<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 1998.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
THE KROLL-O'GARA COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
Ohio 3711 31-1470817
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION) CLASSIFICATION CODE NUMBER)
</TABLE>
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)
ABRAM S. GORDON
VICE PRESIDENT AND GENERAL COUNSEL
THE KROLL-O'GARA COMPANY
9113 LESAINT DRIVE
FAIRFIELD, OHIO 45014
(513) 874-2112
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
TIMOTHY E. HOBERG, ESQ. JONATHAN I. MARK, ESQ.
TAFT, STETTINIUS & HOLLISTER LLP CAHILL GORDON & REINDEL
1800 STAR BANK CENTER 80 PINE STREET
425 WALNUT STREET NEW YORK, NEW YORK 10005-1702
CINCINNATI, OHIO 45202-3957 (212) 701-3000
(513) 381-2838
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
============================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value............ 5,060,000 Shares $18.375 $92,977,500 $27,428
============================================================================================================================
</TABLE>
(1) Includes 660,000 shares which are being registered in connection with an
over-allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and based on the average of high and low prices of
the Common Stock as reported on the Nasdaq National Market on March 11,
1998.
------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS Subject to completion, dated March 17, 1998
- --------------------------------------------------------------------------------
4,400,000 Shares
KROLL-O'GARA LOGO
Common Stock
- --------------------------------------------------------------------------------
Of the 4,400,000 shares of Common Stock, par value $0.01 per share (the "Common
Stock"), offered hereby (the "Offering"), 3,200,000 shares are being offered by
The Kroll-O'Gara Company ("Kroll-O'Gara" or the "Company") and 1,200,000 shares
are being offered by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Shareholders.
The Common Stock is listed on the Nasdaq National Market (the "Nasdaq") under
the symbol "OGAR." On , 1998 the last reported sale price of the
Common Stock on the Nasdaq was $ per share. See "Price Range of Common
Stock and Dividend Policy."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK
OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 7 TO 12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to Proceeds to
Public Commissions(1) Company(2) Selling Shareholders
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Per Share $ $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1)The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2)Before deducting estimated expenses of the Offering of $ , all of
which will be paid by the Company.
(3)Certain of the Selling Shareholders have granted the Underwriters a 30-day
option to purchase up to 660,000 additional shares of Common Stock on the
same terms per share solely to cover over-allotments, if any. If such option
is exercised in full, the total price to public will be $ , the total
underwriting discounts and commissions will be $ , the total proceeds
to Company will be $ and the total proceeds to Selling Shareholders
will be $ . See "Principal and Selling Shareholders" and
"Underwriting."
The Common Stock is being offered by the Underwriters as set forth under
"Underwriting" herein. It is expected that the delivery of certificates therefor
will be made at the offices of SBC Warburg Dillon Read Inc., New York, New York,
on or about , 1998, against payment therefor. The Underwriters
include:
SBC WARBURG DILLON READ INC. BEAR, STEARNS & CO. INC.
SUNTRUST EQUITABLE SECURITIES
<PAGE> 3
[INSIDE FRONT COVER]
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<S> <C>
[Picture of corporate logo; a KROLL-O'GARA
square with the letter K within THE RISK MITIGATION COMPANY
the letter G within the
letter O].
</TABLE>
[Picture of a XM1114 Up-Armored HMMWV and an armored Chevrolet Suburban;
labelled "Armored Vehicles."]
[Picture of a traveler reviewing a Country Risk Report; labeled "Country
Risk Report."]
[Picture of automobile being driven; labelled "Advanced Driver Training."]
SECURITY PRODUCTS & SERVICES
<TABLE>
<S> <C>
- ARMORED VEHICLES - RISK AND CRISIS MANAGEMENT
- ADVANCED DRIVER TRAINING - PUBLICATION OF COUNTRY RISK ANALYSES
- FORCE PROTECTION TRAINING
</TABLE>
[Picture of two investigators working at a computer screen; labelled "Fraud
Investigations."]
[Picture of professional giving a presentation; labelled "Business
Intelligence."]
INVESTIGATIONS & INTELLIGENCE
<TABLE>
<S> <C>
- CORPORATE AND FRAUD INVESTIGATIONS - VENDOR INVESTIGATIONS
- LITIGATION SERVICES - CORPORATE SECURITY
- DUE DILIGENCE - BUSINESS INTELLIGENCE
- ENVIRONMENTAL SERVICES - MONITORING SERVICES
- ASSET SEARCHING & ANALYSES
</TABLE>
[Picture of a computer; labelled "Computer Forensics."]
[Picture of a satellite phone; labelled "Satellite Communications."]
[Picture of a global positioning system receiver; labelled "GPS."]
VOICE & DATA SECURITY
- COMPUTER HARDWARE AND SOFTWARE SECURITY
- SATELLITE COMMUNICATIONS INTEGRATION
- NAVIGATIONAL GLOBAL POSITIONING SATELLITE SYSTEMS
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE COMMON STOCK
AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements of the Company, including the Notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, (i) the financial
statements of the Company included in this Prospectus present the results of
operations and financial condition of the Company as though both (a) a
reorganization (the "Reorganization") of the Company, completed on October 28,
1996, and (b) a merger (the "Merger") of a wholly owned subsidiary of The O'Gara
Company ("O'Gara") into Kroll Holdings, Inc. ("KHI"), the parent company of
Kroll Associates, Inc. ("Kroll"), completed on December 1, 1997, each of which
has been accounted for as a pooling of interests, had been completed at the
dates, or at the beginning of the periods, presented; (ii) all information
presented in this Prospectus has been adjusted to reflect the completion of the
Reorganization and the Merger; and (iii) references in this Prospectus to the
"Company" or "Kroll-O'Gara" refer to The Kroll-O'Gara Company and its
subsidiaries on a consolidated basis, giving effect to the completion of the
Reorganization and the Merger, and to the Company and its predecessors.
THE COMPANY
The Kroll-O'Gara Company ("Kroll-O'Gara" or 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. Worldwide,
governments, businesses and individuals increasingly are recognizing the need
for products and services that mitigate the growing risks associated with
white-collar crimes, fraud, physical attacks, threats, violence and uninformed
decisions based upon incomplete or inaccurate information. Through its network
of 40 offices located in 15 countries, the Company is meeting these needs by
providing information, analysis, training and products to its customers. The
Company has served a diverse customer base of over 4,000 clients during the last
five years, including large multinational corporations, medium and small
businesses, individuals, law firms, investment and commercial banks and U.S. and
foreign government agencies. Giving effect to the Merger, the Company's revenues
have increased from $77.2 million in 1993 to $190.4 million in 1997.
Kroll-O'Gara enjoys strong name recognition and an outstanding reputation
throughout the security industry. The Company's Kroll subsidiary was founded in
1972 by Jules B. Kroll to provide internal fraud investigative services. During
the late 1970s, Kroll expanded the scope of its operations to include other
services such as business intelligence, due diligence for financial
transactions, intelligence gathering in connection with hostile takeovers and
crisis management. Over the past five years, Kroll has handled over 11,000
investigative matters worldwide for its clients, including many Fortune 500
companies. The Company's O'Gara Hess & Eisenhardt Armoring Company ("OHE")
subsidiary has a long and distinguished history dating back to its early days as
a horse-drawn carriage builder in 1876. In the 1940s, OHE designed and built one
of the earliest armored presidential limousines, which was used by President
Harry S Truman. Since then, OHE's armored commercial vehicles have been used by
every U.S. President, as well as other heads of state, business executives and
VIPs worldwide. OHE has been the sole source provider of armoring systems for
the U.S. Military's Up-Armored High Mobility Multi-Purpose Wheeled Vehicles
("HMMWVs") since their introduction in 1994. In November 1996, the Company
completed its initial public offering. Since that time, the Company has acquired
five companies in the highly fragmented security industry. Together these five
acquisitions accounted for $37.3 million of 1997 revenues.
The Company's operations are divided among the following three business
segments:
Investigations and Intelligence. The Company's Investigations and
Intelligence Group provides: (i) investigative services designed to
mitigate or determine financial fraud, theft of trade secrets, infringement
of trademarks or other intellectual property rights, and employee
misconduct; (ii) litigation or arbitration assistance in preparation for
legal proceedings; (iii) forensic auditing and asset tracing services and
financial profiles in connection with matters such as bankruptcy cases and
loan defaults; (iv) due diligence investigations and background information
for business decisions; (v) monitoring and special inquiry assistance in
the discovery and assessment of legal and ethical misconduct and the
development and installation of appropriate systems to assist in ensuring
future compliance with relevant standards; and (vi) environmental risk
consulting services.
3
<PAGE> 5
Security Products and Services. The Company's Security Products and
Services Group provides: (i) armoring products, including ballistic and
blast protected armoring systems for commercial and military vehicles,
aircraft and missile components; and (ii) security services, including
advanced driver training, force protection training, risk and crisis
management and turn-key site security systems.
Voice and Data Security. The Company's Voice and Data Security Group
provides: (i) planning, design, and hardware and software integration
services which are customized to meet specific portable satellite
communications or navigation needs; and (ii) computer hardware and software
security consulting services.
BUSINESS STRATEGY
The key elements of the Company's business strategy include:
Leverage Customer Base. Kroll and O'Gara have served a combined base
of over 4,000 clients during the last five years. Generally, these clients
have not been customers of both firms. Utilizing its expanded portfolio of
product and service offerings resulting from the Merger, the Company has
implemented a cross-marketing and integrated selling approach, with the
goal of becoming the primary supplier of risk mitigation solutions to
customers' security needs.
Offer New Risk Mitigation Products and Services. The Company has
identified a number of security services and security products that are
complementary to its existing offerings, including expanded forensic
accounting services and the armoring of a diversified variety of vehicles,
aircraft and ancillary equipment. The Company believes these new risk
mitigation offerings can be developed internally or acquired through
strategic acquisitions. The Company continually evaluates the benefits of
providing additional products and services based upon the needs of existing
customers and the potential for adding new customers.
Expand Geographically. The Merger provides an opportunity for the
Company to offer a broader range of products and services through its
existing offices, which formerly provided only the products and services of
either Kroll or O'Gara. The Company expects to increase revenues through
such offices without a proportionate increase in overhead. In addition, the
Company believes that significant opportunities exist to leverage its
extensive network of established international offices and its brand name
recognition by expanding into new geographical locations not currently
served by the Company.
Pursue Strategic Acquisitions. The fragmented nature of the security
industry provides the Company with significant opportunities for strategic
acquisitions that will add to the breadth of its products and services or
expand its capacity in existing businesses. The Company believes it is
well-positioned to identify, acquire and integrate risk mitigation-related
companies, based upon its demonstrated track record of evaluating,
acquiring and integrating five businesses since October 1996 accounting for
$37.3 million in 1997 revenues.
Maximize Operating Efficiency and Profitability. The Company's
strategy to improve profitability is focused on: (i) maximizing return on
fixed operating costs; (ii) reducing the number of hours and components
used in the production of armored vehicles through the continued
standardization of manufacturing processes and parts; and (iii) expanding
the number of higher margin service-related offerings to its customers.
The Company is incorporated in the State of Ohio. Its principal executive
offices are located at 9113 LeSaint Drive, Fairfield, Ohio 45014, telephone
(513) 874-2112, and at 900 Third Avenue, New York, New York 10022, telephone
(212) 593-1000.
4
<PAGE> 6
THE OFFERING
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<S> <C>
Common Stock offered by the Company........................ 3,200,000 shares
Common Stock offered by the Selling Shareholders........... 1,200,000 shares
Total Common Stock offered....................... 4,400,000 shares
Common Stock to be outstanding after the Offering.......... 16,798,025 shares(1)
Use of proceeds by the Company............................. To repay a portion of the indebtedness of
the Company (approximately $12.0 million),
and for potential acquisitions, working
capital and other general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol.............................. OGAR
</TABLE>
- ---------------
(1) Excludes 1,163,889 shares issuable upon exercise of stock options
outstanding as of March 13, 1998 (including 551,492 shares issuable upon
exercise of stock options assumed in the Merger).
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. For a discussion of certain of these risks, see
"Risk Factors" on pages 7 to 12.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data, which reflect the
combined operations and financial position of O'Gara and KHI for all periods
presented utilizing the pooling of interests method of accounting, should be
read in conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993(2) 1994 1995 1996 1997(2)(3)
------- ------- ------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Net sales........................................... $77,215 $86,784 $85,841 $153,661 $190,413
Gross profit........................................ 31,551 30,595 23,727 42,202 58,769
Operating expenses.................................. 25,487 29,953 28,364 33,704 42,593
Merger related costs................................ -- -- -- -- 7,205
Operating income (loss)............................. 6,064 642 (4,637) 8,499 8,971
Other income (expense), net......................... (1,824) (2,132) (3,197) (2,803) (5,199)
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect of
change in accounting principle.................... 3,806 (1,490) (7,834) 5,696 3,615
Provision (benefit) for income taxes (4)............ 7,070 (1,751) (1,298) (162) 2,352
Net income (loss)(5)................................ $(3,559) $ 261 $(6,536) $ 5,857 $ 710
Diluted earnings (loss) per share(6)(7)............. $ (0.47) $ (0.02) $ (0.65) $ 0.51 $ 0.05
Diluted weighted average shares outstanding(6)(7)... 7,554 8,969 10,021 11,160 13,721
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(8)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents........................................ $ 6,899
Working capital, net of cash and equivalents................ 24,627
Net property, plant and equipment........................... 14,612
Total assets................................................ 133,971
Long-term debt, including current maturities................ 50,065
Shareholders' equity........................................ 27,954
</TABLE>
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(1) The summary consolidated financial data reflect the Reorganization and the
Merger, each of which was accounted for as a pooling of interests which
requires the presentation of all prior period consolidated financial
information as if the respective entities had always been a part of the
Company.
(2) Effective January 1, 1993, KHI adopted Statement of Financial Accounting
Standards ("SFAS") No. 109 and reported the cumulative effect of a change in
the method of accounting for income taxes in its 1993 consolidated statement
of operations. Effective in the fourth quarter of 1997, the Company changed
its method of accounting for costs incurred in connection with business
process reengineering activities.
(3) The Company completed certain other acquisitions, primarily in 1997, that
utilized the purchase method of accounting which requires including the
reported results of the acquired business only from the effective date of
the acquisition.
(4) Historical periods prior to 1997 include results of operations of certain
entities that were not taxable.
(5) In 1997, the Company recorded a charge for a minority interest of
approximately $0.2 million, an extraordinary loss, net of tax benefit, of
approximately $0.2 million due to the early extinguishment of debt, and a
cumulative effect of change in accounting principle, net of tax benefit, of
approximately $0.4 million.
(6) Diluted earnings (loss) per share and diluted weighted average shares
outstanding are shown for all periods presented following guidelines
established under SFAS No. 128 and SEC Staff Accounting Bulletin No. 98 and
include the dilutive impact of all common stock equivalents. See Notes to
Consolidated Financial Statements.
(7) Supplemental pro forma diluted earnings per share, assuming the repayment of
a portion of the indebtedness of the Company as noted under "Use of
Proceeds," would have been $ per diluted share for the year ended
December 31, 1997, based on the diluted weighted average shares outstanding
during the period, plus the estimated number of shares to be issued to repay
such indebtedness.
(8) Adjusted to give effect to the sale of 3,200,000 shares of Common Stock
offered by the Company hereby at an estimated offering price of $
per share, and the application of the net proceeds therefrom.
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors in evaluating the
Company and its business before purchasing any of the Common Stock offered
hereby. Prospective investors are cautioned that the statements in this
Prospectus that are not descriptions of historical facts may be forward-looking
statements that are subject to risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those identified in this section on "Risk Factors" and elsewhere in
this Prospectus.
MANAGEMENT OF GROWTH
Part of the Company's strategy requires further development of existing
lines of business in current markets and geographic expansion into new markets.
As the Company's business develops and expands, it will need to implement
enhanced operational and financial systems and will require additional
employees, management and operational and financial resources. If the Company
cannot successfully implement and maintain these operational and financial
systems or successfully obtain, integrate or utilize the employees, management
and operational and financial resources required to manage a developing and
expanding business, it could have a material adverse effect on the Company's
financial condition, results of operations and cash flows.
A further part of the Company's strategy is to grow through the acquisition
of companies that will complement its existing operations or provide it with an
entry into markets it does not currently serve. The Company may not be able to
identify or acquire suitable companies or, if acquired, to integrate or manage
them so as to produce returns that justify the Company's investments. In
addition, the Company may compete for acquisition and expansion opportunities
with companies that have significantly greater resources than the Company.
The expansion of the Company's business eventually will require additional
capital from operations, borrowings under the Company's credit facility or the
issuance of debt or equity securities. The Company may not be able to generate
adequate cash or obtain adequate financing from external sources. The issuance
of additional Common Stock to raise capital or to finance acquisitions may
result in substantial dilution to holders of the Common Stock. Any debt
financing may increase significantly the Company's leverage and may involve
restrictive covenants which limit the Company's operations. Future acquisitions
by the Company also may require approval under the Company's credit facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The Merger has necessitated combining two formerly unrelated companies with
different lines of business, operating and accounting systems and corporate
cultures, as well as integrating personnel with disparate business backgrounds.
This has required substantial attention from management. The process is not yet
complete and the failure to complete it successfully could have a material
adverse effect on the Company's financial condition, results of operations and
cash flows.
COMPETITION
The markets in which the Company does and intends to do business are highly
competitive. There are a large number of companies, both public and private,
that provide products or services similar to those offered by the Company.
Furthermore, the Company may encounter additional competition from future
industry entrants. Certain of the Company's current competitors have, and new
competitors may have, substantially greater financial and other resources than
the Company. A number also have long established relationships with their
clients. For example, certain accounting firms and other large security product
and service providers, which have indicated an interest in expanding their
product offerings to include value-added services such as certain of the
investigative and consulting services provided by the Company, may prove to be
formidable competitors if they elect to devote the necessary resources to such
competitive businesses. Competitive conditions could have a material adverse
effect on the Company's financial condition, results of operations and cash
flows. See "Business -- Competition."
7
<PAGE> 9
U.S. MILITARY CONTRACTS
Since August 1993, U.S. Military contracts have accounted for a significant
portion of the Company's business, representing 8%, 20%, 17%, 36% and 23% of net
sales for 1993, 1994, 1995, 1996 and 1997, respectively. Prior to August 1993,
the Company's business did not include armoring military vehicles. The Company's
U.S. Military contracts are funded in annual increments and require subsequent
authorization and appropriation which may not occur or which may provide less
than the total amount of the contract due to budgetary or other considerations.
