999 and September 2000, are $17.9 million and $0.5
million respectively. The Company's foreign currency translation adjustment
component of accumulated other comprehensive income (loss) was increased by $0.1
million in the first three quarters of 1998 as a result of these agreements.
12
<PAGE> 15
ITEM 2. 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 the Company's
Consolidated Financial Statements and Notes. As a result of the acquisitions
made by the Company in 1997 and 1998, financial results from period-to-period
may lack comparability. Additionally, prior to December 1, 1997, the Company
reported revenue under the categories Security Hardware Products, Security
Systems Integration and Security Services. Effective December 1, 1997, the
Company recategorized its groups as Security Products and Services,
Investigations and Intelligence and Voice and Data Security. Historical revenue
amounts have been reclassified to conform to the current categories.
GENERAL
The Kroll-O'Gara Company is a leading global provider of a broad range
of specialized products and services that are designed to provide solutions to a
variety of security needs. The Company reports its revenue through three groups.
The Security Products and Services Group markets ballistic and blast protected
vehicles to businesses, individuals, and governments. It also offers security
services such as training, risk and crisis management services, and site
security systems. The Investigations and Intelligence Group offers business
intelligence and investigation services to clients worldwide. The Voice and Data
Security Group offers secure satellite communication equipment, satellite
navigation systems, and computer hardware and software security.
On May 5, 1998, the Company completed a public offering of 3,200,000
shares of its Common Stock at $20.50 per share (the "Offering"), resulting in
net proceeds to the Company of $60.4 million. A portion of the net proceeds was
used to pay off $14.8 million of the indebtedness of the Company, with the
balance available for potential acquisitions, working capital and other general
corporate purposes. In addition to the shares sold by the Company, certain
shareholders sold 1,860,000 shares of Common Stock in conjunction with the
Offering. The Offering followed the Company's initial public offering, which was
completed on November 15, 1996 and resulted in the issuance of 2,048,000 shares
of Common Stock.
Merger. On December 1, 1997, a wholly owned subsidiary of the Company
merged (the "Merger") into Kroll Holdings, Inc ("KHI"). In the Merger, the
Company issued 6,098,561 shares of Common Stock and repaid an aggregate of $14.5
million in outstanding indebtedness of KHI. Approximately 550,000 additional
shares of Common Stock were reserved for issuance upon the exercise of options
held by KHI employees, which were assumed by the Company. Revenues of KHI
comprise all of those reported by the Company's Investigations and Intelligence
Group as well as certain revenues in its other two Groups.
Acquisitions-1997. On February 5, 1997, the Company completed the
acquisition of all of the shares of Next Destination, Ltd ("Next Destination")
of Salisbury, the United Kingdom, a distributor of high technology products for
the global positioning satellite and satellite communication markets. The
purchase price consisted of 170,234 shares of 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% notes. Next
Destination, which had been selling the portable satellite terminal offered by
the Company, reports revenue through the Company's Voice and Data Security
Group. For accounting purposes, the acquisition was effective February 1, 1997,
and the results of operations of Next Destination are included in the
consolidated results of operations of the Company from that date forward.
On February 12, 1997, the Company completed the acquisition of all of
the shares of Labbe, S.A. ("Labbe") a leading armorer of commercial and private
vehicles headquartered in Lamballe, France. The purchase price consisted of
$10.7 million in cash and 376,597 shares of Common Stock (valued at
approximately $3.5 million or $9.29 per share). The acquisition of Labbe
increased substantially the level of commercial revenue generated by the
Security Products and Services Group and enhanced the Company's competitive
position due to an expanded product line, which includes cash-in-transit
vehicles,
13
<PAGE> 16
and penetration into new markets, such as Europe and Africa. For accounting
purposes, the acquisition was effective 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.
On March 24, 1997, the Company completed the acquisition of all the
shares of International Training, Inc. ("ITI"), a provider of advanced security
training headquartered near Washington, D.C. The purchase price consisted of
$0.5 million in cash, 68,086 shares of Common Stock (valued at approximately
$0.8 million or $11.89 per share) and $1.2 million in seller-provided financing
in the form of unsecured, two-year 10% notes. ITI, which reports revenue through
the Company's Security Products and Services Group, added a number of new
services, such as evasive and defensive driver training, terrorist surveillance
training, force protection consulting and advanced weapons training, not
previously available from the Company. For accounting purposes, the acquisition
was effective March 1, 1997, and the results of operations of ITI are included
in the consolidated results of operations of the Company from that date forward.