The Company has negotiated an extension of its current prime contract to armor
and blast protect HMMWVs which will continue production through June 2000. The
contract is expected to be signed in April 1998. Future contracts may not be
received and the size of any contracts that are received may vary. Fluctuations
in spending by the U.S. Government for national defense could adversely affect
the Company's ability to receive future contracts. Moreover, U.S. Government
contracts, in general, are cancelable unilaterally at the convenience of the
U.S. Government, and a variety of international and/or domestic political
factors or decisions could result in the cancellation of the HMMWV armoring
project or a curtailing of its scope. The loss of, or a significant reduction
in, this business would have a material adverse effect on the Company's
financial condition, results of operations and cash flows. See "Business -- U.S.
Government Contracts."
On several occasions during the U.S. Government's 1996 fiscal year, certain
operations of the U.S. Government essentially were "shut down" because of budget
impasses between the U.S. Congress and the President. During these periods,
payments to the Company under its U.S. Military contracts were delayed. Future
U.S. Government shut downs, if sufficiently prolonged, could have a material
adverse effect on the Company's financial condition, results of operations and
cash flows.
SINGLE AND PRIMARY SOURCE SUPPLIERS
HMMWVs armored by the Company are manufactured under separate U.S. Military
contracts by AM General Corporation ("AM General"). Should AM General for any
reason be unable to deliver HMMWVs to the Company, as occurred during 1995, or
should the U.S. Military elect or be obligated to select a new HMMWV supplier,
there could be a material adverse effect on the Company's financial condition,
results of operations and cash flows.
In 1997, the Company obtained approximately 69% of the glass used in
armoring its vehicles from Pilkington Aerospace Limited. Should the Company at
some time find it necessary to select one or more additional or substitute
suppliers, delays could be encountered in obtaining glass which meets the
Company's specifications.
FLUCTUATIONS IN OPERATING RESULTS
In its Security Products and Services Group, approximately 23% of the
Company's net sales for 1997 were derived from U.S. Military contracts and an
additional 5% were derived from commercial contracts with U.S. governmental
agencies or foreign governments. These contracts generally are awarded on a
periodic and/or sporadic basis. As a result, the Company's Security Products and
Services Group generally has significant fluctuations from time to time in its
business. Period-to-period comparisons within a given year or between years may
not be meaningful or indicative of operating results over a full fiscal year.
The 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
dependent upon obtaining many new projects each year, most of which are of
relatively short duration. As a result, the Company's net sales and net income
from year-to-year and period-to-period in its Investigations and Intelligence
Group are not necessarily predictable and historically there has not been a
consistent year-to-year pattern of growth. Additionally, the demand for the
Company's services is affected by general economic conditions and the level of
corporate acquisitions and other financial transactions, and clients may reduce
their reliance on the Company's services during periods when there is a decline
in such activities. See "Business -- Seasonality, Backlog and Related Matters"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
8
<PAGE> 10
FIXED PRICE CONTRACTS
A substantial portion of the Company's projects in its Security Products
and Services Group are currently performed on a fixed-price basis. The Company
attempts to cover anticipated increases in labor, material and service costs of
long-term fixed-price contracts through an estimation of such increases which is
reflected in the original price. Despite these attempts, however, the revenue,
cost and gross profit realized on a fixed-price contract often will vary from
the estimated amounts due to unforeseen conditions or changes in job conditions
and variations in productivity over the term of the contract. These variations
and the risks generally inherent in fixed-price contracts may result in the
gross profits realized by the Company being different from those originally
estimated and may result in the Company's experiencing reduced profitability or
losses on projects. Depending on the size of a contract, these variations from
estimated contract performance could have a material adverse effect on the
Company's results of operations for any quarter or year.
PERCENTAGE-OF-COMPLETION ACCOUNTING
The Company's net sales from government contracts and most commercial
contracts in its Security Products and Services Group are recognized using the
percentage-of-completion method. Under this method, estimated contract revenues
are accrued based generally on the percentage that costs to date bear to total
estimated costs. Estimated contract losses are recognized in full when
determined. Accordingly, contract revenues and total cost estimates are reviewed
and revised periodically as the work progresses and as change orders are
approved, and adjustments based upon the percentage-of-completion are reflected
in contract revenues in the period when such estimates are revised. To the
extent that these adjustments result in an increase, a reduction or an
elimination of previously reported contract revenues, the Company would
recognize a credit or a charge against current earnings, which could be
material. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
POLITICAL AND ECONOMIC RISKS OF DOING BUSINESS OUTSIDE THE UNITED STATES
In addition to its U.S. facilities, the Company has operations and assets
in Australia, Brazil, China, France, India, Italy, Japan, Mexico, the
Philippines, Russia, Saudi Arabia, Singapore, Switzerland and the United
Kingdom. The Company also sells its products and services in other foreign
countries and is seeking to increase its level of international business
activity. Accordingly, the Company is subject to various risks, including
exchange rate fluctuations, foreign currency restrictions, U.S. imposed
embargoes of sales to specific countries, expropriation of assets, war, civil
uprisings and riots, government instability and legal systems of decrees, laws,
regulations, interpretations and court decisions which are not always fully
developed and which may be retroactively applied. The Company's operations in
foreign countries may be materially adversely affected due to certain local
governmental agencies interpreting laws, regulations or court decisions in a
manner which might be considered inconsistent or inequitable in other countries.
The Company may be subject to unanticipated income taxes, excise duties, import
taxes, export taxes or other governmental assessments. Such risks could result
in a loss of business, significant unexpected write-offs of assets or other
unexpected costs which could have a material adverse effect on the Company's
financial condition, results of operations and cash flows. In the past, the
Company occasionally has encountered difficulties in collecting significant
accounts receivable for services of its Investigations and Intelligence Group,
particularly when the receivable obligor was located in a foreign country. See
"Business -- Government Regulation."
GOVERNMENT REGULATION
As a contractor with agencies of the U.S. Government, the Company is
obligated to comply with a variety of regulations governing certain aspects of
its operations and the workplace. Additionally, such contracts give the
contracting agency the right to conduct audits of the Company's facilities and
operations, and such audits occur routinely. The Company may be subject to
investigations as a result of an audit or for other causes. Adverse findings in
an audit or other investigation, including violations of environmental or labor
laws, could result in fines or other penalties up to and including
disqualification as a U.S. Government contractor. In addition, U.S. Government
contracts may contain specific delivery requirements. Failure to meet these
requirements could result in penalties or lost profits to the Company.
9
<PAGE> 11
The Company is subject to federal licensing requirements with respect to
the sale in foreign countries of certain products and services. Regulations
promulgated by the U.S. Commerce Department require the Company to obtain a
general destination license in connection with the sale of certain commercial
products in foreign countries, and certain U.S. State Department regulations
require the Company to file an export license in connection with sales of
military equipment in foreign countries. Furthermore, the U.S. State Department
prohibits all sales of military equipment to certain countries, including, among
others, China, Cuba, Iran, Iraq, Libya and Syria. Such regulations could become
more restrictive in the future, which could limit the Company's ability to
market its products internationally. If additional restrictions were imposed,
they could have a material adverse effect on the Company's financial condition,
results of operations and cash flows.
The services provided by the Company's Investigations and Intelligence
Group are subject to various federal, state, local and foreign laws, including
laws designed to protect the privacy of persons. A wholly owned subsidiary of
the Company holds private investigative licenses from, and its investigative
activities are regulated by, government agencies in various jurisdictions. The
Company also utilizes certain data from outside sources, including data from
third party vendors and various government and public record services, in
performing its services. To date, applicable laws and regulations have not
interfered materially with the conduct of the business or operations of the
Company, including the Company's access to data used in its business. However,
new regulations, or changes in governmental regulations relating to the
protection of privacy, could be enacted that would interfere materially with the
manner in which the Company obtains information, conducts its operations and
provides its services, with a resulting material adverse effect on the Company's
financial condition, results of operations and cash flows. See "Business --
Government Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company's operations currently depend on the continued efforts of its
executive officers and on its senior management, particularly Jules B. Kroll,
its Chairman and Chief Executive Officer, and Wilfred T. O'Gara, its President
and Chief Operating Officer. Other members of the Company's senior management
play key roles in the management and direction of the Company. Additionally, the
Company is highly dependent on the quality and efforts of its professional staff
to provide its services and attract and retain clients. Competition for
qualified management and professional employees is intense. If the executive
officers of the Company unexpectedly become unable or decide not to continue in
their present positions, or if a number of senior managers fail to continue with
the Company and the Company is unable to attract and retain qualified
replacements, the Company's business could be materially and adversely affected.
See "Management."
CONTROL BY MANAGEMENT AND BOARD
After the Offering, the Company's officers and directors will control
approximately % of the Company's outstanding Common Stock and will be able
to control most matters requiring approval by shareholders, including the
election of directors. In addition, the Board of Directors has the authority to
issue 1,000,000 shares of undesignated preferred stock and to determine the
rights, preferences, privileges and restrictions of such shares without further
action by shareholders. Ohio law contains provisions that may discourage
takeover bids for the Company that have not been negotiated with the Board of
Directors. Each of these factors could have the effect of delaying or preventing
a change in control of the Company and, accordingly, could limit the price that
investors might be willing to pay for the Common Stock. See "Principal and
Selling Shareholders" and "Description of Capital Stock."
LIABILITY TO CLIENTS AND OTHERS
Certain of the matters with respect to which the Company provides services
are extremely large and complex financial transactions in which very substantial
amounts of money may be at risk. The Company maintains environmental consulting,
product liability and professional liability insurance policies with limits of
$5 million, $25 million and $15 million, respectively; however, a successful
claim could result in liability in excess of coverage limits and have a material
adverse effect on the Company's financial condition, results of operations and
cash flows. Furthermore, in the ordinary course of its business, the Company is
subject to
10
<PAGE> 12
claims of third parties other than clients alleging trespass, invasion of
privacy and other tortious conduct by its investigators and other personnel.
Although the Company endeavors to minimize the risk of such claims, they could
have a material adverse effect on the Company's financial condition, results of
operations and cash flows. See "Business--Legal Proceedings."
YEAR 2000 ISSUES
The Company has implemented a Year 2000 program to ensure that the
Company's computer systems and applications will function properly beyond 1999.
The Company believes that it has allocated adequate resources for this purpose
and expects its Year 2000 date conversion program to be completed successfully
on a timely basis. In addition, the Company is selecting and implementing
several new software applications which are all believed to be Year 2000
compliant. Failure to implement successfully these applications on a timely
basis could have a material impact on the Company's operations. Although the
ability of third parties with whom the Company transacts business to address
adequately their Year 2000 issues is outside the Company's control, the Company
is discussing with its vendors and customers the possibility of any interface
difficulties which may affect the Company. The Company currently does not expect
the costs necessary to address the Year 2000 issue to be material to its
financial condition or results of operations. However, the failure of the
Company or of third parties with whom the Company transacts business to address
adequately, and in a timely manner, their respective Year 2000 issues could have
a material adverse effect on the Company's business, financial condition,
results of operations and cash flows.
POSSIBLE VOLATILITY OF SHARE PRICE
The market price for the Common Stock may be highly volatile. The Company
believes that a variety of factors, including announcements by the Company or
its competitors, quarterly variations in financial results, trading volume,
general market trends and other factors, could cause the market price of the
Common Stock to fluctuate substantially. In addition, the stock market has
experienced extreme price and volume fluctuations that are often unrelated to
the operating performance of particular companies. These market fluctuations may
adversely affect the price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
the Common Stock and may make it more difficult for the Company to sell shares
of Common Stock in the future at times and for prices that it deems appropriate.
Upon completion of the Offering, the Company will have 16,798,125 shares of
Common Stock outstanding (assuming no exercise of outstanding stock options).
The 4,400,000 shares of Common Stock offered hereby, as well as
previously issued shares, will be or are freely tradeable without restriction
under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining shares (the "Restricted Shares") of outstanding Common Stock
may not be resold unless they are registered under the Securities Act or sold
pursuant to an applicable exemption from registration, including Rule 144 under
the Securities Act. Of the Restricted Shares, are subject to "lock-up"
agreements with the Underwriters expiring 90 days after the date of this
Prospectus and may be sold during that period only with the prior written
consent of SBC Warburg Dillon Read Inc. SBC Warburg Dillon Read Inc., in its
sole discretion, and at any time without prior notice, may release all or any
portion of the Common Stock subject to the lock-up agreements. When such lock-up
restrictions lapse, approximately of the Restricted Shares may be sold
in the public market or otherwise disposed of in compliance with the Securities
Act. See "Shares Eligible for Future Sale."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any dividends on the Common Stock in
the foreseeable future. Additionally, the terms of the Company's Senior Notes
due 2004, which were issued to certain institutional investors in 1997 (the
"Senior Notes"), and of the Company's credit agreement with its bank require
maintenance of certain financial ratios which may limit the funds available for
cash dividends. See "Price Range of Common Stock and Dividend Policy."
11
<PAGE> 13
POTENTIAL ANTI-TAKEOVER EFFECT AND POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF
CERTAIN CHARTER AND CODE OF REGULATIONS PROVISIONS AND THE OHIO GENERAL
CORPORATION LAW
Certain provisions of the Company's Amended and Restated Articles of
Incorporation and Code of Regulations and of the Ohio General Corporation Law
(the "OGCL"), together or separately, could discourage potential acquisition
proposals, delay or prevent a change in control of the Company and limit the
price that certain investors might be willing to pay in the future for the
Common Stock.
The Board of Directors of the Company has authority to issue up to
1,000,000 preferred shares without further shareholder approval. Such preferred
shares could have dividend, liquidation, conversion, voting and other rights and
privileges that are superior or senior to the Common Stock. Issuance of
preferred shares could result in the dilution of the voting power of the Common
Stock, adversely affect holders of the Common Stock in the event of liquidation
of the Company or delay, defer or prevent a change in control of the Company.
In addition, Sections 1701.01 and 1701.831 of the OGCL contain provisions
that require shareholder approval of any proposed "control share acquisition" of
an Ohio corporation at any of three ownership thresholds: 20%, 33 1/3% and 50%;
and Chapter 1704 of the Ohio Revised Code contains provisions that restrict
certain business combinations and other transactions between an Ohio corporation
and interested shareholders. See "Description of Capital Stock--Provisions
Affecting Business Combinations and Changes in Control."
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds from the sale of the 3,200,000 shares of Common Stock
offered by the Company, after deducting underwriting discounts and expenses
payable by the Company in connection with the Offering, are estimated to be
approximately $ million. The Company will not receive any proceeds from the
shares of Common Stock sold by the Selling Shareholders. See "Principal and
Selling Shareholders."
Approximately $12.0 million of the net proceeds to the Company will be used
to repay certain indebtedness of the Company. The remainder will be reserved to
fund growth through potential acquisitions and expansion of products and
services, for working capital and for other general corporate purposes. The
amounts actually expended for such purposes may vary significantly and are
subject to change at the Company's discretion, depending upon certain factors,
including economic conditions, the competitive environment and strategic
opportunities that may arise. See "Business--Business Strategy." Pending such
uses, the Company intends to invest the net proceeds from the Offering in
short-term investment grade instruments.
The debt to be repaid is comprised of $7.0 million outstanding under a term
note with KeyBank National Association ("KeyBank") and the outstanding balance
(approximately $5.5 million at March 13, 1998) under the Company's revolving
credit agreement with KeyBank, both of which are a part of the Company's total
credit facility with KeyBank. The term note bears interest at the prime rate or,
at the Company's option, the LIBOR rate plus 2.5% per annum and matures in
January 1999. The revolving credit portion of the facility bears interest as
follows: for advances outstanding of less than $4.5 million, at the prime rate
less 0.5% or, at the Company's option, the LIBOR rate plus 2.0%; and for
advances outstanding in excess of $4.5 million, at the prime rate or, at the
Company's option, the LIBOR rate plus 2.5%. As of March 13, 1998, the term note
bore interest at the rate of 8.5% per annum and the revolving credit portion of
the facility bore interest at an effective rate of 8.1% per annum. The term note
and most of the amount outstanding under the revolving credit agreement were
used to replace debt of KHI outstanding at the time of the Merger and to fund
transaction and integration costs associated with the Merger. For additional
information concerning the Company's credit facility, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." See also Notes 7 and 8 to the
Company's Consolidated Financial Statements.
Following the closing of the Offering and the application of the net
proceeds as described above, the Company anticipates that it will have
approximately $ million of outstanding indebtedness (including $35.0 million
of Senior Notes) and approximately $ million remaining from the net proceeds
of the Offering.
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock commenced trading on the Nasdaq on November 13,
1996. The following table sets forth, for the periods indicated, the high and
low sale prices for the Common Stock as reported on the Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1996
Fourth Quarter (from November 13, 1996)..................... $ 9-3/4 $ 8-1/4
1997
First Quarter............................................... 13-1/4 9-1/8
Second Quarter.............................................. 13 9-5/8
Third Quarter............................................... 16-5/8 10-1/4
Fourth Quarter.............................................. 20-7/8 16
1998
First Quarter...............................................
Second Quarter (through , 1998).................
</TABLE>
On , 1998, the last reported sale price of the Common Stock on
the Nasdaq was $ per share. As of , 1998, there were
approximately beneficial holders of the outstanding shares of Common
Stock.