Effective December 2, 1997, the Company acquired all of the shares of
ZAO IMEA ("IMEA"), as well as certain work in process of, and an agreement not
to compete in Russia by, Acorn Communications Group, Inc. ("Acorn"). IMEA and
Acorn had substantially common ownership prior to the acquisition. The purchase
price of $3.0 million consisted of $0.5 million in cash, 138,889 shares of
Common Stock (valued at approximately $2.4 million or $18.00 per share) and $0.1
million in cash payable over the six months commencing January 1, 1998. IMEA is
engaged in the business of selling cash-in-transit vehicles and other commercial
bank equipment, such as safes, money counters and counterfeit detectors,
throughout Russia; it reports revenue through the Company's Security Products
and Services Group. For accounting purposes, the acquisition was effective
December 1, 1997, and the results of operations of IMEA are included in the
consolidated results of operations of the Company from that date forward.
Acquisitions-1998. On March 16, 1998, the Company acquired all of the
shares of Corplex, Inc. ("Corplex"), a provider of investigative and executive
protection services based in New York, New York. The purchase price consisted of
29,207 shares of Common Stock (valued at approximately $0.5 million or $17.98
per share). Corplex, which reports revenue through the Company's Investigations
and Intelligence Group, allows the Company to streamline its use of subcontract
investigators in the New York metropolitan area and to offer certain new
products, such as executive protection and electronic counter measure expertise,
that are natural extensions of existing service areas. For accounting purposes,
the acquisition was effective March 1, 1998, and the results of operations of
Corplex are included in the consolidated results of operations of the Company
from that date forward.
On June 15, 1998, the Company acquired all of the capital stock of
Lindquist Avey MacDonald Baskerville, Inc. ("Lindquist Avey"), a provider of
forensic and investigative accounting services headquartered in Toronto, Canada.
The purchase price consisted of $4.7 million in cash and 278,340 shares of
Common Stock (valued at approximately $6.0 million or $21.52 per share). The
acquisition of Lindquist Avey expands the Company's forensic and investigative
accounting service product line and establishes the Company in a new geographic
market. For accounting purposes, the acquisition was effective June 1, 1998, and
the results of operations of Lindquist Avey are included in the consolidated
results of operations of the Company from that date forward.
On September 1, 1998, the Company acquired all of the capital stock of
Kizorek, Inc. of Naperville, Illinois, now renamed InPhoto Surveillance, Inc.
("InPhoto"). The purchase price consisted of $0.8 million in cash and 352,381
shares of Common Stock (valued at approximately $8.2 million or $23.35 per
share). InPhoto is a leading claims investigation agency, primarily providing
video surveillance services to insurance companies, corporations, and government
agencies in connection with investigating exaggerated disability claims and
other fraud. It reports revenue through the Investigations and Intelligence
Group. For accounting purposes, the acquisition was effective July 1, 1998, and
the results of
14
<PAGE> 17
operations of InPhoto are included in the consolidated results of operations of
the Company from that date forward.
On September 22, 1998, a wholly owned subsidiary of the Company,
O'Gara-Hess & Eisenhardt de Colombia ("OHE Colombia"), acquired all of the
assets of Protec S.A. of Bogota, Colombia. Protec S.A. was engaged in the
business of armoring cars and manufacturing bullet- and smash-resistant glass
for the Colombian market. The purchase price consisted of approximately $3.2
million in cash and 38,788 shares of Common Stock (valued at approximately $0.9
million or $22.95 per share). OHE Colombia will report revenue through the
Security Products and Services Group. For accounting purposes, the acquisition
was effective September 30, 1998, and the results of operations of OHE Colombia
will be included in the results of operations of the Company from that date
forward.
Potential Acquisitions/Mergers. On October 22, 1998, the Company
announced it had executed a definitive purchase agreement to acquire all of the
shares of Laboratory Specialists of America, Inc. ("Laboratory Specialists").
Laboratory Specialists owns and operates an independent drug testing laboratory
in New Orleans, Louisiana which provides drug-testing services to corporate and
institutional clients seeking to deter the use of illegal drugs. The purchase
price for the transaction, which is expected to qualify for "pooling of
interests" accounting treatment, will total approximately $29.0 million and will
be payable in Common Stock (approximately 1.4 million shares).
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 For the Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Security Products and Services:
Military 26.3% 22.1% 24.7% 21.8%
Commercial 28.4 33.5 31.6 31.7
Intelligence and Investigations 39.0 33.3 35.4 36.8
Voice and Data Communications 6.3 11.1 8.3 9.7
------------ ------------ ------------ ------------
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 66.2 69.7 67.1 68.1
------------ ------------ ------------ ------------
Gross profit 33.8 30.3 32.9 31.9
Operating expenses:
Selling and marketing 6.5 6.7 6.8 7.1
General and administrative 12.9 13.1 13.2 14.2
Amortization of costs in excess of
assets acquired 0.7 0.8 0.6 0.5
------------ ------------ ------------ ------------
Operating income 13.7 9.7 12.3 10.0
Other income (expense):
Interest expense (1.4) (2.7) (1.9) (2.5)
Interest income 0.7 0.2 0.4 0.2
Other, net 0.1 (0.4) (0.1) (0.2)
------------ ------------ ------------ ------------
Income before minority interest,
provision for income taxes
and extraordinary item 13.0 6.8 10.7 7.6
Minority interest - 0.1 - 0.1
------------ ------------ ------------ ------------
</TABLE>
15
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C>
Income before provision for 13.0 6.7 10.7 7.5
income taxes and extraordinary item
Provision for income taxes 5.2 2.2 4.3 3.0
------------ ------------ ------------ ------------
Income before extraordinary item
7.8 4.5 6.5 4.5
Extraordinary item, net - - - (0.1)
------------ ------------ ------------ -----------=
Net income 7.8% 4.5% 6.5% 4.4%
============ ============ ============ ============
</TABLE>
Three and Nine Months Ended September 30, 1998 Compared to Three and Nine Months
Ended September 30, 1997
NET SALES. Net sales for the three months ended September 30, 1998 were
$67.1 million, an increase of $19.3 million, or 40%, from $47.8 million in the
same period in 1997. For the nine months ended September 30, net sales increased
$42.6 million, or 31%, to $178.9 million in 1998 from $136.4 million in the same
period in 1997.
Security Products and Services Group. Net sales for the Security
Products and Services Group for the three months ended September 30, 1998
increased $10.2 million, or 38%, from $26.5 million in 1997 to $36.7 million in
1998. For the nine months ended September 30, net sales for the Security
Products and Services Group increased $27.8 million, or 38%, from $73.0 million
in 1997 to $100.8 million in 1998. Both increases include net sales of
commercial products and services, which increased $3.0 million, or 19%, from
$16.0 million in 1997 to $19.0 million for the three months ended September 30,
1998 and increased $13.5 million, or 31%, from $43.2 million for the nine months
ended September 30, 1997 to $56.6 million in 1998. The increase in commercial
net sales was primarily due to continued growth in the Company's international
armoring divisions. During 1996, 1997, and 1998, the Company initiated start-up
armoring operations in Mexico, Brazil and the Philippines, and acquired Labbe,
and IMEA and the assets of Protec. The Company will continue in its efforts to
expand the operations of its existing foreign subsidiaries along with evaluating
new acquisition opportunities and additional new markets.
Increases in net sales for security services contributed to the
increase in net sales for commercial products and services contained within the
Security Products and Services Group. Net sales increased $0.4 million, or 23%,
in the three months ended and $1.0 million, or 18%, for the nine months ended
September 30, 1998 in comparison with 1997.
Also included in net sales for the Security Products and Services Group
are sales of military products and services, which increased $7.1 million, or
68%, from $10.6 million for the three months ended September 30, 1997 to $17.7
million in 1998. For the nine months ended September 30, net sales of military
products increased $14.4 million, or 48%, from $29.8 million in 1997 to $44.2
million in 1998. In April 1998, the Company began work on a new contract with
the U.S. Military to supply 738 armored High Mobility Multi-Purpose Wheeled
Vehicles ("HMMWVs") to the U.S. Army and the U.S. Air Force (the "738
Contract"). Production on the Company's previous contract with the U.S. Military
for 360 Up-Armored HMMWV's (the "360 Contract") continued through July 1998. The
combination of production on the two contracts was a factor in the increase in
net sales. In future periods, HMMWV production will be solely based on the 738
Contract.