DIVIDENDS
The Company anticipates that any future earnings will be retained to
finance the Company's operations and for the growth and development of its
business. Accordingly, the Company currently does not anticipate paying cash
dividends on its shares of Common Stock in the foreseeable future. Additionally,
the terms of the Company's Senior Notes and the credit agreement with its bank
require maintenance of certain financial ratios which may limit the funds
available for cash dividends. The payment of any future dividends will be
subject to the discretion of the Board of Directors of the Company and will
depend on the Company's results of operations, financial position and capital
requirements, general business conditions, restrictions imposed by financing
arrangements, if any, legal restrictions on the payment of dividends and other
factors the Board of Directors deems relevant.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the cash and equivalents, short-term debt
and capitalization of the Company as of December 31, 1997 on an actual basis and
as adjusted for the sale of the 3,200,000 shares of Common Stock offered by the
Company and the application of the net proceeds therefrom, after deducting
underwriting discounts and expenses payable by the Company in connection with
the Offering. See "Use of Proceeds." The table should be read in conjunction
with the Company's Consolidated Financial Statements, including the Notes
thereto, contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and equivalents........................................ $ 6,899 $
========== ==========
Short-term debt:
Revolving line of credit(1)............................... $ 559 $
Current portion of long-term debt......................... 3,201
Shareholder payable....................................... 310
---------- ----------
Total short-term debt............................. $ 4,070 $
========== ==========
Long-term debt, excluding current portion................... $ 46,864 $
---------- ----------
Shareholders' equity:
Preferred Stock, $.01 par value per share,
1,000,000 shares authorized, no shares issued or
outstanding........................................... -- --
Common Stock, $.01 par value per share,
50,000,000 shares authorized, 13,590,525 shares
outstanding, 16,790,525 shares outstanding as
adjusted(2)............................................ 136
Additional paid-in capital................................ 50,590
Retained deficit.......................................... (22,388) (22,388)
Unrealized appreciation of marketable securities.......... 10 10
Cumulative foreign currency translation adjustment........ (394) (394)
---------- ----------
Total shareholders' equity........................ 27,954
---------- ----------
Total capitalization............................ $ 74,818 $
========== ==========
</TABLE>
- ---------------
(1) As of , 1998, the Company had approximately $ outstanding under
its revolving line of credit.
(2) Excludes 1,171,389 shares of Common Stock issuable upon exercise of stock
options outstanding as of December 31, 1997.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company reflects:
(i) the Merger and the Reorganization, each of which was accounted for as a
pooling of interests which requires the presentation of all prior period
consolidated financial information as though the respective entities had always
been a part of the Company, (ii) the completion of certain other acquisitions,
primarily in 1997, that utilized the purchase method of accounting which
requires including the reported results of the acquired business only from the
effective date of the acquisition, and (iii) the fact that certain significant
entities of the Company were S Corporations for some of the historical periods
presented and, therefore, were not required to provide for federal, state or
certain foreign income taxes. The selected historical consolidated financial
data presented below as of December 31, 1996 and 1997 and for each of the three
years in the period ended December 31, 1997, have been derived from the audited
Consolidated Financial Statements of the Company presented elsewhere herein. The
consolidated financial data as of December 31, 1993, 1994 and 1995 and for the
years ended December 31, 1993 and 1994 are derived from the Company's unaudited
consolidated financial statements not included herein. The selected consolidated
financial data should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1993 1994 1995 1996 1997(2)
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Net sales............................................... $77,215 $86,784 $85,841 $153,661 $190,413
Cost of sales........................................... 45,664 56,189 62,114 111,458 131,644
---------- ---------- ---------- ---------- ----------
Gross profit.......................................... 31,551 30,595 23,727 42,202 58,769
Selling and marketing expenses.......................... 6,017 7,436 9,448 9,763 14,371
General and administrative expenses, including
amortization.......................................... 19,470 22,517 18,915 23,941 28,222
Merger related costs.................................... -- -- -- -- 7,205
---------- ---------- ---------- ---------- ----------
Operating income (loss)............................... 6,064 642 (4,637) 8,499 8,971
Interest expense........................................ (2,692) (2,598) (2,812) (3,140) (4,806)
Other income (expense), net............................. 434 466 (384) 337 (393)
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest, provision
(benefit) for income taxes, extraordinary item and
cumulative effect of change in accounting
principle........................................... 3,806 (1,490) (7,834) 5,696 3,772
Minority interest....................................... -- -- -- -- (156)
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect of
change in accounting principle...................... 3,806 (1,490) (7,834) 5,696 3,615
Provision (benefit) for income taxes (3)................ 7,070 (1,751) (1,298) (162) 2,352
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle............ (3,264) 261 (6,536) 5,857 1,264
Extraordinary item, net of tax benefit(5)............... -- -- -- -- (194)
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect of change in
accounting principle................................ (3,264) 261 (6,536) 5,857 1,070
Cumulative effect of change in accounting principle, net
of tax benefit(4)..................................... (295) -- -- -- (360)
---------- ---------- ---------- ---------- ----------
Net income (loss)(6).................................... $(3,559) $261 $(6,536) $5,857 $710
========== ========== ========== ========== ==========
Basic earnings (loss) per share (7) (8)................. $(0.47) $0.03 $(0.65) $0.55 $0.05
========== ========== ========== ========== ==========
Diluted earnings (loss) per share (7) (8)............... $(0.47) $(0.02) $(0.65) $0.51 $0.05
========== ========== ========== ========== ==========
Basic weighted average shares outstanding(7)............ 7,554,071 8,510,467 10,020,777 10,742,131 13,060,818
Diluted weighted average shares outstanding(7).......... 7,554,071 8,968,672 10,020,777 11,160,157 13,720,556
</TABLE>
16
<PAGE> 18
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997(2)
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Working capital.............................. $23,920 $14,511 $ 4,087 $10,600 $ 31,526
Net property, plant and equipment............ 7,204 7,012 6,876 8,564 14,612
Total assets................................. 59,551 63,902 66,767 81,234 133,971
Long-term debt, including current portion.... 23,374 27,566 30,915 17,479 50,065
Shareholders' equity......................... 10,339 11,076 4,657 16,867 27,954
</TABLE>
- ---------------
(1) The selected consolidated financial data include the Merger on December 1,
1997 and the Reorganization on October 28, 1996, each of which was accounted
for as a pooling of interests. Prior to the Company's initial public
offering in November 1996 its business was conducted by a group of
corporations affiliated by substantially common management and control (the
"Related Corporations"), which were combined in the Reorganization. All
prior period consolidated financial data presented have been restated to
include the combined results of operations, financial position and cash
flows of the respective entities as though they had always been a part of
the Company.
(2) The Company completed certain other acquisitions, primarily in 1997, that
utilized the purchase method of accounting. The Company acquired Palmer
Associates, S.C. in October 1996 for approximately $1.0 million, Next
Destination Limited in February 1997 for approximately $3.5 million, Labbe,
S.A. in February 1997 for approximately $14.2 million, International
Training, Inc. in March 1997 for approximately $2.5 million and ZAO IMEA in
December 1997 for approximately $3.0 million.
(3) Historical periods prior to 1997 include results of operations of certain
entities that were not taxable. The most significant of the Related
Corporations had elected to be treated as an S Corporation for federal and
state income tax purposes, rather than be taxed at the corporate level. This
entity became a taxable entity, or a C Corporation, in connection with the
Reorganization. In addition, prior to 1993, KHI had elected to be treated as
an S Corporation for federal and state income tax purposes. During 1993, KHI
changed its tax filing status from an S to a C Corporation. The deferred tax
liability resulting from this tax status change has been included in income
tax expense for the year ended December 31, 1993. All entities of the
Company are taxable entities only for periods subsequent to the
Reorganization.
(4) Effective January 1, 1993, KHI adopted SFAS No. 109 and reported the
cumulative effect of a change in the method of accounting for income taxes
in its 1993 consolidated statement of operations. Effective in the fourth
quarter of 1997, the Company changed its method of accounting for costs
incurred in connection with business process reengineering activities.
(5) In 1997, the Company recorded an extraordinary loss, net of tax benefit, of
approximately $0.2 million due to the early extinguishment of debt.
(6) The net income (loss) and cost of sales for the year ended December 31, 1996
reflect a write-off by the Company of approximately $5.0 million ($2.8
million net of tax benefit) of uncollectible accounts receivable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(7) Basic and diluted earnings per share and weighted average shares outstanding
are shown for all periods presented following guidelines established under
SFAS No. 128 and SEC Staff Accounting Bulletin No. 98. See Notes to
Consolidated Financial Statements.
(8) Supplemental pro forma earnings per share, assuming the repayment of a
portion of the indebtedness of the Company as noted under "Use of Proceeds",
would have been $ per basic share and $ per diluted share for
the year ended December 31, 1997, based on the basic and diluted weighted
average shares outstanding during the period, plus the estimated number of
shares to be issued to repay such indebtedness.
17
<PAGE> 19
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 thereto, the selected consolidated financial data
and other financial data appearing elsewhere in this Prospectus. As a result of
the acquisitions made by the Company since 1996, 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 November 15, 1996, the Company completed an initial public offering of
2,000,000 shares of its Common Stock at $9.00 per share. Additionally, on
December 16, 1996, the Company issued 48,000 shares under a partial exercise of
the underwriters' over-allotment option. The net proceeds from the initial
public offering were used to finance certain distributions to existing
shareholders, to acquire the Company's leased Mexico City manufacturing
facility, and to pay initial installments for the acquisition of Palmer
Associates, S.C. ("Palmer Associates"). The balance of the proceeds were used to
repay a portion of the indebtedness of the Company.
On December 1, 1997, a wholly owned subsidiary of the Company merged into
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 may be issued 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. On October 29, 1996, the Company acquired substantially all
the assets of Palmer Associates of Mexico City, Mexico, for $1.0 million
(excluding $0.2 million for a non-competition agreement), most of which is
payable over two years. Palmer Associates is a provider of security services
such as advanced driver training, background investigations, due diligence
reports and forensic auditing, and reports its revenue primarily through the
Company's Investigations and Intelligence Group and also through the Security
Products and Services Group.
On February 5, 1997, the Company completed the acquisition of all of the
shares of Next Destination, Limited ("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 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.
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. The acquisition of
Labbe has increased substantially the level of commercial revenue generated by
the Security Products and
18
<PAGE> 20
Services Group and enhanced the Company's competitive position due to an
expanded product line, which includes cash-in-transit vehicles, and penetration
into new markets, such as Europe and Africa.
On March 24, 1997, the Company completed the acquisition of all the shares
of International Training, Incorporated ("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 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 products, such as evasive and defensive driver training,
terrorist surveillance training, force protection consulting and advanced
weapons training, not previously available from the Company.
Effective December 2, 1997, the Company acquired all of the shares of ZAO
IMEA, a Russian corporation ("IMEA"), as well as certain work in process of, and
an agreement not to compete in Russia by, Acorn Communications Group, Inc., a
Massachusetts corporation ("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 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.
Revenue recognition. The Company's net sales from government and most
commercial armoring contracts are recognized using the percentage-of-completion
method calculated utilizing the cost-to-cost approach. Under this method,
estimated contract revenues are accrued based generally on the percentage that
costs to date bear to total estimated costs. Estimated contract losses are
recognized in full when determined. Accordingly, contract revenues and total
cost estimates are reviewed and revised periodically as the work progresses and
as change orders are approved, and adjustments based upon the percentage of
completion are reflected in contract revenues in the period when such estimates
are revised. To the extent that these adjustments result in an increase, a
reduction or an elimination of previously reported contract revenues, the
Company would recognize a credit or a charge against current earnings, which
could be material. Contract costs include all direct material and labor costs,
along with certain overhead costs allocated to contract production. Provisions
for any estimated total contract losses on uncompleted contracts are recorded in
the period in which it is concluded that such losses will occur. Changes in
estimated total contract costs will result in revisions to contract revenue. The
revisions are recognized when determined.
Revenue from investigative and intelligence services is recognized as the
services are performed. The Company records either billed or unbilled accounts
receivable based on case-by-case invoicing determinations.
Revenue related to telecommunications equipment and services is recognized
as equipment is shipped or as services are provided. Revenue and related direct
costs of brokered satellite time are recorded when payments are received from
customers.
Provision for income taxes. From 1988 until October 28, 1996, OHE was
treated as an S Corporation under Subchapter S of the Internal Revenue Code and
comparable provisions of certain state tax laws. As a result, it paid no federal
or state income tax. The Company is a C Corporation and is responsible for
federal and state income taxes.
19
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Security products and services
Military.................................................. 17.4% 35.5% 23.0%
Commercial................................................ 23.2 16.0 32.5
Investigations and intelligence............................. 57.0 43.4 35.4
Voice and data security..................................... 2.4 5.1 9.1
------ ------ ------
Total net sales........................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 72.4 72.5 69.1
------ ------ ------
Gross profit.............................................. 27.6 27.5 30.9
Operating expenses:
Selling and marketing..................................... 11.0 6.4 7.5
General and administrative................................ 22.0 15.6 14.8
Merger related costs...................................... -- -- 3.9
------ ------ ------
Operating income (loss)..................................... (5.4) 5.5 4.7
Other income (expense):
Interest expense.......................................... (3.3) (2.0) (2.5)
Other, net................................................ (0.4) 0.2 (0.2)
------ ------ ------
Income (loss) before minority interest, provision (benefit)
for income taxes, extraordinary item and cumulative effect
of change in accounting principle......................... (9.1) 3.7 2.0
Minority interest........................................... -- -- 0.1
------ ------ ------
Income (loss) before provision (benefit) for income taxes,
extraordinary item and cumulative effect of change in
accounting principle...................................... (9.1) 3.7 1.9
Provision (benefit) for income taxes................... (1.5) (0.1) 1.2
------ ------ ------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle.................. (7.6) 3.8 0.7
Extraordinary loss.......................................... -- -- (0.1)
------ ------ ------
Income (loss) before cumulative effect of change in
accounting principle...................................... -- -- 0.6
Cumulative effect of change in accounting principle......... -- -- (0.2)
------ ------ ------
Net income (loss)........................................... (7.6)% 3.8% 0.4%
====== ====== ======
</TABLE>
1997 COMPARED TO 1996
NET SALES. Net sales increased $36.7 million, or 24%, from $153.7 million
in 1996 to $190.4 million in 1997. The primary reasons for this increase were
the acquisitions made in the Company's Security Products and Services Group and
Voice and Data Security Group in 1997.
Security Products and Services Group. Net sales for the Security Products
and Services Group increased $26.4 million, or 33%, from $79.2 million in 1996
to $105.6 million in 1997.
The Group's net sales for 1997 from commercial products and services were
$61.8 million, an increase of $37.3 million, or 152%, over 1996. This increase
was due to several factors, including primarily the incorporation of net sales
from Labbe and ITI in the Group's results. Excluding acquisitions, net sales
from commercial products and services increased $12.7 million, or 52%. The
Company experienced significant growth in its Brazilian and Mexican armoring
subsidiaries, a trend management believes will continue for the foreseeable
future. With the purchase of IMEA and the initiation of a start-up armoring
operation in the
20
<PAGE> 22
Philippines, the Security Products and Services Group continued its expansion in
existing and new markets. The Company will continue to seek out new acquisition
opportunities and additional new markets for its security products and services.
In 1996, the U.S. Military requested accelerated production of Up-Armored
HMMWVs. This resulted in net sales of $54.6 million in 1996. Military net sales
returned to a non-accelerated level in 1997, resulting in net sales from
military products decreasing by $10.9 million, or 20%, to $43.7 million in 1997.
Management expects net sales from military products to remain at a level
comparable to 1997 for the foreseeable future.
Investigations and Intelligence Group. Net sales of the Investigations and
Intelligence Group in 1997 were derived predominantly from the activities of
KHI. Throughout 1997, KHI was actively involved in various strategic discussions
that contemplated a sale of the company. Pending the outcome of such
discussions, KHI delayed implementation of its internal growth plans.
Furthermore, uncertainties regarding the outcome of the discussions resulted in
the departure of certain KHI managers prior to the Merger. Finally, in
connection with the Merger and in an effort to improve its cost structure, the
Company reduced personnel in certain markets. As a result of these factors, net
sales for the Investigations and Intelligence Group increased only $0.7 million,
or 1%, from $66.7 million in 1996 to $67.4 million in 1997. The change in 1997
was attributable primarily to an increase in net sales from business
intelligence services, which includes due diligence work and services related to
corporate mergers and acquisitions, offset by a decline in net sales from
investigations.
During the fourth quarter, the Investigations and Intelligence Group
reactivated its growth plan to open offices in Boston, Mexico City and Dallas
and to pursue related acquisitions. The Company expects these initiatives will
have a favorable impact on growth of net sales in 1998.
Voice and Data Security Group. During 1997, the Company replaced its
primary wholesale distributor, acquired Next Destination, a subdistributor, and
reconfigured its distribution product mix to focus on the sale of satellite
communications equipment in addition to satellite navigation equipment. As a
result, the Company experienced a growth rate in 1997 approximately five to six
times higher than normal. Net sales for the Voice and Data Security Group were
$17.4 million in 1997, an increase of $9.7 million, or 124%, from $7.8 million
in 1996. The Company expects growth in this segment to return to a more normal
rate in 1998.
COST OF SALES AND GROSS PROFIT. Cost of sales for 1997 increased $20.2
million, or 18%, from $111.5 million in 1996 to $131.6 million in 1997. The
increase in cost of sales was due to increases in the Company's level of
business activity as result of the acquisitions made in 1997.
Security Products and Services Group. Gross profit as a percent of net
sales for the Security Products and Services Group increased from 25.8% in 1996
to 28.4% in 1997. As revenues and costs are recognized using the
percentage-of-completion method of accounting, actual cost and gross profit may
be revised from previously estimated amounts.
Historically the Company has experienced a higher gross profit percent
related to net sales of commercial armoring products in comparison with those of
military armoring products. In the future, the Company expects to increase its
percentage of sales from commercial armoring products. However, because the
Company's gross profit percentage was affected favorably by adjustments
resulting from performance on certain contracts in 1997, the Company does not
expect to maintain the 1997 gross profit percentage level in 1998.
Investigations and Intelligence Group. Gross profit as a percent of net
sales for the Investigations and Intelligence Group increased from 29.4% in 1996
to 38.0% in 1997. Gross profit percent in 1996 was unfavorably affected by a
write-off of $5.0 million in uncollectible accounts receivable relating to
services provided in earlier periods. Without the write-off, the gross profit
percentages would have been comparable between periods.
Voice and Data Security Group. Prior to the acquisition of Next
Destination, the Company's Voice and Data Security Group realized a higher gross
profit percentage due to a higher mix of integrated products
21
<PAGE> 23
versus distributed products. As a distributor, Next Destination's gross profit
percentages were relatively lower. Gross profit as a percent of net sales for
the Voice and Data Security Group decreased from 27.6% in 1996 to 17.9% in 1997.
Management expects the level of gross profit percentage experienced in 1997 to
be maintained in future periods.