Based on certain internal requirements, the U.S. Air Force has dictated
an aggressive delivery schedule for the 738 Contract. This delivery schedule
will require the Company to maintain an increased level of production for the
Up-Armored HMMWV in comparison with production levels in previous periods. This
increase in production will result in an increase in net sales of military
products over levels experienced in 1997 and the first quarter of 1998.
Management expects to maintain the increased level of
16
<PAGE> 19
production throughout the balance of 1998, with decreases in production and net
sales as the 738 Contract nears completion in 1999.
Investigations and Intelligence Group. Net sales for the Investigations
and Intelligence Group increased $10.3 million, or 64%, from $15.9 million in
the third quarter of 1997 to $26.2 million in the same period in 1998. For the
nine months ended September 30, net sales for the Investigations and
Intelligence Group increased $13.1 million, or 26%, from $50.2 million in 1997
to $63.3 million in 1998. The increases in 1998 are primarily due to the
inclusion of net sales from the acquisitions of Lindquist Avey, InPhoto, and
Corplex. Excluding net sales reported by these acquired entities, net sales for
the Investigations and Intelligence Group would have been $18.6 million and
$54.3 million for the three and nine months ended September 30, 1998, in
comparison with $15.9 million and $50.2 million for the three and nine months
ended September 30, 1997, an increase of 17% and 8%, respectively.
Voice and Data Communications Group. Net sales for the Voice and Data
Communications Group decreased $1.1 million, or 20%, from $5.3 million in 1997
to $4.3 million in 1998 for the three months ended September 30. For the nine
months ended September 30, net sales increased $1.6 million, or 12%, from $13.2
million in 1997 to $14.8 million in 1998. Late in the second quarter and
throughout a majority of the third quarter, the Company was approached by a
third party interested in purchasing the Voice and Data Communications Group.
The Group's management during this time period was focused on negotiations, due
diligence requests, and related demands on their time. The diversion resulted in
the decrease in net sales experienced in the third quarter. Due to several
factors, the potential buyer decided not to complete the transaction, and all
discussions have been abandoned. The Company does not expect to incur any
material changes associated with these discussions. Management expects that the
fourth quarter results from the Voice and Data Communications Group will return
to the levels experienced in the first half of 1998. In addition, the Company is
exploring opportunities to expand this Group by increasing the Company's
presence in the computer and data security market, which would be a natural
extension of its risk mitigation services.
COST OF SALES. Cost of sales for the three months ended September 30,
1998 increased $11.2 million, or 34%, from $33.3 million in 1997 to $44.5
million in 1998. For the nine months ended September 30, cost of sales increased
$27.2 million, or 29%, from $92.9 million in 1997 to $120.1 million in 1998. The
increase in cost of sales was due to the increased level of business activity
experienced in 1998. Gross profit as a percentage of net sales for the three
months ended September 30, 1998 was 33.8%, as compared with 30.3% for the same
period in 1997. For the nine months ended September 30, gross profit as a
percent of net sales was 32.9% and 31.9% for 1998 and 1997, respectively.
The Company has historically experienced its highest levels of gross
profit as a percent of net sales in the Investigations and Intelligence Group
and its lowest level in the Voice and Data Communications Group. For the three
months ended September 30, 1998, net sales for the Investigations and
Intelligence Group increased as a percent of total net sales in comparison with
the same period in 1997. In addition, net sales for the Voice and Data
Communications Group fell as a percent of total net sales for the three and nine
months ended September 30, 1998 in comparison with the same periods in 1997.
These changes in sales mix were the primary reasons for the increases in gross
profit percent.
Gross profit as a percentage of net sales for the Investigations and
Intelligence Group increased approximately 9% (from approximately 36% in 1997 to
45% in 1998) and 5% (from approximately 39% in 1997 to 44% in 1998) for the
three and nine months ended September 30, 1997 and 1998, respectively. This
increase was primarily due to a more efficient use of subcontract services and
certain high margin engagements booked in the third quarter which are
historically infrequent in nature.
Because these engagements are historically infrequent, management does
not expect to maintain the level of gross profit as a percent of net sales
reflected in the third quarter results of the Investigations and Intelligence
Group. Management does, however, expect the Company to maintain the level of
gross
17
<PAGE> 20
profit as a percent of net sales experienced in the first half of 1998. As
always, the gross profit percent will vary on the mix of sales from the three
groups. As revenue from the Investigations and Intelligence Group increases as a
percent of total net sales, the gross profit percent should increase as well.
Operating expenses. Operating expenses for the three months ended
September 30, 1998 increased $3.6 million, or 37%, to $13.5 million, compared to
$9.8 million for the same period in 1997. For the nine months ended September
30, 1998, operating expenses increased $7.1 million, or 24%, to $36.9 million
from $29.8 million for the same period in 1997. The increase is primarily
attributable to an increase in the level of personnel and professional services
required to administer the growth experienced by the Company in 1997 and 1998.
As a percent of net sales, operating expenses for the three months
ended September 30 decreased from 21% in 1997 to 20% in 1998. For the nine
months ended September 30, operating expenses decreased from 22% in 1997 to 21%
in 1998. As a result of investments made by the Company in facilities and
personnel in previous periods, the Company did not require an additional
commitment of fixed cost to achieve growth in net sales in 1998. As sales
increase further, the Company will be required to commit additional amounts of
fixed cost to secure increased incremental net sales.
Interest expense. Interest expense for the three months ended September
30, 1998 decreased $0.3 million, or 25%, to $1.0 million, compared to $1.3
million in the same period in 1997. For the nine months ended September 30,
interest expense decreased from $3.4 million in 1997 to $3.3 million in 1998, a
decrease of 2%. With the completion of the Offering, a significant portion of
the Company's indebtedness was paid off (approximately $14.8 million). As a
result, the Company experienced lower interest expense in the third quarter of
1998 and expects interest expense to be lower in comparison with 1997 for the
remainder of 1998.
On May 30, 1997, the Company entered into an agreement with certain
institutional investors to issue and sell $35.0 million worth of Senior Notes.
This agreement contained a provision for a reduction of the interest rate if
certain criteria were met. The Company complied with the specified criteria and
the reduction of rates commenced in the second quarter of 1998. The reduction,
which changed the interest rate from 9.56% to 8.56%, contributed to the decrease
in interest expense in 1998.
Interest income. Interest income for the three months ended September
30, 1998 increased $0.3 million, or 354%, to $0.4 million, compared to $0.1
million in the same period in 1997. For the nine months ended September 30,
interest income increased from $0.3 million in 1997 to $0.8 million in 1998, an
increase of 193%. Net proceeds of the Offering that were not used to pay down
debt were invested in short-term instruments with maturities of three months or
less. The return on these investments is responsible for the increase in
interest income in 1998. Management anticipates that it will continue to have
funds available for investment in the foreseeable future. As a result, the
Company anticipates it will continue to experience higher levels of interest
income in 1998 in comparison with 1997.
Provision for income taxes. The provision for income taxes was $3.5
million for the three months ended September 30, 1998 in comparison with $1.1
million for the same period in 1997. For the nine months ended September 30, the
provision for taxes was $7.6 million and $4.0 million in 1998 and 1997,
respectively. The effective tax rate for the first three quarters of 1998 and
1997 was 40%.
18
<PAGE> 21
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 operations, excluding non-cash charges such as depreciation and amortization.
Public Offering. A portion of the net proceeds of the Offering
(approximately $60.4 million) was used to pay off certain indebtedness of the
Company (approximately $14.8 million). The remaining amounts were invested in
short-term instruments and are being used as necessary for acquisitions, working
capital and other general corporate purposes.
Credit Facility. The Company's credit agreement with KeyBank National
Association ("KeyBank"), entered into in May 1997, was amended effective October
30, 1998. The amendment to the credit agreement allows the Company to maintain
the same capacity on its revolving credit facility ($7.0 million) and its letter
of credit facility (approximately $7.7 million), while reducing the applicable
interest rates and revising the covenant restrictions. The interest rate on the
revolving credit facility will vary, based on certain financial ratios between
prime less 1.75% to prime less 0.25%, or, at the Company's option, LIBOR plus
0.75% to LIBOR plus 1.50%. The covenants contained in the original credit
agreement were no longer appropriate given the Company's capital structure
following the Offering. The covenants were adjusted to reflect the changes
experienced by the Company and the changes anticipated in future periods.
As of November 9, 1998, there were no borrowings under the revolving
credit agreement. The remaining proceeds from the Offering along with the unused
capacity on the revolving line of credit will be sufficient to fund the working
capital needs of the Company for the foreseeable future.