OPERATING EXPENSES. Excluding Merger related expenses of $7.2 million,
operating expenses increased $8.9 million, or 26%, from $33.7 million in 1996 to
$42.6 million in 1997. The $7.2 million in expenses related to the Merger
consisted of approximately $4.6 million in professional fees and expenses and
approximately $2.6 million relating to the integration of the operations of the
two companies. Included in the integration expenses were bonuses paid to certain
key employees as incentives to remain with the Company and severance payments
made to employees who left employment of the Company in connection with the
Merger. Also included was a charge made as result of the acceleration of the
vesting of certain shares of restricted KHI stock immediately prior to the
Merger. All of the Merger related costs were recognized in 1997 and will have no
effect on the earnings of the Company in future periods.
The primary reason for the increase in operating expenses, exclusive of
Merger related expenses, was the inclusion of operations from the acquisitions
made in 1997. In addition, the increase in operating expenses reflects the
Company's efforts to expand into new markets, both in the Security Products and
Services Group and the Investigations and Intelligence Group. Excluding Merger
related expenses, operating expenses as a percent of net sales stayed constant
at 22% in both 1996 and 1997.
Prior to the Merger, KHI was involved in merger discussions with
Choicepoint, Inc. ("Choicepoint") a subsidiary of Equifax, Inc. Choicepoint and
KHI did not reach a final agreement and, as a result, did not consummate the
transaction. Certain professional fees, which totaled approximately $0.5
million, associated with the Choicepoint transaction are included in the
Company's operating expenses in 1997.
INTEREST EXPENSE. Interest expense for 1997 increased $1.7 million, or 53%,
to $4.8 million, compared to $3.1 million in 1996. The increase in 1997 was the
result of increased borrowing to finance the Company's 1997 acquisitions. The
Company expects to retire a portion of its debt from the proceeds of the
Offering. As a result, assuming completion of the Offering, interest expense is
expected to be lower in 1998 than in 1997.
OTHER, NET. Other income (expense), net decreased from $0.3 million of
income in 1996 to $0.4 million in expense in 1997. The change was due primarily
to an increase in foreign currency transaction losses recognized in 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for income
taxes increased from a benefit of $(0.2) million in 1996 to a provision of $2.4
million in 1997. The Company's OHE subsidiary did not book a tax provision for
the first ten months of 1996 due to OHE's S Corporation status, which was
terminated on October 28, 1996 in conjunction with the Reorganization.
The Company incurred taxes at the effective rate of 65% in 1997. The
effective rate was unfavorably affected by the non-deductibility of certain
Merger related expenses in the period and the impact of foreign losses for which
no benefit can be provided. Management believes that the rate is substantially
higher than the Company will experience in 1998 and for future periods.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. The Company had
previously capitalized costs related to the reengineering of certain information
systems. The capitalized amount, approximately $0.6 million before tax, was
expensed in 1997 in accordance with Emerging Issues Task Force Issue No. 97-13
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation." The amount expensed is shown net of applicable tax benefit of
$0.2 million.
1996 COMPARED TO 1995
NET SALES. Net sales increased $67.8 million, or 79%, from $85.8 million in
1995 to $153.7 million in 1996. The primary reasons for this change were the
acceleration of the HMMWV contract and increases in
22
<PAGE> 24
the level of business activity in the Investigations and Intelligence Group and
Voice and Data Security Group discussed below.
Security Products and Services Group. Net sales for the Security Products
and Services Group increased $44.3 million, or 127%, from $34.9 million in 1995
to $79.2 million in 1996. 1996 net sales reflect the U.S. Government's request
to accelerate the production of Up-Armored HMMWVs and HMMWV armor kits. In
addition, the level of military net sales in 1995 was significantly impacted by
an unanticipated six-month delay in the delivery of HMMWV chassis from a
supplier, leading to production of substantially fewer Up-Armored HMMWVs.
Commercial revenue for 1996 was $24.6 million, an increase of $4.6 million,
or 23% over 1995. This increase was primarily due to the inclusion of net sales
from start-up operations in Russia, Mexico and Brazil.
Investigations and Intelligence Group. Net sales for the Investigations and
Intelligence Group increased $17.8 million, or 36%, from $48.9 million in 1995
to $66.7 million in 1996. The increase in 1996 was attributable primarily to an
increase in net sales from corporate investigation and business intelligence
services, which increased $12.3 million and $4.0 million, respectively. These
increases were the result of expansion into new geographic areas and an enhanced
marketing program, including a Vendor Integrity Program (VIP), which accounted
for approximately $1.0 million of the increase in net sales.
Voice and Data Security Group. Net sales for the Voice and Data Security
Group increased $5.7 million, or 280%, from $2.0 million in 1995 to $7.8 million
in 1996. The increase in net sales was attributable primarily to the addition of
the Compact-M portable satellite terminal, initially marketed by the Company in
1996.
COST OF SALES AND GROSS PROFIT. Cost of sales for 1996 increased $49.3
million, or 79%, from $62.1 million in 1995 to $111.5 million in 1996. The
increase in cost of sales was due to increases in the Company's level of
business activity.
Security Products and Services Group. Gross profit as a percent of net
sales for the Security Products and Services Group increased from 23.3% in 1995
to 25.8% in 1996. This increase was due to revenue recognized on new military
contracts, both U.S. and foreign, with a higher gross profit percent than
previously experienced. Also contributing to the increase in gross profit as a
percent of sales was the effect of the start-up operations in Brazil, Mexico and
Russia, which experienced higher gross margins for their products than the
Company had experienced previously. These higher margins were the result of
lower direct costs and less developed competition in the markets where these
start-up operations exist.
Investigations and Intelligence Group. Gross profit as a percent of net
sales decreased from 31.1% in 1995 to 29.4% in 1996. Cost of sales in 1996
included a write-off of $5.0 million in uncollectible accounts receivable
relating to services provided in earlier periods. Without the effect of the
write-off, gross margin as a percent of net sales would have increased 5.8% over
1995 to 36.9%.
Voice and Data Security Group. Gross profit as a percent of net sales
increased from 20.0% in 1995 to 27.6% in 1996. This increase was due primarily
to new products marketed by the Company in 1996, that were sold at a higher
gross margin than the Company had experienced with other products.
OPERATING EXPENSES. Operating expenses in 1996 increased $5.3 million, or
19%, from $28.4 million in 1995 to $33.7 million in 1996. As a percent of net
sales, operating expenses decreased from 33% in 1995 to 22% in 1996, as result
of increases in net sales which did not require a commitment of additional
marketing and administrative resources.
Selling and marketing expenses increased approximately $0.3 million, or 3%,
from $9.4 million in 1995 to $9.7 million in 1996. Certain costs, primarily
personnel and advertising, increased $1.2 million due to the Company's growth
into its new Brazilian, Mexican and Russian markets. This increase was offset by
a $0.9 million reduction primarily attributable to the use of lower cost
information services for pre-marketing purposes in the Investigations and
Intelligence Group.
General and administrative expenses increased $5.0 million, or 27%, from
$18.9 million in 1995 to $23.9 million in 1996. This increase was attributable
primarily to the addition of professional employees and
23
<PAGE> 25
associated infrastructure to support the Company's increased level of business
activity. These increases included the addition of personnel and facilities to
support expansion into new product lines, such as risk and crisis management
services, and new geographic regions, such as Asia and Latin America.
INTEREST EXPENSE. Interest expense increased $0.3 million, or 12%, from
$2.8 million in 1995 to $3.1 million in 1996. The increase was due primarily to
increased borrowings necessary to finance increased production levels and new
operations in the Company's Security Products and Services Group. This increase
was offset partially by a reduction in interest expense paid on long-term debt
outstanding to certain shareholders. The amount outstanding to those
shareholders was reduced due to principal payments made in 1996.
OTHER, NET. Other income (expense), net increased $0.7 million, from $(0.4)
million in 1995 to $0.3 million in 1996. This increase was due primarily to a
gain on the sale of marketable securities and a realized foreign currency
transaction gain.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) decreased
from a benefit of $1.3 million in 1995 to a benefit of $0.2 million in 1996. The
lower benefit for income taxes in 1996 in comparison with 1995 was related to
KHI's losses before taxes, which were lower in 1996. OHE booked no provision for
income taxes prior to the termination of its S Corporation status in October
1996.
QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain unaudited quarterly operating data
for each of the Company's last four quarters as well as such data expressed as a
percent of net sales for the periods indicated. This information has been
prepared by the Company on a basis consistent with the Company's audited
financial statements and includes all adjustments (consisting of normal and
recurring adjustments) that management considers necessary for a fair
presentation of the data. These quarterly results are not necessarily indicative
of future results of operations. The Company does not believe that its business
is seasonal overall, although historically the first quarter has been weaker
than the other three. This information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................................... $41,239 $47,360 $47,791 $54,023
Cost of sales............................................... 27,834 31,775 33,310 38,725
------- ------- ------- -------
Gross profit.............................................. 13,405 15,585 14,481 15,298
------- ------- ------- -------
Operating expenses:
Selling and marketing..................................... 3,162 3,378 3,199 4,632
General and administrative................................ 6,284 7,134 6,634 8,169
Merger related costs...................................... -- -- -- 7,205
------- ------- ------- -------
Operating income (loss)................................. 3,959 5,073 4,648 (4,708)
Interest expense............................................ (861) (1,255) (1,274) (1,416)
Other income (expense), net................................. (266) 314 (131) (467)
------- ------- ------- -------
Income (loss) before provision for income taxes............. 2,832 4,132 3,243 (6,591)
Provision (benefit) for income taxes........................ 1,303 1,646 1,087 (1,684)
Extraordinary item/accounting change, net................... -- (194) -- (360)
------- ------- ------- -------
Net income (loss)......................................... $ 1,529 $ 2,292 $ 2,156 $(5,267)
======= ======= ======= =======
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
MARCH 31 JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 67.5 67.1 69.7 71.7
------ ------ ------ ------
Gross profit.............................................. 32.5 32.9 30.3 28.3
------ ------ ------ ------
Operating expenses:
Selling and marketing..................................... 7.7 7.1 6.7 8.6
General and administrative................................ 15.2 15.1 13.9 15.1
Merger related costs...................................... -- -- -- 13.3
------ ------ ------ ------
Operating income (loss)................................. 9.6 10.7 9.7 (8.7)
Interest expense............................................ (2.1) (2.7) (2.7) (2.4)
Other income (expense), net................................. (0.6) 0.7 (0.3) (1.1)
------ ------ ------ ------
Income (loss) before provision for income taxes............. 6.9 8.7 6.8 (12.2)
Provision (benefit) for income taxes........................ 3.2 3.4 2.3 (3.1)
Extraordinary item/accounting change, net................... -- (0.4) -- (0.7)
------ ------ ------ ------
Net income (loss)......................................... 3.7% 4.8% 4.5% (9.8)%
====== ====== ====== ======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
General. The Company historically has met its operating cash needs by
utilizing borrowings from shareholders and credit arrangements to supplement
cash provided by net income, excluding non-cash charges such as depreciation and
amortization.
The Company's operations 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 short-term liquidity may be affected by the payment terms of its U.S.
Military contracts and certain foreign government contracts.
The Company attempts to mitigate the risks of doing business in foreign
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.
Senior Notes. On May 30, 1997 the Company issued and sold $35.0 million
worth of Senior Notes, maturing on May 30, 2004, to certain institutional
investors. The Senior Notes bear interest at a rate of 9.56%, subject to a step
down of the associated interest rate if the Company meets certain defined
requirements. The Senior Notes impose covenant restrictions on the Company's
operations, including limitations on dividends and priority debt, and
constraints on specific investments, as well as requirements relating to the
Company's reported net worth, fixed charges coverage and level of outstanding
debt. Of the $35.0 million in proceeds from the issuance of the Senior Notes,
$26.2 million was used to pay off the term loan and revolver from the Company's
previous credit agreement. The payoff also resulted in the recognition of an
extraordinary charge against earnings of $0.2 million, net of $0.1 million of
tax benefit, for the bank fees associated with the previous agreement.
Credit Facility. On December 1, 1997, the Company entered into a restated
credit agreement with KeyBank concurrent with the closing of the Merger. The
agreement provides for a revolving line of credit of $7.0 million, a letter of
credit facility of approximately $7.7 million and a $7.0 million term note
maturing in January 1999. The term note bears interest at the prime rate or, at
the Company's option, the LIBOR rate plus 2.5% per annum and matures in January
1999. The revolving credit portion of the facility bears interest as follows:
for advances outstanding of less than $4.5 million, at the prime rate less 0.5%
or, at the Company's option, the LIBOR rate plus 2.0%; and for advances
outstanding in excess of $4.5 million, at the prime rate or, at the Company's
option, the LIBOR rate plus 2.5%. As of March 13, 1998, the term note bore
interest at the rate of 8.5% per annum and the revolving credit portion of the
facility bore interest at an effective rate of 8.1% per annum. The credit
agreement imposes requirements on the Company's reported fixed charge coverage
ratio, net worth and debt capitalization, along with certain restrictions on
investments, acquisitions, intangibles
25
<PAGE> 27
and capital expenditures. The restated agreement replaced an agreement signed
with KeyBank on May 30, 1997.
On March 13, 1998, approximately $5.5 million was outstanding on the
Company's revolving credit agreement and $7.0 million was outstanding on the
term note with KeyBank. Upon consummation of the Merger, the Company used cash
on hand, proceeds from its revolving credit facility, the term note and cash
from KHI to replace substantially all of KHI's existing debt (approximately
$14.5 million) and to fund transaction and integration costs previously
discussed. Amounts outstanding under the credit agreement and the term note will
be repaid out of the proceeds of the Offering. If the Offering is not completed,
the Company will seek other sources of capital to refinance the $7.0 million
obligation under the term note when it matures in January 1999.
Cash Flows from Operating Activities. Net cash provided by operating
activities was $7.4 million and $4.5 million for the twelve months ended
December 31, 1996 and 1997, respectively. The Company generated over $5.7
million in depreciation and amortization for the twelve months ended December
31, 1997, versus $4.6 million for the previous year. Working capital changes,
net of effects of acquisitions, utilized $5.3 million in cash in 1997, primarily
due to increases in accounts receivable, inventory and prepaid expenses largely
offset by an increase in accounts payable. These increases resulted from a
general increase in the Company's business activity.
Cash Flows from Investing Activities. Historically, the Company has limited
its capital expenditure requirements by leasing certain facilities and
equipment. Capital expenditures totaled $3.2 million and $4.4 million for the
twelve months ended December 31, 1996 and 1997, respectively. Additions to
databases totaled $3.3 million and $3.9 million for the twelve months ended
December 31, 1996 and 1997, respectively.
In addition to capital expenditures and database additions, the Company
also used $8.2 million in net cash in connection with the acquisitions of Labbe,
ITI, and IMEA in 1997.
Cash Flows from Financing Activities. Net cash provided by financing
activities was $1.6 million and $13.8 million for the twelve months ended
December 31, 1996 and 1997, respectively. The increase in 1997 was due primarily
to issuance of the Senior Notes in the second quarter of 1997 ($35.0 million)
and the issuance of a $7.0 million term bank note in the fourth quarter in
connection with the Merger. This increase was partially offset by the $14.5
million in repayments made in conjunction with the Merger and net repayments of
approximately $9.4 million made under the Company's revolving line of credit
during 1997.
The Company utilizes derivative financial instruments, in the form of
forward contracts, to hedge its exposure to foreign currency rate fluctuations.
At December 31, 1997, four such contracts were outstanding in connection with an
intercompany demand note with Labbe. 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 this forward contract were
$15.5 million and $0.5 million, respectively. These contracts mature on July 15,
1998, January 15, 1999, July 15, 1999 and September 15, 1999, respectively.
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 implemented a Year 2000 program to
ensure that its computer systems and applications will function properly beyond
1999. The Company believes that it has allocated adequate resources for this
purpose and expects its Year 2000 date conversion program to be completed
successfully on a timely basis. In addition, the Company is selecting and
implementing several new software applications, all of which are believed to be
Year 2000 compliant. Although the ability of third parties with whom the Company
transacts business to address adequately their Year 2000 issues is outside the
Company's control, the Company is discussing with its vendors and customers the
possibility of any interface difficulties which may affect the Company. The
Company currently does not expect the costs necessary to address this matter to
be material to its financial condition or results of operations.
26
<PAGE> 28
Available Funds. After the Offering, the Company will have approximately
$ million in working capital and will have $ million available
under its credit facility. The Company believes the total of funds on hand,
available credit and cash flows from operating activities will be adequate for
the Company's 1998 operational and capital expenditure needs.
As noted above, the Company continues to seek opportunities to invest in
new markets, products and services, and acquisitions that fit its strategic
growth plans. The Company believes that adequate financing for any such
investments or acquisitions will be available through funds on hand, through
future borrowings due to the enhanced financial condition of the Company after
the Offering or through the issuance of Common Stock in payment for acquired
businesses.
27
<PAGE> 29
BUSINESS
GENERAL
Worldwide, governments, businesses and individuals increasingly are
recognizing the need for products and services that mitigate the growing risks
associated with white-collar crimes, fraud, physical attacks, threats, violence
and uninformed decisions based upon incomplete or inaccurate information. The
need for protection against these risks is confirmed by a variety of statistics.
Fraud costs U.S. organizations more than $400 billion annually, according to the
Association of Certified Fraud Examiners. In addition, between 1993 and 1995,
700 incidents of intellectual property theft resulted in estimated potential
losses of $63 billion, according to the American Society for Industrial
Security. Spending by businesses, communities and individuals on private
security increased from $19 billion in 1980 to $52 billion in 1990, according to
the Hallcrest Report. The FBI Explosives Unit reported that there were 2,577
bombings in the U.S. in 1995, up from 1,582 bombings in 1990. The number of
casualties resulting from terrorist incidents has increased from 317 in 1991 to
2,963 in 1996, according to the U.S. State Department. In addition, the U.S.
State Department determined that businesses increasingly are the target of
international terrorism, with 65% of all incidents targeting businesses in 1996
compared to 55% of all incidents in 1991.
Currently, products and services intended to mitigate these risks are
provided by thousands of local, regional, national and international businesses.
In most instances, these businesses, which include accounting firms, specialized
consulting firms, armoring products companies and computer and communications
systems consultants, focus their products and services on mitigating a
particular type of risk. These products and services include information-based
services such as due diligence, forensic accounting, background checks and
country risk assessments; products to protect individuals or assets such as
armored vehicles, surveillance systems and other security equipment; and
consulting and training services to assist companies with particular crisis
situations or to develop policies and procedures for use in crisis or emergency
situations.