Cash flows from operating activities. Net cash used in operating
activities was $11.7 million and $6.3 million for the nine months ended
September 30, 1998 and 1997, respectively. Since the inception of the Company's
contract with the U.S. Government to armor the HMMWV through the time of the
Merger and the acquisitions completed in 1997 and 1998, the Company was
designated a Small Business according to U.S. Government procurement
regulations. Thereafter, the Company's designation was changed to Large Business
for government procurement purposes.
The change in designation affects progress payments made by the
government to the Company over the course of a contract, and the Company's cash
flow, in two ways. First, the progress payments will be determined using a
smaller percentage of total cost committed than they have in the past. Second,
the Company will only be reimbursed for vendor invoices paid instead of expenses
incurred. Although these changes will not affect the total amount ultimately
collected, they will defer certain amounts previously included as part of a
progress payment until the vehicles are delivered.
The majority of these adjustments to the way the Company is reimbursed
for its military business were applied to the HMMWV contracts on a cumulative
basis in the second quarter of 1998. This resulted in a significant increase in
the balance of Cost and Estimated Earnings in Excess of Billings on Uncompleted
Contracts and its related effect on cash flows from operating activities. The
Company initiated discussions with the government in the third quarter of 1998
in an attempt to alleviate the significant negative cash flow position the
Company had been put in due to the change in designation. The result of these
discussions was an agreement that the new payment guidelines would be applied to
the Company on a prospective basis (effective in the 2nd quarter of 1998) only.
As result, the Company received a payment for approximately $11.0 million in the
third quarter and currently has approximately $8.0 million of outstanding
receivables with the government as of September 30, 1998.
The Company will continue to absorb the effect of the change in
procurement designation throughout the life of the HMMWV contract. Although
there will be no effect on Cash Flows from
19
<PAGE> 22
Operating Activities on a cumulative basis, the change in payment terms will
impact accounts receivable and cost and estimated earnings in excess of billings
on uncompleted contracts from period-to-period.
Additionally, due to provisions of the purchase agreement, the Company
did not record any accounts receivable on the opening balance sheet in
connection with the acquisition of Lindquist Avey. As of September 30, 1998,
Lindquist Avey had approximately $2.7 million recorded in accounts receivable,
helping to explain the significant amount of cash used by changes in accounts
receivable.
Cash flows from investing activities. Historically, the Company has
limited its capital expenditure requirements by leasing certain assets. Capital
expenditures totaled $3.5 million for the nine months ended September 30, 1998,
and $3.1 million for the same period in 1997. Additions to databases totaled
$3.1 million and $3.0 million for the nine months ended September 30, 1998 and
1997, respectively.
In addition to capital expenditures, 1997 investing activities included
the acquisitions of Labbe and ITI, which required a total cash outlay of $7.6
million, net of cash acquired. In 1998, the acquisitions of Lindquist Avey and
InPhoto, and the assets of Protec required cash of approximately $8.3 million,
net of cash acquired. Management anticipates that, as the Company continues to
pursue strategic acquisitions, additional cash outlays will be required.
Cash flows from financing activities. Net cash provided by financing
activities was $52.4 million and $24.1 million for the nine months ended
September 30, 1998 and 1997, respectively. Cash from financing activities in
1998 includes the net proceeds from the Offering ( approximately $60.4 million)
completed in the second quarter. The amount in 1997 reflects borrowing under the
Senior Notes that was used to finance certain acquisitions and working capital
requirements.
Foreign operations. The Company attempts to mitigate the risks of doing
business in foreign countries by separately incorporating its operations in such
countries, maintaining reserves for credit losses, maintaining insurance on
equipment to protect against losses related to political risks and terrorism,
and using financial instruments to hedge the Company's risk from translation
gains and losses.
The Company utilizes derivative financial instruments, in the form of
forward contracts, to hedge its exposure to foreign currency rate fluctuations.
At September 30, 1998 five such contracts were outstanding in connection with
intercompany demand notes with Labbe and Lindquist Avey. These contracts are
intended to hedge the Company's exposure to deterioration in the amount
outstanding due to changes in currency translation rates. The notional amount
(together with amortized premium) and the fair market value associated with
these forward contracts were $17.9 million and $0.5 million, respectively. These
contracts mature between January 1999 and September 2000. Gains or losses on
existing forward instruments are offset against the translation effects
reflected in shareholders' equity. The fair value of forward contracts is not
recognized in the consolidated financial statements since they are accounted for
as hedges. The Company does not hold or issue derivative financial instruments
for trading purposes.