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 is distinguished by its ability to deliver
integrated solutions to its customers' risk mitigation needs. Through its
network of 40 offices located in 15 countries, the Company is meeting these
needs by providing information, analysis, training and products to its
customers. The Company has served a diverse customer base of over 4,000 clients
during the last five years, including large multinational corporations, medium
and small businesses, individuals, law firms, investment and commercial banks
and U.S. and foreign government agencies.
Kroll-O'Gara enjoys strong name recognition and an outstanding reputation
throughout the security industry. The Company's Kroll subsidiary was founded in
1972 by Jules B. Kroll to provide internal fraud investigative services. During
the late 1970s, Kroll expanded the scope of its operations to include a variety
of investigative and crisis management services such as business intelligence,
due diligence for financial transactions and intelligence gathering in
connection with hostile takeovers. Over the past five years, Kroll has handled
over 11,000 investigative matters worldwide for its clients, including many
Fortune 500 companies. The Company's OHE subsidiary has a long and distinguished
history dating back to its early days as a horse-drawn carriage builder in 1876.
In the 1940s, OHE designed and built one of the earliest armored presidential
limousines, which was used by President Harry S Truman. Since then, OHE's
armored commercial vehicles have been used by every U.S. President, as well as
other heads of state, business executives and VIPs worldwide. OHE has been the
sole source provider of armoring systems for the U.S. Military's HMMWVs since
their introduction in 1994. In November 1996, the Company completed its initial
public offering. Since that time, the Company has acquired five companies in the
highly fragmented security industry. Together these five acquisitions accounted
for $37.3 million of 1997 revenues. Giving effect to the Merger, the Company's
revenues have increased from $77.2 million in 1993 to $190.4 million in 1997.
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<PAGE> 30
BUSINESS STRATEGY
The key elements of the Company's business strategy include:
Leverage Customer Base. Kroll and O'Gara have served a combined base
of over 4,000 clients during the last five years. Generally, these clients
have not been customers of both firms. Utilizing its expanded portfolio of
product and service offerings resulting from the Merger, the Company has
implemented a cross-marketing and integrated selling approach, with the
goal of becoming the primary supplier of risk mitigation solutions to
customers' security needs.
Offer New Risk Mitigation Products and Services. The Company has
identified a number of security services and security products that are
complementary to its existing offerings, including expanded forensic
accounting services and the armoring of a diversified variety of vehicles,
aircraft and ancillary equipment. The Company believes these new risk
mitigation offerings can be developed internally or acquired through
strategic acquisitions. The Company continually evaluates the benefits of
providing additional products and services based upon the needs of existing
customers and the potential for adding new customers.
Expand Geographically. The Merger provides an opportunity for the
Company to offer a broader range of products and services through existing
offices that formerly provided only the products and services of either
Kroll or O'Gara. The Company expects to increase revenues through such
offices without a proportionate increase in overhead. In addition, the
Company believes that significant opportunities exist to leverage its
extensive network of established international offices and its brand name
recognition by expanding into new geographical locations not currently
served by the Company.
Pursue Strategic Acquisitions. The fragmented nature of the security
industry provides the Company with significant opportunities for strategic
acquisitions that will add to the breadth of its products and services or
expand its capacity in existing businesses. The Company believes it is
well-positioned to identify, acquire and integrate risk mitigation-related
companies, based upon its demonstrated track record of evaluating,
acquiring and integrating five businesses since October 1996 accounting for
$37.3 million in 1997 revenues.
Maximize Operating Efficiency and Profitability. The Company's
strategy to improve profitability is focused on: (i) maximizing return on
fixed operating costs, (ii) reducing the number of hours and components
used in the production of armored vehicles through the continued
standardization of manufacturing processes and parts, and (iii) expanding
the number of higher margin service-related offerings to its customers.
PRODUCTS AND SERVICES
The following table presents the net sales of Kroll-O'Gara's products and
services by Group for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Security Products and Services Group........................ $34,883 $ 79,156 $105,557
Investigations and Intelligence Group....................... 48,914 66,735 67,419
Voice and Data Security Group............................... 2,044 7,770 17,437
------- -------- --------
$85,841 $153,661 $190,413
======= ======== ========
</TABLE>
In addition to the information presented above, see Notes to the Company's
Consolidated Financial Statements included elsewhere in this Prospectus for
business segment data and for information concerning foreign and domestic
operations and export sales.
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<PAGE> 31
SECURITY PRODUCTS AND SERVICES GROUP
The Security Products and Services Group has three product categories: (i)
commercial products, (ii) military products and (iii) security services. Net
sales for the Security Products and Services Group totaled $105.6 million for
fiscal year 1997. The following table presents the aggregate net sales for each
of the three product categories for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial products......................................... $15,818 $ 18,304 $ 54,541
Military products........................................... 14,955 54,596 43,719
Security services........................................... 4,110 6,256 7,297
------- -------- --------
$34,883 $ 79,156 $105,557
======= ======== ========
</TABLE>
Commercial Products
The Company armors a variety of vehicles including limousines, sedans,
sport utility vehicles, commercial trucks, and money transport vehicles that
protect against varying degrees of ballistic and blast threats. The armoring
process begins with the disassembly of a base vehicle which is purchased new
from a dealership or directly from the factory. This disassembly normally
involves the removal of the interior trim, seats, doors and windows. The
passenger compartment then is armored with both opaque armor (metallic, fibrous
and ceramic materials) and transparent armor (glass/plastic laminate) and other
features, such as run flat tires and non-exploding gas tanks are added. Finally,
the vehicle is reassembled as close to its original appearance as possible. The
types of commercial products produced by the Company are described below. During
1997, the Company shipped approximately 1,000 armored vehicles.
Armored vehicles. The Company produces fully armored vehicles and light
armored vehicles. Fully armored vehicles, such as limousines, large sedans (such
as a Cadillac, Mercedes Benz S600 or Volvo S90) or sport utility vehicles (such
as the GMC/Chevrolet Suburban), typically are armored to protect against attacks
from military assault rifles such as AK-47s and M16s and from certain underbody
explosives. Certain vehicles also are blast protected by incorporating the
ballistic and underbody protection with proprietary materials and installation
methods that protect the occupants against a defined blast threat.
Blast-protected vehicles defend against threats such as pipe bombs attached to
the exterior of the vehicle and nondirectional charges of 20 kg of TNT detonated
approximately five meters from the vehicle. Fully armored vehicles typically
sell for $50,000 to $200,000 exclusive of the cost of the base vehicle.
Fully armored vehicles also include Parade Cars, which are formal
limousines used predominantly for official functions by a president or other
head of state. These vehicles are usually customized based upon a commercially
available chassis which the Company essentially rebuilds from the ground up.
Because the threat of organized assassination attempts is greater for heads of
state, these vehicles normally incorporate more advanced armor and sophisticated
protection systems and have special features such as supplemental air and oxygen
systems, air purification systems to protect against chemical or biological
contamination, underbody fire suppressant systems, tear gas launchers,
anti-explosive self-sealing fuel tanks, electric deadbolt door locks, gun ports
and remote-starters with bomb scanning capability. Parade Cars normally sell for
$300,000 to in excess of $1.0 million inclusive of the cost of the base vehicle.
Light armored vehicles are similar in all respects to a fully armored
vehicle except that substantially less total-weight of armoring is added.
Therefore, it is possible to armor smaller vehicles such as the Volkswagen Jetta
and the General Motors Omega, as well as larger vehicles such as the Mercedes
Benz S600 and the Jeep Cherokee. Light armored vehicles are designed to protect
against attacks from handguns, such as a 9 mm or .357 Magnum. The price of a
light armored vehicle ranges from $5,000 to $60,000 exclusive of the cost of the
base vehicle.
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<PAGE> 32
Other vehicles. The Company also produces specialty vehicles,
cash-in-transit ("CIT") money transport vehicles and commercial truck bodies.
Specialty vehicles are custom built for a specific mission, such as Escort Cars
(usually a convertible) and Chase Cars (usually a closed-top vehicle) in which
security personnel ride while in a head of state motorcade. The Company's Labbe
and IMEA subsidiaries produce CIT vehicles which are used by banks or other
businesses to transport currency and other valuables. After starting with a van
or small truck, the Company modifies the base vehicle to provide protection for
the cargo and passengers from ballistic and blast threats. The Company believes
that conditions in many emerging growth countries will promote high demand for
these vehicles. Labbe also builds commercial truck bodies. The truck bodies are
manufactured primarily for 3.5 ton trucks and are installed on chassis produced
by a variety of manufacturers.
Military Products
Up-Armored HMMWVs. The Company is the prime contractor to the U.S. Military
for the supply of armoring and blast protection for HMMWVs. The HMMWV chassis
are produced by AM General and shipped directly to the Company's facility in
Fairfield, Ohio where armor and blast protection components are added. These
Up-Armored HMMWVs provide protection against 7.62 mm armor-piercing ammunition
(such as that fired by the AK-47 military assault rifle), overhead airburst
protection against a 155 mm shell, front underbody blast protection against a 12
lb. anti-tank mine and rear underbody blast protection against a 4 lb.
antipersonnel mine. In addition, the Company installs other features designed to
enhance crew safety, comfort and performance, such as air conditioning, weapon
turrets and mounts, door locks and shock-absorbing seats. The Company charges
its customers $70,000 to $100,000 for these ballistic and blast protective
systems, which is in addition to the cost of the vehicle. During 1997, the
Company shipped 366 Up-Armored HMMWVs. The Company also supplies engineering
design and prototype services in support of the Up-Armored HMMWV Program,
supplies spare parts and logistic support and produces field-installable
armoring kits.
Other armor systems. The Company markets armor sub-systems for other
tactical wheeled vehicles, such as 2.5 ton and 5.0 ton trucks. The Company also
produces various armor systems as a subcontractor to larger defense contractors,
such as Lockheed Martin Corporation and The Boeing Company. These products
include armor for containers for fuels and missile launchers and for pilot
protection, and typically involve the use of materials or methods which are
unique to the Company.
Security Services
The Company provides a variety of services designed to protect and help its
clients manage risks and respond to crisis situations. These services include
training, risk and crisis management and site security systems.
Training. The Company offers comprehensive training programs in advanced
driving, ballistics, security and counterintelligence, and surveillance. Driver
training programs are offered primarily through the Company's ITI subsidiary.
ITI utilizes various facilities around the world including its Force Protection
Institute in San Antonio, Texas, which offer a full range of advanced driver and
force protection training. The Company offers ballistics training in a
progressive and realistic 360 degree, .223 caliber ballistic shooting house,
encompassing 6,800 square feet of training space, at its facility near
Washington, DC. Ballistics training consists of a wide spectrum of combat
marksmanship skills which focuses on realistic situations, exposing students to
stress while under difficult firing situations. The Company also offers security
and counterintelligence training courses for both U.S. Government agencies and
clients in the private sector. These courses provide a history of U.S.
counterintelligence efforts and current issues in the field, such as force
protection, protection of intellectual property rights and information security.
The training includes instruction on methods of recognizing and deterring
political and business intelligence risks. Additionally, the Company provides
training in the detection of, and responses to, surveillance. Students learn
methodologies utilized by terrorists, what information is needed by terrorists
in order to plan an attack and how to block or manipulate this flow of
intelligence.
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<PAGE> 33
Risk and crisis management. The Company provides a variety of consulting
services to assist businesses in managing diverse risks to their personnel and
assets and in meeting and managing unexpected crises. The Company's crisis
management services are provided in a variety of contexts, including the crisis
response to a kidnapping of a company's executive, the safety of consumers, the
contamination of a consumer product or the environment or the potential damage
to the reputation of a corporate client as a result of disclosure of adverse
events. The Company maintains a crisis management center in Vienna, Virginia
where personnel are on duty 24 hours a day, 365 days a year, to handle requests
for information and provide initial advice and immediate contact with members of
the Company's professional staff specializing in the particular crisis
presented.
As part of its risk and crisis management service, the Company furnishes
periodic information that includes: reports providing city-specific advisories
to business travelers on conditions and other relevant information with respect
to almost 300 cities around the world; a comprehensive country security risk
assessment service that includes daily intelligence briefings containing early
warnings of events and up-to-date information about political unrest, terrorist
activities, product contaminations, health emergencies and other similar events;
a monthly bulletin that reviews and analyzes safety and security issues relating
to air travel around the world; a monthly intelligence review that provides a
global survey of political risk development in countries around the world; and
special reports on relevant topics, such as kidnappings or specific regions or
countries that are relevant to business travelers.
Site security systems. The Company offers comprehensive planning, design
and hardware and software integration services customized to meet the
requirements of customers for physical site protection. Primarily intended for
perimeter security around business facilities and plant operations, the Company
also offers its services to embassies, VIPs' homes and public facilities.
Generally, such a systems integration project begins with a site survey, which
identifies areas of vulnerability and recommends methods for securing the entire
area surveyed. Specific pieces of hardware are ordered and installed, processes
and procedures are outlined, engineering documentation is provided and control
centers are established. Although each job is unique, the methodology used to
develop the system is similar in most cases.
INVESTIGATIONS AND INTELLIGENCE GROUP
The Investigations and Intelligence Group has three product categories: (i)
investigations, (ii) business intelligence and (iii) other services. The
Company's investigative and intelligence services are provided by professionals
with backgrounds in law, finance, business, consulting, law enforcement,
accounting, journalism, environmental science and technology. The Company
believes that its blend of talent and expertise is important to the success of
this Group. The following table presents the aggregate net sales for each of the
Group's three product categories for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Investigations...................................... $35,244 $45,737 $40,675
Business intelligence............................... 8,834 11,925 19,148
Other services...................................... 4,836 9,073 7,596
------- ------- -------
$48,914 $66,735 $67,419
======= ======= =======
</TABLE>
Investigations
The Company provides a variety of investigative services including
financial fraud investigations, corporate investigations, litigation services,
asset tracing and analysis, vendor investigations and corporate security.
Financial fraud investigations. The Company's investigators, including
forensic accountants and computer specialists, work with corporations and
governmental entities to detect and curtail fraudulent and illegal activities by
a client's employees, vendors or contractors. When a company's senior management
or a board of directors suspects their company is being victimized by such
conduct, they must act quickly to confirm their
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<PAGE> 34
suspicions, safeguard the company's assets, halt the undesired activity and
prevent recurrences. This must be accomplished without disrupting the normal
business flow. To this end, Kroll-O'Gara personnel collect and analyze
information about the suspected conduct, thereby maximizing the client's ability
to assess the extent of losses, attempt to recover assets and contain or prevent
damaging financial impact on the company. The Company's investigators have
extensive experience in detecting and solving misappropriations of corporate
assets, violations of fiduciary duties, business frauds and insolvency and
bankruptcy fraud.
Corporate investigations. Working closely and confidentially with
management and/or legal counsel, the Company's investigators and forensic
accountants help to devise a strategy to solve such problems as thefts of trade
secrets, threats and hostile acts, gray market and counterfeit products, patent
and trademark infringements, and sexual harassment and other employee issues.
Businesses have encountered growing numbers of disgruntled employees, vengeful
ex-employees and ruthless competitors and distributors. This has resulted in a
growing need for corporate investigations. The Company attempts to determine the
source and extent of the problem, develop information about the parties
responsible, minimize damage to the client and propose effective measures to
prevent further losses.
Litigation services. The Company provides litigation support services to a
client's outside counsel and in-house lawyers in preparation for litigation or
arbitration proceedings and designing settlement strategies. These services
include developing evidence to support a claim or a defense, identifying and
locating material witnesses, investigating adverse witnesses, locating and
evaluating recoverable or relevant assets of adverse parties, assessing the
strategic goals and financial commitment of the opposition and helping to assess
whether an adequate recovery can be obtained if a lawsuit is successful. The
Company's wide-ranging information gathering can help businesses and legal
strategists decide whether to sue, go to trial or employ alternative dispute
resolution, and whether, and at what level, to negotiate a settlement. In
complex litigation, Kroll-O'Gara's sophisticated link-analysis software can
track and process voluminous documentation, as well as extensive database
material, in order to identify elusive connections and produce investigative
leads.
Asset tracing and analysis. The Company's asset tracing services consist of
tracing and locating assets anywhere in the world and developing financial
profiles and life style assessments in connection with bankruptcy cases, loan
defaults, internal investigations and other due diligence requests by clients.
In many cases, the Company has worked with trustees in bankruptcy and
insolvency, creditors' committees, bankers in workout and restructuring
departments, litigators and bankruptcy attorneys, conducting searches for
concealed or undisclosed assets. In other contexts, clients may be interested in
a financial profile or asset analysis of a person in connection with a potential
business relationship, lawsuit or internal investigation. The Company's asset
searching and analysis techniques are effective both in uncovering assets and in
bringing debtors to the negotiating table. The Company's strategies for
identifying assets rely both on a range of investigative techniques and on the
highly sophisticated use of electronic databases. Tactics employed include
searching through sometimes obscure but publicly available local records,
reviewing financial documents and conducting discreet interviews with people
associated with the subject.
Vendor qualification. The Company has recently developed a vendor integrity
program that provides profiles of a client's vendors, using information provided
by the vendors and obtained from independent sources. A client utilizes these
profiles to insure that its vendors adhere to the client's standards for ethical
business practices. The fees for this service may be paid either through nominal
fees charged to each participating vendor or billed directly to the client.
Corporate security services. The Company designs corporate security
programs that help to safeguard clients' operations and premises. Security
programs and systems are designed to protect the safety of key executives,
preserve assets and protect the integrity of computer and telecommunications
systems.
Business Intelligence
Kroll-O'Gara provides business intelligence services to clients requiring
reliable insight into the strengths, vulnerabilities and strategies of
competitors and potential business partners. The Company's professionals provide
sophisticated business intelligence on companies and individuals, reporting on
their market position,
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<PAGE> 35
technical capabilities, strategic direction and the industries and countries in
which they operate. The due diligence and background information and analysis
furnished by the Company is intended to be useful for clients considering
significant operating or strategic decisions, such as proposed acquisitions or
unsolicited offers to acquire corporate control, possible business arrangements
with particular partners and proposed entries into new markets.
Business intelligence services are utilized by lenders, underwriters,
potential acquirers and other businesses concerned with assessing and attempting
to minimize the risks related to major financial and other business decisions.
These services include pre-transaction intelligence, due diligence
investigations, competitor intelligence and analysis, intelligence in contests
for corporate control, new market entry intelligence and intelligence on
business partners, customers and critical vendors.