Year 2000 Issues. The Company has initiated a program to prepare for
the year 2000. During 1997, the Company began the process of replacing the
enterprise systems at its two largest subsidiaries, both for the purpose of
making the systems Year 2000 compliant and to enhance the information systems
capabilities of these subsidiaries. The new systems are scheduled to be
operational by mid-1999.
Additionally, the Company is implementing a plan to prepare its
remaining systems for Year 2000. The Company has completed an inventory of all
its computer software and embedded technology and has prepared a master database
of all technology potentially impacted by the Year 2000 issue. In conjunction
with outside consultants, the Company now is in the process of evaluating the
findings from its inventory and formulating plans of action. The Company
anticipates that it will have taken all the necessary steps to ensure no
interruption of services as result of the Year 2000 issue by the third quarter
of 1999. Total Year
20
<PAGE> 23
2000 compliance cost is estimated to be approximately $4.0 million, of which
approximately $3.6 million relates to the new enterprise systems and will be
capitalized. The remaining approximately $0.4 million will be charged to expense
over several reporting periods in accordance with established accounting
pronouncements and is not expected to be material to the Company's results of
operations or cash flows.
If systems are not in place or if all appropriate actions have not been
taken, the Company's ability to administer and report revenue will be greatly
compromised. Both of the Company's largest revenue Groups are, for the most
part, manual operations. The manufacture of bullet resistant vehicles and the
investigation and intelligence services provided by the Company are not largely
dependent on embedded technology. Barring a catastrophic collapse from third
party sources, such as a lack of electrical power, the Company should be able to
maintain production in its main revenue producing groups, although at a reduced
level.
Many operations the Company maintains, especially in the Voice and Data
and Investigations and Intelligence Groups, rely on third party compliance with
the Year 2000 issue to ensure the Company can continue to operate in these
areas. Limited services in the Company's Investigations and Intelligence Group,
including certain intelligence gathering services, rely solely on third party
sources, such as Lexis-Nexis, for their continued operation. The satellite and
global positioning equipment marketed by the Voice and Data Communications Group
is exclusively dependent on the compliance of the manufacturers of the equipment
and the agencies that maintain the satellites for its revenue. Lack of
compliance by third parties would significantly impact the Company in these
areas.
Quarterly fluctuations. The Company's operations may fluctuate on a
quarterly basis as a result of the timing of contract costs and revenues of its
Security Products and Services Group, particularly from its military and
governmental contracts which are generally awarded in a periodic and/or sporadic
basis. The Company generally does not have long-term contracts with its clients
in its Investigations and Intelligence Group and its ability to generate net
sales is dependant upon obtaining many new projects each year, most of which are
of a relatively short duration. 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.
Forward-Looking Statements. Forward-looking statements, within the
meaning of Section 21E of the Securities and Exchange Act of 1934, are made
throughout this Management's Discussion and Analysis of Financial Conditions and
Results of Operations. The Company's results may differ materially from those in
the forward-looking statements. Forward-looking statements are based on
management's current views and assumptions, and involve risks and uncertainties
that could significantly affect expected results. For example, operating results
may be affected by external factors such as actions of competitors, changes in
laws and regulations, customer demand, effectiveness of programs, strategic
relations, fluctuations in the cost and availability of resources, and foreign
economic conditions, including currency rate fluctuations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
21
<PAGE> 24
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended September 30, 1998, the Company made the
following sales of securities which were not registered under the Securities Act
of 1933 (the "Act").
(a) On September 1, 1998, the Company issued 352,381
shares of Common Stock to the sole shareholder of
Kizorek, Inc. in connection with the acquisition of
that company. The issuances were exempt from the
registration pursuant to Section 4(2) of the Act.
(b) On September 22, 1998, the Company issued 38,788
shares of Common Stock to the two former owners of
Protec, S.A. in connection with the acquisition of
the assets of that company. The issuances were exempt
from registration pursuant to Section 4(2) of the
Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held in New York,
NY on August 12, 1998, for the purpose of considering and acting upon the
following:
(a) Election of Directors
<TABLE>
<CAPTION>
- --------------------------- --------------- --------------
NOMINEE FOR WITHHELD
- --------------------------- --------------- --------------
<S> <C> <C>
Jules B. Kroll 13,361,379 11,297
- --------------------------- --------------- --------------
Thomas M. O'Gara 13,361,379 11,297
- --------------------------- --------------- --------------
Wilfred T. O'Gara 13,361,379 11,297
- --------------------------- --------------- --------------
Michael G. Cherkasky 13,361,379 11,307
- --------------------------- --------------- --------------
Marshall S. Cogan 13,363,879 8,797
- --------------------------- --------------- --------------
Michael J. Lennon 13,361,379 11,297
- --------------------------- --------------- --------------
Raymond E. Mabus 13,364,879 7,797
- --------------------------- --------------- --------------
Hugh E. Price 13,313,479 59,197
- --------------------------- --------------- --------------
Jerry E. Ritter 13,364,879 7,797
- --------------------------- --------------- --------------
William S. Sessions 13,313,479 59,197
- --------------------------- --------------- --------------
Howard I. Smith 13,361,369 11,307
- --------------------------- --------------- --------------
</TABLE>
(b) Stock Option Plan-proposal to increase the number of shares
issuable under the 1996 Stock Option Plan to 1,757,000 shares.
For: 11,345,467
Against: 1,228,283
Abstain: 3,110
Broker Non-Votes: 795,816
(c) Ratification of Appointment of Independent Auditors-proposal
to ratify the selection of Arthur Andersen LLP as the
Company's independent public accountants for the year 1998.
For: 13,370,816
Against: 1,645
Abstain: 215
Broker Non-Votes: 0
22
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Loan Agreement dated
October 30, 1998 among the Company,
O'Gara-Hess & Eisenhardt Armoring Company,
Kroll Holdings, Inc., Kroll Associates, Inc.
and KeyBank National Association (filed as
an exhibit to the Company's Registration
Statement on Form S-4 No. 333-66959 and
incorporated herein by reference).
10.2 Agreement and Plan of Merger by and among
the Company, Kroll-O'Gara Oklahoma, Inc.,
and Laboratory Specialists of America, Inc.
dated October 21, 1998 (filed as an exhibit
to the Company's Registration Statement on
Form S-4 No. 333-66959 and incorporated
herein by reference).
27 Financial Data Schedule (Edgar version only)
(b) Reports on Form 8-K.
During the quarter ended September 30, 1998,
the Company filed the following Current
Reports on Form 8-K:
a) Announcing the completion of the
acquisition of Kizorek, Inc. (Date of
Report: September 1, 1998) - filed
September 15, 1998; amended to
provide financial statements and pro
forma financial information on
October 23, 1998 (Items 2 and
7).
b) Announcing the completion of the
acquisition of the assets of Protec
S.A. (Date of Report: September 22,
1998) - filed
October 6, 1998 (Item 5)
23
<PAGE> 26
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 13th day of November, 1998.
THE KROLL-O'GARA COMPANY
By /s/ Nicholas P. Carpinello
------------------------------------
Nicholas P. Carpinello
Controller and Treasurer
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS, CONSOLIDATED STATEMENT OF
SHAREHOLDERS' EQUITY, CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 32,859
<SECURITIES> 0
<RECEIVABLES> 80,791
<ALLOWANCES> (3,295)
<INVENTORY> 19,094
<CURRENT-ASSETS> 143,285
<PP&E> 38,932
<DEPRECIATION> 20,543
<TOTAL-ASSETS> 218,262
<CURRENT-LIABILITIES> 54,764
<BONDS> 0
0
0
<COMMON> 178
<OTHER-SE> 118,746
<TOTAL-LIABILITY-AND-EQUITY> 218,262
<SALES> 178,943
<TOTAL-REVENUES> 178,943
<CGS> 120,100
<TOTAL-COSTS> 120,100
<OTHER-EXPENSES> 36,860
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,322
<INCOME-PRETAX> 19,201
<INCOME-TAX> 7,641
<INCOME-CONTINUING> 11,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,560
<EPS-PRIMARY> .74
<EPS-DILUTED> .72
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS, CONSOLIDATED STATEMENT OF
SHAREHOLDERS' EQUITY, CONSOLIDATED STATEMENTS OF CASH FLOWS 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-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> SEP-30-1998
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0
0
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<SALES> 67,128
<TOTAL-REVENUES> 67,128
<CGS> 44,469
<TOTAL-COSTS> 44,469
<OTHER-EXPENSES> 13,483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 953
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<INCOME-TAX> 3,501
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