Other Services
Monitoring services and special inquiries. Kroll-O'Gara provides monitoring
services and special inquiries to clients that require an independent fact
finder to end fraud and install systems that monitor compliance. The Company's
lawyers, forensic accountants, investigators, analysts and industry experts seek
to identify violations of federal or state regulatory requirements or corporate
policies and consult with clients with respect to establishing systems to audit
and ensure compliance with such regulatory requirements or policies. The Company
serves as an objective fact finder, one whose work product might well be turned
over to a questioning government regulator or a skeptical and vocal segment of
the public. In addition, the Company's fact finding efforts have been enlisted
by management or by audit committees concerned about problems that need to be
resolved within an enterprise.
Environmental services. The Company's environmental services involve
investigations, establishing audit and compliance verification programs,
providing litigation support and reporting to insurance companies in connection
with underwriting analysis and conducting due diligence for clients facing
potential environmental liabilities. These services are provided primarily to
large corporations, insurance companies, and potential business partners.
Increasingly stringent environmental regulations have created the need for
thorough environmental investigations in order to avoid stiff penalties.
VOICE AND DATA SECURITY GROUP
Satellite communication integration. The Company offers comprehensive
design and hardware and software integration services customized to meet
specific satellite communication requirements of its customers. This involves
the integration of portable satellite terminals, mobile antennas and
software-based air time. Usually these systems are designed for remote or
security intensive operations. The portable satellite terminals, which are
manufactured by third party suppliers and distributed by the Company, allow the
user to make voice and data transmissions via satellite link anywhere in the
world.
Navigation systems. The Company distributes Global Positioning Satellite
Systems ("GPS") primarily in the United Kingdom and Europe. The GPS products
enable users to identify their exact location throughout the world.
Computer hardware and software security. The Company offers computer
hardware and software consulting services. Businesses face a variety of risks
from both employees and outsiders who infiltrate computer systems by various
means including e-mail and internet access points. For example, disgruntled
employees or competitors may cause unauthorized changes to a company's website,
redirect message traffic to an alternative website or create "hate sites"
containing negative and often untrue information about a business. The Company's
investigators are able to track down the perpetrators of these activities,
analyze how the incident occurred and offer countermeasures to prevent future
security breaches. The Company also can help a client locate information vital
to a lawsuit, and do so in a manner that assists in proving the admissability of
such evidence. Such information is located by the use of forensic software that
allows the Company to recover previously deleted computer files, obtain access
to password protected files, and search a hard drive for up to 256 words or
phrases simultaneously.
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<PAGE> 36
CUSTOMERS
SECURITY PRODUCTS AND SERVICES GROUP
Commercial products. The Company's armored commercial vehicle customers
include governmental and private buyers. U.S. and foreign governmental buyers
purchase both fully and light-armored vehicles. Governmental buyers also
comprise the market for Parade Cars. Typically, governmental buyers consist of
ministries of foreign affairs, defense and internal affairs and offices of
presidential security. Such customers are not constrained in their purchasing
decisions by considerations such as import duties and taxes and are free to
search globally for the best product available. The procurement cycles of
governmental buyers can range from relatively rapid, when the vehicles are for
the use of the head of state or in response to a particular crisis, to prolonged
bureaucratic bids and evaluations for normally budgeted items. The Company's
private customers for armored commercial vehicles include corporations and
individuals. Private buyers are much more sensitive to cost (of which import
duties and taxes may be a substantial part) and, therefore, often will buy a
locally produced product, if one exists. Local servicing of the vehicle is also
a critical concern to private buyers. The Company's customers for CITs are
generally financial institutions. Purchasing decisions for CITs depend on many
criteria including the ownership of the institution (private or governmental),
insurance requirements and costs. The geographic distribution of 1997 sales of
the Company's commercial armored vehicles, as a percentage of total 1997 sales
for those products, was as follows:
1997 COMMERCIAL SALES
BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMERCIAL SALES
----------------
<S> <C>
Central and South America................................. 38%
Europe.................................................... 33
North America............................................. 10
Middle East............................................... 8
Far East.................................................. 6
Other..................................................... 5
</TABLE>
Military products. The Company's market for military hardware products is
worldwide in scope, including the U.S. Military and foreign defense forces. The
Company's major contracts for delivery of Up-Armored HMMWVs are with the U.S.
Military. Additionally, the Company provides protected container systems,
typically used to protect missile systems from small arms fire, to the U.S.
Military under a subcontract with Lockheed Martin. The Company has sold
Up-Armored HMMWVs to Qatar and Luxembourg, either directly or through the U.S.
Foreign Military Sales Program and is seeking to expand its sales of these
vehicles to foreign defense forces.
Training. The Company began offering advanced driver training, firearms
training and surveillance detection training courses after its acquisition of
ITI, which had an established customer base of U.S. and foreign governmental
agencies and corporate customers. Many private sector clients are drawn to the
Company's training courses due to the Company's reputation of providing these
services to various governmental agencies. The Company markets its various
courses to its armored commercial vehicle customers and vice versa.
Risk and crisis management. A significant portion of the Company's
customers for investigating and negotiating ransom demands in connection with
kidnappings and for investigating incidents of product tampering or
disparagement arise from a contract with American International Group, Inc.
("AIG"), an international multi-risk insurance company, under which the Company
investigates certain claims by AIG's insureds. Although the Company is paid by
AIG after claims are made for such occurrences, the Company's client is the
affected person or entity. The Company's customers for its information services
relating to travel safety are multinational corporations and individuals. The
Company markets its information services to many of its customers for other
products and services.
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<PAGE> 37
Site security systems. Since it began offering site protection systems
integration services in early 1996, the Company has obtained numerous contracts
with both Russian and multinational companies to provide integrated site
security systems. Currently, the Company is marketing these products primarily
in Russia. Corporate and governmental buyers of integrated security systems
normally purchase through their corporate security officer, a governmental
department responsible for the particular facility's security, a facility
manager or a construction project manager. Purchases generally are made on
project-specific proposals and include the cost of the hardware, transportation
costs to the site, engineering integration and documentation.
INVESTIGATIONS AND INTELLIGENCE GROUP
From 1994 through 1997, the Company provided investigative and intelligence
services to approximately 2,100 clients located in the United States and
approximately 1,200 clients located in other parts of the world. The Company's
clients for these services include multinational corporations, leading law
firms, financial institutions, government agencies and individuals in a wide
range of business sectors. The financial institutions to which the Company
provides services include many of the largest international investment banks,
numerous commercial banks, insurance companies and other significant credit
institutions. The Company's governmental clients include agencies of the U.S.
Government, state and local governments in the United States and a number of
foreign governments and ministries.
The Company classifies its investigative and intelligence sales by where
the services are delivered; international sales are services delivered outside
the United States. For the years ended December 31, 1995, 1996 and 1997, 71%,
73% and 69%, respectively, of this Group's net sales were attributable to
services delivered in the United States; the balance were attributable to
services delivered outside the United States.
Although many of the Company's clients utilize these services on a periodic
basis, relatively few clients utilize the Company's services each year and the
clients that account for a material percentage of net sales in any year may vary
widely.
Generally, in the United States the Company charges for its investigative
and intelligence services on an hourly basis at varying rates, depending upon
the type of service being provided and the competition that exists in providing
the service. The Company also provides these services, particularly outside the
United States, on a negotiated project, or fixed fee, basis. Providing services
on a fixed fee basis enhances the potential for higher profit margins. However,
such arrangements can also result in unexpected losses on a particular project.
The Company believes that this risk is reduced by the large number of its fixed
fee arrangements.
VOICE AND DATA SECURITY GROUP
Satellite communication integration. Principal customers for satellite
communications services include private corporations and individuals,
governmental agencies, peacekeeping forces and disaster relief organizations
which operate in lesser-developed countries that lack a telecommunications
infrastructure, in rural areas of developed countries or in disaster scenarios
in which the traditional forms of telecommunications are rendered inoperable.
Increasingly, customers are demanding that the satellite communication channels
provided be secure. Depending on the level of security desired, satellite
communication systems can be implemented using a variety of encryption methods
up to and including fully secure U.S. Government STU-III telephones. Most of the
Company's satellite communication customers are located outside of the United
States because the U.S. Federal Communications Commission does not permit
private corporations or individuals to use terminals in the United States which
do not utilize the American Mobile Satellite Corp. ("AMSC") satellite network.
The terminals marketed by the Company access the INMARSAT network rather than
the AMSC network.
Navigation systems. The Company resells GPS equipment through approximately
1,270 independent distributors and retailers in the United Kingdom and France.
Marine GPS units are sold generally through distributors and retailers which
specialize in marine electronics and others that sell general boat equipment.
Outdoor (general recreational) GPS units are sold through sporting goods
retailers, camping and outdoor stores and general electronics stores. Aviation
GPS equipment is sold through aviation equipment retailers.
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<PAGE> 38
Computer hardware and software security. The Company markets its computer
hardware and software security to its corporate customers. These customers
either are concerned about potential infiltration of their proprietary databases
or have had their databases infiltrated by employees or third parties.
MARKETING AND SALES
Commercial. The Company believes that it enjoys excellent name recognition
and a strong reputation in the security industry. The central element of the
Company's commercial marketing strategy is to leverage the name recognition and
reputation of its products and services by positioning the Company as a global
provider of one-stop risk mitigation services and products. The Company believes
that by positioning itself in this manner it can capitalize on its existing
customer base, maximize the benefits of its long history of supplying
security-related products and services around the world and leverage its
leadership niche in the risk mitigation market. The Company tailors its
marketing strategy to each geographic area of the world and often will tailor
its product and services offering by country. There is strong cross-marketing of
its products and services which the Company believes strengthens the image of
each product group.
On a worldwide basis, the Company employs 39 full-time sales professionals
in its Security Products and Services Group who operate out of Los Angeles,
California; Washington, D.C.; Miami, Florida; Fairfield, Ohio; Sao Paulo,
Brazil; Lamballe, France; Paris, France; Mexico City, Mexico; Subic Bay, the
Philippines; Moscow, Russia; and Geneva, Switzerland. All personnel have a
geographic and/or product-specific responsibility. In most cases, these sales
personnel also maintain and recruit sales agents or distributors. The agents or
distributors have geographic and product-specific agreements, and compensation
in most cases is based upon a commission arrangement. The sales personnel use a
consultative approach when offering solutions to the customer's security
problems. Sales cycles for commercial physical security products can range from
several months to a matter of days, depending upon the product and the urgency
associated with the security problem being addressed. Physical security products
which are readily available, such as the fully armored Standard Suburban, allow
the Company to assist customers who have, or believe they have, developed an
immediate threat.
In its Investigations and Intelligence Group, the Company relies on its
professionals not only to provide services to existing clients, but also for
business development. The Company's professionals are principally responsible
for the marketing of services and for establishing relationships with clients.
The Company obtains engagements from a client's board of directors, chief
executive and chief financial officers, general counsel and a variety of other
corporate officials, including business development officers, security managers,
risk managers and human resource personnel. The Company's senior professionals
act as relationship managers for the Company's major clients, and a significant
amount of the Company's marketing consists of maintaining and developing these
personal relationships. In addition, the Company has a professional staff in New
York City and in each of its regional headquarters that includes marketing,
sales and public relations professionals who support and coordinate the
Company's marketing efforts on a worldwide basis. These marketing efforts
include seminars, briefings, receptions, breakfast and lunch meetings, direct
mail and selected advertising in trade and other journals. The Company's
services and marketing events are promoted through its Internet website and a
publication mailed periodically to approximately 20,000 clients and prospective
clients.
The Company's marketing efforts attempt to increase business with existing
clients by expanding clients' awareness of the range of services offered by the
Company and by broadening the decision makers within a client's organization
that are aware of the range of services offered by the Company. The Company's
business development staff periodically conducts surveys of clients to assess
their perception of the range and quality of its services and, after the
completion of an assignment, clients are often asked to complete a quality
control questionnaire.
Because most of the product sales of the Company's Voice and Data Security
Group are through independent distributors and retailers, the Company employs
only eight sales professionals in that Group, most of whom operate out of its
Deer Park, New York and Salisbury, United Kingdom facilities.
Military. The Company continues to position itself in the marketplace as a
commercial company with a military production capability and to emphasize its
ability to develop new products, or product adaptations,
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<PAGE> 39
quickly and more cost-effectively than traditional defense contractors. In
marketing its products to the military, the Company also places strong emphasis
on its superior antitank and antipersonnel mine protection for the occupants of
tactical wheeled vehicles. The Company markets its military products through a
combination of trade show exhibitions, print advertising in military-related
periodicals and direct customer visits. The Company emphasizes the
cross-marketing of military and commercial products, which it believes
strengthens the image of each product group. The Company also has entered into
exclusive teaming and joint marketing agreements with AM General, the
manufacturer of the basic HMMWV, for sales in the military and commercial
arenas. These agreements designate the Company as the exclusive armorer to AM
General for HMMWVs and allow the Company to benefit from the AM General
distribution network and save on certain costs, such as exhibitions where AM
General and the Company otherwise would both show products.
The Company's military sales activities are directed toward identifying
contract bid opportunities with various U.S. Government agencies, private
enterprises acting as prime contractors on government contracts, sales through
the Foreign Military Sales Program, and military sales directly to foreign
military organizations. The Company has two full-time business development
managers who are responsible for this activity and also has contractual
arrangements with several outside consultants who assist the business
development managers in their activities. Proposal preparation and presentation
for government projects is done by a proposal team which normally consists of
program managers who have specific project responsibilities, a contracting
officer, a cost accountant and various manufacturing and engineering personnel.
ENGINEERING AND DEVELOPMENT
The Company's engineering and development activities are centered on
products offered by its Security Products and Services Group. The Company
emphasizes engineering excellence and has an extensive engineering staff. Design
engineers use state-of-the-art two-dimensional and three-dimensional computer
aided design and engineering (CAD/CAE) systems in conjunction with coordinate
measuring machines to develop electronic models which generally are converted to
solid models or prototypes. Manufacturing engineers concentrate on the ability
of the Company to manufacture a product design, on improvements in the
production process and overall cost reductions from better methods, fewer
components and less expensive materials with equal or superior quality and on
materials handling issues. Applying these techniques, in the last several years
the Company has been able to produce savings in both the time and cost necessary
to produce its armored vehicles.
Quality engineering is responsible for assuring that manufacturing and
design plans are consistent with a reliable, quality product that meets the
specifications of the customer. Quality engineers also are responsible for
identifying in-process quality inspection points in the work orders. The
Company's ballistic engineer, in conjunction with its design and manufacturing
engineers, develops new ballistic and blast protection systems that meet
ever-changing threats. The ballistic engineer also is responsible for the
ballistic testing required by customers, the assignment of ballistic
specifications to final products and the issuance of ballistic specifications
for internal quality control. Advanced engineering is responsible for new
product development in conjunction with design engineering, manufacturing
engineering and ballistic engineering. The Company estimates that it expended
approximately $2.0 million, $2.8 million and $2.9 million in 1995, 1996 and
1997, respectively, on its engineering and development efforts. The amount for
1997 includes expensed amounts reimbursed under a Systems Technical Support
Contract described under "U.S. Government Contracts."
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<PAGE> 40
U.S. GOVERNMENT CONTRACTS
The Company serves as the U.S. Military's sole source contractor for
armoring the HMMWV fleet. Since its initial contract in August 1993 to armor 59
HMMWVs, the Company has been awarded contracts to armor a total of 1,993 HMMWVs.
Of these, 1,098 Up-Armored HMMWVs have been shipped, as follows:
<TABLE>
<CAPTION>
NUMBER OF
HMMWVS
YEAR SHIPPED
---- ---------
<S> <C>
1993........................................................ 0
1994........................................................ 139
1995........................................................ 26
1996........................................................ 507
1997........................................................ 366
1998 (through February 28).................................. 60
-----
Total................................................ 1,098
=====
</TABLE>
The Company's most recent contract with the U.S. Military was negotiated on
January 8, 1998 and covers 738 Up-Armored HMMWVs for the U.S. Army and the U.S.
Air Force, to be delivered from August 1998 through June 2000. The contract is
expected to be signed in April 1998. As the Up-Armored HMMWV fleet grows, the
Company is experiencing continued growth in sales of spare parts and related
fleet management activity, including a $2.0 million annual contract to support
field requirements. This contract was most recently renewed in March 1998.
In January 1997, the Company signed a Systems Technical Support ("STS")
Contract with the U.S. Military to support continued research and development on
the Up-Armored HMMWV program. The four year contract, three of which are option
years, was budgeted for $2.5 million in 1997, with $2.5 million options in each
of 1998 and 1999 and a $2.0 million option in 2000. In September 1997, the U.S.
Military exercised its options for 1998 and 1999. The STS Contract, in part,
allows the Company to make new design improvements, to conduct additional
testing of materials, components and vehicles and to explore alternate and more
advanced armor configurations. The contract requires the Company to provide
25,000 hours per year of engineering and development time to the U.S. Military.
The Company believes that the knowledge gained from STS Contract work can be
applied to its commercial manufacturing programs.
As a subcontractor to Lockheed Martin, the Company has provided armoring
for certain missile weapons systems. The Company was first engaged in September
1993 by Lockheed Martin to armor launch systems of missiles. The Company was
most recently engaged by Lockheed Martin in March 1997 to provide such armoring
and believes that it is well positioned for future engagements.
COMPETITION
The markets for the Company's products and services are highly competitive.
The Company competes in a variety of fields, with competitors ranging from small
businesses to multinational corporations.
SECURITY PRODUCTS AND SERVICES GROUP
The Company believes that its design, engineering and production expertise
in providing fully integrated ballistic and blast protected vehicles gives it a
competitive advantage over those competitors who provide protection against only
selected ballistic threats. The largest competitor on a worldwide basis in the
production of armored commercial vehicles is Mercedes-Benz Aktiengesellschaft,
which sells its product through its worldwide dealer distribution system. In
addition, there are a number of other vehicle armorers in Europe, the Middle
East and Latin America which armor primarily locally manufactured automobiles.
U.S. based protected passenger automobile armorers include the Pittston Company
(owner of Brinks armored vehicles), Moloney Coachbuilders, Inc., Safe Car, Inc.,
and Armet Armored Vehicles, Inc. The principal competitive factors are price,
quality of engineering and design, production capability and capacity, ability
to meet delivery
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<PAGE> 41
schedules and reputation in the industry. There are a large number of companies,
such as Simula, Inc., that provide specific armoring packages for tactical
wheeled vehicles, helicopters and selected other military applications. The
Company believes that, as the size of the Up-Armored HMMWV requirement continues
to grow, competition from major defense contractors may increase.
With regard to the security services provided by this Group, the Company
competes with numerous local integrators and small consultant-type businesses,
such as Control Risks Group Ltd., and also with large suppliers of
security-related equipment such as Western Resources, Inc., Pinkerton's, Inc.,
The Wackenhut Corporation, Borg-Warner Security Corporation, Pittway
Corporation, Armor Holdings, Inc., ICTS International, N.V. and Tyco
International Ltd. The principal competitive factors are the best approach to
solving the problems, expertise, price, trust, availability and the company or
individual reputation.
INVESTIGATIONS AND INTELLIGENCE GROUP
In this area, the Company competes with local, regional, national and
international firms, including investigative and security firms, guard companies
and specialized consultants in specific areas such as kidnapping. The Company
believes that it is one of the largest companies in the world providing a broad
array of corporate investigation, risk and crisis management and business
intelligence services on a global basis and enjoys strong name recognition in
its industry. Nevertheless, the Company faces significant, and increasing,
competition in the United States and elsewhere in the world from a variety of
companies that provide some of the services offered by the Company. In most
service areas in which the Company operates, there is at least one competitor
that is significantly larger or more established than the Company. Many of the
national and international accounting firms, along with other companies such as
Decision Strategies/Fairfax International, LLC and Investigations Group, Inc.,
provide consulting services similar to some of the services provided by the
Company. Some of these firms have indicated an interest in providing corporate
investigation and business intelligence services on a broader scale. The
accounting firms have significantly larger financial and other resources than
the Company and have long-established relationships with their clients, which
also are likely to be clients or prospective clients of the Company. In
addition, large multinational security product and service providers have
indicated an interest in expanding their services to include value-added
services such as certain of the investigation and consulting services provided
by the Company.
VOICE AND DATA SECURITY GROUP
In this Group, the products distributed by the Company compete with those
offered by many companies, including STN Atlas Elektronik, GmbH and Nera AS. The
Company believes that the competitive factors in this portion of its business
include product reliability, the incorporation of advanced technological
features, price, ease of installation, availability and service. With respect to
secure custom communications systems integration services and computer hardware
and software security services, the Company competes with small and large
communications and computer security systems integrators.
SEASONALITY, BACKLOG AND RELATED MATTERS
Approximately 23% of the Company's net sales during 1997 were derived from
U.S. Military contracts and an additional 5% were derived from commercial
contracts with U.S. governmental agencies or foreign governments. For 1996,
these percentages were 36% and 6%, respectively. Military and governmental
contracts generally are awarded on a periodic or sporadic basis. The Company
frequently receives substantial orders in one quarter, the revenues from which
will not be recognized until one or more subsequent quarters. As a result, the
Company generally has significant fluctuations from time to time in its
business. Historically, these fluctuations have not been seasonal. The Company
does not believe that its business is seasonal overall, although historically
the first quarter has been weaker than the other three. Period-to-period
comparisons within a given year or between years may not be meaningful or
indicative of operating results over a full fiscal year.
The Company's backlog at December 31, 1996 and 1997 was approximately $28.8
million and $50.0 million, respectively. Backlog consists of net sales value for
firm orders not previously included in net
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<PAGE> 42
sales on the basis of percentage-of-completion accounting. Because many factors
affect the conclusion of definitive agreements for contracts awarded and the
production and delivery of the Company's products, no assurance can be given as
to when or whether net sales will be recognized from the Company's backlog.
Year-to-year comparisons of backlog are not necessarily indicative of future
operating results.
The Company's net sales from government contracts and most commercial
contracts for its armoring products are recognized using the
percentage-of-completion method. Under this method, estimated contract revenues
are accrued based generally on the percentage that costs to date bear to total
estimated costs. Estimated contract losses are recognized in full when
determined. Accordingly, contract revenues and total cost estimates are reviewed
and revised periodically as the work progresses and as change orders are
approved, and adjustments based upon the percentage-of-completion are reflected
in contract revenues in the period when such estimates are revised. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PROPERTIES AND FACILITIES
The Company maintains executive offices in New York, New York, and
Fairfield, Ohio, and regional headquarters in London, England, Hong Kong, Miami,
Florida, and New York, New York. In addition, the Company maintains 20 domestic
offices or facilities in 14 states and 20 foreign offices or facilities in 14
foreign countries around the world. The Company's principal properties and
facilities as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
BUILDING
LOCATION SQUARE FOOTAGE STATUS
-------- -------------- ------
<S> <C> <C>
Fairfield, Ohio................................. 130,000 owned
Lamballe, France................................ 125,000 leased
Subic Bay, the Philippines...................... 85,000 subcontractor
Sao Paulo, Brazil............................... 50,000 leased
New York, New York.............................. 36,900 leased
Mexico City, Mexico............................. 20,000 owned
Torino, Italy................................... 15,000 subcontractor
Washington, D.C. area........................... n/a leased
San Antonio, Texas.............................. n/a owned
</TABLE>
Fairfield, Ohio. In addition to executive offices, this facility contains
full production and assembly facilities for the Company's armored commercial
vehicles and the manufacturing and distribution of Up-Armored HMMWVs. The
facility is financed through tax-exempt debt and is pledged to secure the
repayment of such debt. The facility includes a complete fabrication and machine
shop equipped with a computer controlled plasma cutter, a computer controlled
press break, mills, automated grinders, a robotic welder and two coordinate
measuring machines, paint booths and ancillary equipment for both military and
commercial painting.
Lamballe, France. This facility houses the management, sales and
accounting functions of Labbe. The site contains facilities for production of
armored commercial and cash-in-transit vehicles, design studios for development
of prototypes, integrated computer systems, and areas for parts, fabrication,
painting and quality control. This facility also contains a ballistics range.
Labbe has occupied the site since 1948. It currently is leased for a term
expiring in September 2000. For accounting purposes, this is treated as an
operating lease.
Subic Bay, the Philippines. This facility is owned by a subcontractor, but
is supervised by the Company's personnel and performs installation of armoring
kits engineered in the Fairfield, Ohio facility.
Sao Paulo, Brazil. This facility, which was expanded to include a second
facility on an adjacent location in December 1996, is used for manufacturing and
sales of a full product line of armored commercial vehicles. It currently is
leased for a term expiring in March 2000. For accounting purposes, this lease is
treated as an operating lease.
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<PAGE> 43
New York, New York. This facility contains executive offices and serves as
the headquarters for the Company's Investigations and Intelligence Group. The
space is leased for a term expiring in December 2007. For accounting purposes,
this lease is treated as an operating lease.
Mexico City, Mexico. This facility is used for manufacturing and sales of
armored commercial vehicles. The facility currently is installing armoring kits
which have been engineered in the Fairfield, Ohio facility. The Company expects
the facility to have the capability to build a complete product line once it has
fully trained its production work force.
Torino, Italy. This facility is owned by a subcontractor, but is
supervised by the Company's personnel, and performs all aspects of manufacturing
specialty armored and unarmored commercial vehicles, from component fabrication
through final assembly. On occasion, the Torino subcontractor will act as a
vendor to the Company.
Washington D.C. area. This facility is used for advanced security training
and includes a portion of an abandoned airport runway that is used specifically
for advanced driver training. The facility is leased for a term expiring in May
1999. For accounting purposes, this lease is treated as an operating lease.
San Antonio, Texas. This facility, which was acquired in 1997, consists of
165 acres of land used for advanced driver and force protection training.
The Company's manufacturing capabilities include fully integrated
manufacturing programs which link production control, materials control, quality
control and accounting, thus allowing the Company to issue work orders, update
and track inventories, implement quality assurance procedures, schedule and
track production and report, on a daily basis, costs accumulated to a job. The
Company's non-executive offices range from approximately 320 square feet to
approximately 8,800 square feet and are subject to leases expiring through May
2002. The Company believes that its facilities are adequate for its current
needs and that its properties, including machinery and equipment, are generally
in good condition, well maintained and suitable for intended current and
foreseeable uses.
EMPLOYEES
As of December 31, 1997, the Company had 913 employees (excluding 81
temporary employees), comprised of 70 in marketing and sales, 410 in
manufacturing, 183 in professional services, 47 in engineering and 203 in
general and administrative. The Company's U.S. employees are not represented by
any union and are not covered by any collective bargaining agreements.
Approximately 25 employees of Labbe are employed under agreements with the
Confederation Francaise Democratique du Travail (FTDT). Wage increase parameters
are set twice a year by the Company's local management in consultation with the
union. The Company has not experienced any work stoppages or employee related
slowdowns and believes that its relationship with its employees is good.
GOVERNMENT REGULATION
The Company's services are subject to various federal, state, local and
foreign laws, including laws designed to protect the privacy of persons. A
wholly owned subsidiary of the Company holds private investigative licenses
from, and its investigative activities are subject to regulation by, the state
and local licensing authorities in the locations where the Company does
business. The Company also utilizes certain data from outside sources, including
data from third party vendors and various government and public record services,
in performing its services. Such utilization is subject to compliance with
applicable law.
As a contractor with agencies of the U.S. Government, the Company is
obligated to comply with a variety of regulations governing certain aspects of
its operations and the workplace. Additionally, the Company's contracts give the
contracting agency the right to conduct audits of the Company's facilities and
operations, and such audits occur routinely. An audit involves a governmental
agency's review of the Company's compliance with the prescribed procedures
established in connection with the government contract.
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<PAGE> 44
The Company is subject to federal licensing requirements with respect to
the sale in foreign countries of certain of the products of its Security
Products and Services Group. Regulations promulgated by the U.S. Commerce
Department require the Company to obtain a general destination license in
connection with the sale of certain commercial products in foreign countries,
and certain U.S. State Department regulations require the Company to file an
export license in connection with sales of military equipment in foreign
countries. Furthermore, the U.S. State Department prohibits all sales of
military equipment to certain countries, including, among others, China, Cuba,
Iran, Iraq, Libya and Syria.
The Company's foreign operations are subject to the laws and regulations of
the various countries in which they are conducted, including licensing, labor,
environmental and currency control restrictions.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to a number of environmental
laws, regulations and ordinances, both in the U.S. and various foreign
countries, that govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling,
storage and disposal practices regarding solid and hazardous materials, and
impose liability for the cost of remediating, and certain damages resulting
from, sites of past releases of hazardous materials. Environmental laws continue
to change rapidly, and it is likely that the Company will be subject to
increasingly stringent environmental standards in the future. The Company
believes that it currently conducts its activities and operations in substantial
compliance with applicable environmental laws. The Company is implementing
recommendations of an environmental consulting company designed to address
certain air pollution, hazardous waste, underground storage tank and hazard
communication matters at its Fairfield, Ohio facility. No notices of violation
have been issued to the Company by any regulatory agency with respect to
environmental matters which remain uncorrected. The Company believes that its
potential liability under the environmental laws, if any, would not have a
material adverse effect, individually or in the aggregate, on its results of
operations, financial condition or cash flows.
LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of its business; however, the Company does not believe that there is any
pending litigation, individually or in the aggregate, that is likely to have a
material adverse effect on its business or financial condition.
The Company is a defendant in an action titled Douglas H. Cohen v. Madison
Square Garden, L.P. and Kroll Associates, Inc., pending in the United States
District Court, Southern District of New York. In this litigation, which was
commenced in February 1998, Mr. Cohen seeks $1.0 million in compensatory damages
and $10.0 million in punitive damages against his former employer, Madison
Square Garden ("MSG"), and the Company. Mr. Cohen alleges libel and slander in
connection with an investigation of ticket sales practices and policies at MSG
carried out by the Company. Mr. Cohen was terminated by MSG for violating its
ticket sales policies. MSG successfully prevailed in a similar action brought by
another terminated employee to which the Company was not a party. The Company
intends vigorously to defend these claims, but there can be no assurance that a
favorable outcome will be obtained.
PATENTS, TRADEMARKS AND COPYRIGHTS
The Company currently has four issued U.S. patents relating to its armoring
business. The Company currently has three federally registered trademarks and a
pending application for a fourth trademark. The Company has no federally
registered copyrights. Although the Company does not believe that its ability to
compete in any of its product markets is dependent on its intellectual property,
the Company does believe that the protection afforded by its "Armoring Assembly"
and "Vehicle Mine Protection Structure" patents, both of which relate to vehicle
underbody blast protection, provides the Company with important technological
advantages over its competitors. Although the Company has protected its
technologies to the extent that it believes appropriate, there can be no
assurance that the Company's measures to protect its proprietary rights will
deter or prevent unauthorized use of the Company's technologies. In other
countries, the Company's proprietary rights may not be protected to the same
extent as in the United States.
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<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of March 13, 1998
concerning each of the Company's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jules B. Kroll....................... 56 Chairman of the Board, Chief Executive Officer and
Director
Thomas M. O'Gara..................... 47 Vice Chairman of the Board and Director
Wilfred T. O'Gara.................... 40 President, Chief Operating Officer and Director
Nicholas P. Carpinello............... 48 Controller and Treasurer
Michael G. Cherkasky................. 48 Chief Operating Officer -- Investigations and
Intelligence Group and Director
Marshall S. Cogan.................... 60 Director
Abram S. Gordon...................... 34 Vice President, General Counsel and Secretary
Michael J. Lennon.................... 41 Chief Operating Officer -- Security Products and
Services and Director
Raymond E. Mabus..................... 49 Director
Nazzareno E. Paciotti................ 51 Chief Financial Officer
Hugh E. Price........................ 61 Director
Jerry E. Ritter...................... 63 Director
William S. Sessions.................. 67 Director
Howard I. Smith...................... 53 Director
</TABLE>
Jules B. Kroll has been Chairman of the Board and Chief Executive Officer
of the Company since the Merger on December 1, 1997. He founded Kroll in 1972
and has been the Chairman of the Board and Chief Executive Officer of Kroll and
KHI since their foundings. Mr. Kroll also is a director of United Auto Group,
Inc. He has been a director of the Company since December 1997.
Thomas M. O'Gara has been Vice Chairman of the Board of the Company since
the Merger. He served as Chairman of the Board of the Company from August 1996
until December 1997. Mr. O'Gara has also been Chairman of the Board of OHE since
1990 and was OHE's Chief Executive Officer from 1990 until 1995. He has been a
director of the Company since August 1996 and a director of OHE since 1988. Mr.
O'Gara has held numerous executive officer and director positions with the
Company, its subsidiaries and its predecessors since 1975. From 1984 until 1986,
Mr. O'Gara also was Honorary Consul General for the Sultanate of Oman. Thomas M.
O'Gara and Wilfred T. O'Gara are brothers.
Wilfred T. O'Gara is President and Chief Operating Officer of the Company.
He served as the Company's Chief Executive Officer from August 1996 until the
Merger. Mr. O'Gara has been associated with the Company, its subsidiaries and
its predecessors since 1983 and has held numerous executive officer and director
positions, including serving as Chief Executive Officer of OHE since January
1996, President and Chief Operating Officer of OHE from 1991 through 1995 and
Vice President--Sales and Marketing of OHE from 1988 until 1991. Mr. O'Gara has
been a director of the Company since August 1996 and a director of OHE since
1991.
Nicholas P. Carpinello has been Controller and Treasurer of the Company
since the Merger. From August 1996 until December 1997 he served as the
Company's Executive Vice President, Chief Financial Officer and Treasurer,
positions he also has held with OHE since 1993. He has been Treasurer of OSN,
Inc. since 1995. Mr. Carpinello has been associated with the Company and its
predecessors since 1984. From 1975 until 1984, he was employed by Arthur
Andersen LLP where he served as a manager in the audit and small business
consulting divisions.
Michael G. Cherkasky became Chief Operating Officer of the Company's
Investigations and Intelligence Group in December 1997. Prior to the Merger he
had been an Executive Managing Director of KHI since
44
<PAGE> 46
April 1997 and Chief Operating Officer of KHI since January 1997. From November
1995 to January 1997, he was the head of KHI's North American Region and from
February 1994 to November 1995 he was the head of KHI's Monitoring Group. From
June 1993 to November 1993, Mr. Cherkasky was a candidate for public office.
From 1978 to June 1993, Mr. Cherkasky was with the District Attorney's office
for New York County, his last position being Chief of the Investigation
Division. He became a director of the Company in December 1997.
Marshall S. Cogan has been Vice Chairman of Foamex International Inc., a
manufacturer of polyurethane foam products ("Foamex"), since May 1997 and
Chairman and Chief Executive Officer of United Auto Group, a franchisor of car
and light truck dealerships, since April 1997. Mr. Cogan was Chairman of the
Board and Chairman of the Executive Committee of Foamex from 1993 until 1997 and
was Chief Executive Officer of Foamex from 1994 until 1997. Since 1974, Mr.
Cogan has been the principal stockholder, Chairman or Co-Chairman of the Board
of Directors, and Chief Executive Officer or Co-Chief Executive Officer, of
Trace International Holdings, Inc., a holding company operating businesses in
the auto sales, foam, textile and publishing industries. Mr. Cogan has been a
director of the Company since December 1997.
Abram S. Gordon is Vice President, General Counsel and Secretary of the
Company. Prior to joining the Company in January 1997, he was with the law firm
of Taft, Stettinius & Hollister LLP, Cincinnati, Ohio, from October 1987 until
December 1996.
Michael J. Lennon became Chief Operating Officer of the Company's Security
Products and Services Group in December 1997. He also has been the President and
Chief Operating Officer of OHE since January 1996. Mr. Lennon joined OHE in
February 1994 as Manager of Commercial and Military Programs; he became Vice
President for Sales, Marketing and Program Management in October 1994 and served
OHE in that capacity through 1995. Prior to joining OHE, Mr. Lennon had 15
years' experience in manufacturing, quality control and marketing with General
Electric Company, which he joined in 1979. From 1990 to 1994, he was Manager of
Advanced Technology Marketing for their G.E. Aircraft Engines business. He was
elected a director of the Company on March 12, 1998.
Raymond E. Mabus is currently of counsel to the law firm of Baker,
Donaldson, Bearman and Caldwell and also manages a family timber business. He
served as the United States' Ambassador to the Kingdom of Saudi Arabia from 1994
until 1996, as a consultant to Mobil Telecommunications Technology from 1992
until 1994 and as Governor of the State of Mississippi from 1988 until 1992. Mr.
Mabus has been a director of the Company since November 1996.
Nazzareno E. Paciotti has been Chief Financial Officer of the Company since
the Merger. Prior to the Merger he had been the Chief Financial Officer of KHI
since 1992. From 1990 to 1992, he was a Managing Director and the Controller of
the Henley Group (the parent of PneumoAbex Inc. and Fisher Scientific, a
laboratory supply company) and from 1988 to 1990, he was a Vice President and
the Controller of PneumoAbex Inc., an aerospace contractor specializing in the
manufacture of landing gear and flight actuating systems.
Hugh E. Price is engaged in business development activities for the
Company. During 1995 and 1996, prior to joining the Company, he was a consultant
to various businesses and organizations. Until his retirement in 1995, Mr. Price
had been employed by the Central Intelligence Agency since 1964. His positions
with the Agency included Deputy and Associate Deputy Director for Operations
(1991-1995), Chief and Deputy Chief for Counterintelligence (1988-1990) and
Director of Personnel (1986-1988). Mr. Price became a director of the Company in
October 1996.
Jerry E. Ritter is currently a consultant to Anheuser-Busch Companies,
Inc., a company engaged in the brewing and family entertainment businesses. He
also is Chairman of the Board of Clark Enterprises, Inc., the general partner of
the Kiel Center and the St. Louis Blues Hockey Club. From 1990 until 1996, Mr.
Ritter served as Executive Vice President and Chief Financial and Administrative
Officer for Anheuser-Busch Companies, Inc. Prior to that time, he served
Anheuser-Busch in various other managerial and executive
45
<PAGE> 47
capacities. Mr. Ritter also is a director of The Earthgrains Company, Brown
Group, Inc. and OmniQuip International, Inc. He became a director of the Company
in January 1997.
William S. Sessions is a partner in the law firm of Sessions & Sessions,
L.C. and is a consultant to various public and private businesses. From 1987
until 1993, Mr. Sessions was Director of the Federal Bureau of Investigation. He
served as a United States District Judge for the Western District of Texas from
1974 until 1987. Mr. Sessions is a director of Zenith National Insurance
Company. He has been a director of the Company since November 1996.
Howard I. Smith has been Executive Vice President, Chief Financial Officer
and Comptroller of AIG since 1996. From 1984 until 1996, Mr. Smith was Senior
Vice President and Comptroller of AIG. From 1975 until 1984 Mr. Smith was a
partner in the independent public accounting firm of Coopers & Lybrand. Mr.
Smith also is a director of AIG, 20th Century Industries, International Lease
Finance Corporation and Transatlantic Holdings, Inc. He became a director of the
Company in December 1997.
Directors of the Company are elected annually. Officers of the Company are
elected annually and serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation Committee,
both of which are composed of Messrs. Ritter (Chairman), Cogan, Mabus, Sessions
and Smith. The Audit Committee recommends the appointment of independent
accountants and reviews and discusses with the independent accountants the scope
of their examination, their proposed fee and the overall approach to the audit.
The Audit Committee also reviews with the independent accountants and the
Company's financial management the annual financial statements and discusses the
effectiveness of internal accounting controls. The Compensation Committee has
responsibility for establishing executive officers' compensation and fringe
benefits.
DIRECTORS' COMPENSATION
Effective at the time of the Company's 1998 Annual Meeting of Shareholders,
directors who are not employees of the Company will receive annually a $15,000
fee, plus options to purchase 2,000 shares of Common Stock, for serving as
directors. These directors also will be paid $1,000 for each Board of Directors
meeting attended in person and $750 for Board meetings held by telephone. Each
committee Chairman receives an annual fee of $1,600 and committee members,
including the Chairman, receive $750 per meeting attended, whether in person or
by telephone, unless the meeting occurs on the same day as a Board meeting, in
which case no separate fee is paid. Employee directors are not separately
compensated for their services as directors.
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<PAGE> 48
EXECUTIVE COMPENSATION
Summary Information. The following table sets forth, for the fiscal years
indicated, amounts of cash and certain other compensation paid by the Company
and its subsidiaries, for services in all capacities, to (i) Jules B. Kroll and
Wilfred T. O'Gara, each of whom served as Chief Executive Officer of the Company
for a portion of 1997, (ii) Michael G. Cherkasky and Nazzareno E. Paciotti, who
became executive officers at the time of the Merger, and (iii) each of the
Company's four other most highly compensated executive officers who received
compensation in excess of $100,000 during 1997. These persons are sometimes
referred to as the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------- -------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING
COMPEN- STOCK STOCK OPTION ALL OTHER
NAME AND SALARY BONUS SATION AWARD GRANTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
------------------ ---- ------- ------ ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jules B. Kroll(1) 1997 489,583 -- -- -- -- 32,965(2)
Chairman and Chief Executive 1996 500,000 75,000 -- -- -- 31,715
Officer 1995 500,000 -- -- -- -- 30,395
Thomas M. O'Gara 1997 252,083 -- -- -- 23,150 4,568(3)
Vice Chairman 1996 379,081 7,000 -- -- -- 4,912
1995 410,631 -- -- -- -- 1,218
Wilfred T. O'Gara 1997 240,000 45,000 -- -- 98,150 4,898(3)
President and Chief Operating 1996 200,231 45,000 -- -- 17,000 4,240
Officer 1995 140,550 -- -- -- -- 462
Michael G. Cherkasky(1) 1997 400,000 -- -- 1,904,578 25,000 28,914(2)
Chief Operating Officer - 1996 300,000 75,000 898 -- 68,647 26,767
Investigations and Intelligence 1995 260,000 -- 898 -- 21,882 25,971
Group
Michael J. Lennon 1997 148,333 70,000 -- -- 20,000 5,401(3)
Chief Operating Officer - 1996 128,334 60,317 -- -- 17,000 4,258
Security Products and Services 1995 89,977 20,000 -- -- -- 277
Group
Nazzareno E. Paciotti(1) 1997 275,520 66,667 -- 229,714 15,000 26,984(2)
Chief Financial Officer 1996 225,520 50,000 -- -- 68,647 24,984
1995 225,520 -- -- -- 21,882 22,797
Gary W. Allen(1) 1997 116,666 60,000 -- -- 4,000 6,063(3)
Vice President, OHE 1996 100,666 47,784 -- -- 15,000 3,817
1995 88,239 -- -- -- -- 414
Richard L. Curotto(1) 1997 110,000 35,000 -- -- 3,000 9,006(3)
Vice President, OHE 1996 100,833 47,392 -- -- 15,000 8,184
1995 98,433 17,000 -- -- -- 2,223
</TABLE>
- ---------------
(1) Messrs. Kroll, Cherkasky and Paciotti were unaffiliated with the Company
prior to the Merger on December 1, 1997; however, their compensation
information is given on a pooling of interests basis, as if they had been
executive officers of the Company throughout the periods presented. Messrs.
Allen and Curotto served as executive officers of the Company until the
Merger; their 1997 information includes compensation for the entire year.
(2) Represents pension contributions and profit-sharing contributions of $20,000
and $500, respectively, for each person and supplemental disability plan
benefits of $12,465 for Mr. Kroll, $8,414 for Mr. Cherkasky and $6,484 for
Mr. Paciotti.
(3) Represents profit-sharing contributions to the Company's 401(k) Plan of
$1,218 for Mr. Thomas M. O'Gara, $714 for Mr. Wilfred T. O'Gara, $714 for
Mr. Lennon, $602 for Mr. Allen and $2,520 for Mr. Curotto and executive
disability insurance plan benefits of $3,350 for Mr. Thomas M. O'Gara,
$4,184 for Mr. Wilfred T. O'Gara, $4,687 for Mr. Lennon, $5,461 for Mr.
Allen and $6,486 for Mr. Curotto.
Employment Agreements. Commencing December 1, 1997, the Company has
employment agreements, or amendments to existing employment agreements, which
expire on November 30, 2000, with each of Messrs. Kroll, Thomas M. O'Gara,
Wilfred T. O'Gara, Lennon, Paciotti, Carpinello and Gordon, providing
47
<PAGE> 49
for annual base salaries in the respective amounts set forth in the table below.
Each executive officer, including Mr. Cherkasky (who does not have an employment
agreement), also is entitled to participate in an annual bonus plan to be
established by the Compensation Committee of the Company's Board of Directors
and to receive up to 50% of such bonus in shares of the Company's Common Stock.
Pursuant to these employment agreements, employment may be terminated by the
Company at any time with or without cause, except that, in a case of termination
without cause, the employee is entitled to receive compensation for the greater
of the balance of the term of the agreement or one year. The agreements also
provide that if the employer does not renew the agreement for one year or more
at the end of the term, the employee will receive an amount equal to one year's
base salary. Each employment agreement restricts the executive officer from
competing with the Company during the term of the agreement, and for two years
thereafter if termination of employment is for cause or at the volition of the
employee. Each of Messrs. Thomas M. and Wilfred T. O'Gara has further agreed
that during his employment and for a period of 10 years thereafter he will not
directly or indirectly own any interest in or perform any services for any
entity which uses the word "O'Gara" as a business or trade name and competes
with the Company. Additionally, Mr. Kroll has agreed that during his employment
with the Company and for a period of 10 years thereafter he will not directly or
indirectly own any interest in or perform any services for any entity which uses
the word "Kroll" as a business or trade name and competes with the Company. Mr.
Cherkasky's base salary, as established by the Company's Board of Directors,
also is listed below. Additionally, at the time of the Merger, the executive
officers were granted options to purchase shares of the Company's Common Stock,
in the amounts listed below; each option has an exercise price equal to 100% of
the fair market value of the Common Stock on December 1, 1997.
<TABLE>
<CAPTION>
OPTIONS TO PURCHASE
SHARES
NAME BASE SALARY OF COMMON STOCK
---- ----------- -------------------
<S> <C> <C>
Jules B. Kroll.......................................... $375,000 -0-
Thomas M. O'Gara........................................ 275,000 -0-
Wilfred T. O'Gara....................................... 350,000 75,000
Michael G. Cherkasky.................................... 400,000 25,000
Michael J. Lennon....................................... 185,000 15,000
Nazzareno E. Paciotti................................... 275,000 15,000
Nicholas P. Carpinello.................................. 140,000 10,000
Abram S. Gordon......................................... 135,000 10,000
</TABLE>
Stock Options. The following table presents information on option grants
to the named executive officers during 1997 pursuant to the Company's 1996 Stock
Option Plan. The Plan does not provide for the grant of stock appreciation
rights ("SARs").
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
------------------------------------------------------ POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM
GRANTED EMPLOYEES IN OR BASE PRICE EXPIRATION -----------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jules B. Kroll....................... -- -- -- -- -- --
Thomas M. O'Gara..................... 23,150 4.8 12.10 3/24/07 176,163 446,431
Wilfred T. O'Gara.................... 23,150 4.8 11.00 3/24/07 160,148 405,847
75,000 15.6 17.25 12/01/07 813,632 2,061,404
Michael G. Cherkasky................. 25,000 5.2 17.25 12/01/07 271,211 687,301
Michael J. Lennon.................... 5,000 1.0 11.00 3/24/07 34,589 87,656
15,000 3.1 17.25 12/01/07 162,726 412,381
Nazzareno E. Paciotti................ 15,000 3.1 17.25 12/01/07 162,726 412,381
Gary W. Allen........................ 4,000 0.8 11.00 3/24/07 27,671 70,125
Richard L. Curotto................... 3,000 0.6 11.00 3/24/07 20,754 52,594
</TABLE>
48
<PAGE> 50
- ---------------
(1) All options vest one-third per year beginning one year after the date of
grant. The exercise price of all options may be paid in cash or by the
transfer of shares of the Company's Common Stock valued at their fair market
value on the date of exercise. Each option becomes exercisable in full in
the event of the execution of an agreement of merger, consolidation or
reorganization pursuant to which the Company is not to be the surviving
corporation or the execution of an agreement of sale or transfer of all or
substantially all of the assets of the Company.
With respect to each named executive officer, the following table sets
forth information concerning unexercised stock options held at December 31,
1997. No options were exercised during 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
VALUE UNEXERCISED IN-THE-MONEY
REALIZED($) OPTIONS AT OPTIONS AT
----------------- FY-END(#) FY-END ($)
(MARKET PRICE ON ------------ ------------
SHARES ACQUIRED EXERCISE LESS EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) EXERCISE PRICE) UNEXERCISABLE UNEXERCISABLE
---- --------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Jules B. Kroll.............. -- -- -- --
Thomas M. O'Gara............ -- -- 7,716/15,434 42,631/85,273
Wilfred T. O'Gara........... -- -- 24,716/90,434 197,744/130,375
Michael G. Cherkasky........ -- -- 90,529/25,000 1,290,776/9,375
Michael J. Lennon........... -- -- 18,666/18,334 157,662/27,713
Nazzareno E. Paciotti....... -- -- 90,529/15,000 1,290,776/5,625
Gary W. Allen............... -- -- 16,333/ 2,667 138,206/17,669
Richard L. Curotto.......... -- -- 16,000/ 2,000 136,000/13,250
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of
the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's
executive officers and directors, and persons who beneficially own more than ten
percent of the Company's equity securities, to file reports of security
ownership and changes in such ownership with the Securities and Exchange
Commission (the "SEC"). These persons also are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based upon
a review of copies of such forms and written representations from its executive
officers and directors, the Company believes that all Section 16(a) forms were
filed on a timely basis during and for 1997, except that Forms 5 reporting stock
options granted in December 1997 were filed after their due date by Messrs.
Carpinello, Cherkasky, Gordon, Lennon, Wilfred T. O'Gara and Paciotti.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In connection with the Company's initial public offering, the Board of
Directors of the Company adopted a policy requiring that any future
transactions, including loans, between the Company and its officers, directors,
principal shareholders and their affiliates be on terms no less favorable to the
Company than could be obtained from unrelated third parties and that any such
transactions be approved by a majority of the disinterested members of the
Company's Board of Directors.
Described below are certain transactions and relationships between the
Company and certain of its officers, directors and shareholders which have
occurred during the last three fiscal years. Except with respect to interest
rates charged on certain of the intercompany notes and accounts
payable/receivable, the Company believes that the material terms of the various
transactions were as favorable as could have been obtained from unrelated third
parties.
49
<PAGE> 51
GENERAL
Prior to October 28, 1996, the Company's business was conducted by a group
of companies affiliated by substantially common ownership and control. The
Company's armoring business was carried out primarily by OHE. Certain foreign
armoring operations, and foreign sales for OHE, were carried out by Overseas
Limited (formerly O'Gara-Hess & Eisenhardt Armoring Company, Limited), an Irish
corporation ("Limited"), and its subsidiaries. Satellite communications
operations were carried out by O'Gara Satellite Networks Limited, an Irish
corporation ("OSN"), and OSN, Inc., a Delaware corporation. On October 28, 1996,
certain of these companies and their businesses were reorganized and combined
with the Company in the Reorganization.
Longline Leasing, Inc. ("Longline") and Excel Armor Products, Inc. ("Excel
Armor" and, together with Longline, "Longline/Excel"), each a Delaware
corporation, merged as of December 31, 1996; Messrs. Thomas M. O'Gara, Wilfred
T. O'Gara and Carpinello own approximately 92%, 1% and 1%, respectively, of the
outstanding capital stock of Longline/Excel.
LONGLINE LEASING/EXCEL ARMOR
Lease agreements. OHE has a Master Equipment Lease with Longline/Excel,
entered into in July 1995, pursuant to which OHE leases various items of
equipment from Longline/Excel. As of December 31, 1997, OHE had approximately
$1,250,000 of equipment under lease for 12 and 36-month terms, beginning on
various dates between July 1995 and April 1996. Rental expenses were $17,000,
$381,446 and $396,005 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Supplier arrangements. During 1995 and 1996, OHE purchased the dual-hard
steel required for certain aspects of its vehicle armoring from Longline/Excel,
which distributed the steel for an unrelated third party. Purchases by OHE from
Longline/Excel were $520,700 and $960,231 during 1995 and 1996, respectively,
and accounted for 90% and 99% of Longline/Excel's sales revenues for the same
periods. In connection with these purchases, OHE advanced $160,390 to
Longline/Excel during 1995 to fund Longline/Excel's initial purchase commitments
and guaranteed a $150,000 letter of credit furnished by Longline/Excel to the
third party. OHE now purchases its dual-hard steel directly from the third
party. At December 31, 1996 and 1997, OHE had receivables of $210,659 and
$282,345, respectively, from Longline/Excel in connection with the prior
arrangement, which sum is guaranteed by the shareholders of Longline/Excel. All
other aspects of the arrangement have been terminated. Also, in August 1995,
Longline/Excel and OHE entered into an agreement under which OHE manufactured
certain parts needed by Longline/Excel in connection with a contract with a
third party. Total revenue recognized in 1995 and 1996 in association with this
contract was $124,000.
Corporate aircraft. In February 1995, OHE entered into a lease for a
Gulfstream G-II aircraft owned by Longline/Excel. The Gulfstream aircraft was
purchased by Longline/Excel for a price of $4,060,000 (represented by an
exchange of a prior jet leased by the Company from Longline/Excel and new
financing). In connection with the cancellation of the prior jet's lease,
$400,493, representing the unamortized portion of OHE's $504,000 deposit on that
lease, was transferred as the deposit on the Gulfstream lease. The Gulfstream
lease had a non-cancelable ten year term and initially provided for rental
payments of $53,000 per month. Nonetheless the Company paid rentals based on
actual usage. In August 1996, the Gulfstream lease was amended to provide for
minimum lease payments of $35,200 per month.
In February 1995, OHE also entered into a supplemental agreement with
Longline/Excel pursuant to which Longline/Excel agreed to provide all aircraft
management (including insurance) for the Gulfstream aircraft and to charter it
to others when not in use by OHE. Pursuant to this arrangement, and in lieu of
the $53,000 per month rental payments then required by the lease, OHE paid
Longline/Excel $30,000 per month, plus $1,800 per hour of monthly use in excess
of 16.7 hours, and Longline/Excel was entitled to retain all revenues from the
charter operations. In connection with the August 1996 amendment to the
Gulfstream lease, this agreement was amended to allow OHE 23 hours of usage per
month and to provide for charges of $1,500 per hour thereafter. Longline/Excel
continues to retain all revenues from charter operations. Rental expense related
to the Gulfstream lease (including amortization of the deposit) was $414,160,
$422,349 and
50
<PAGE> 52
$233,939 for 1995, 1996 and 1997, respectively. Additionally, the Company paid
Longline/Excel $327,000 in 1996 relating to usage of the aircraft during the
Company's initial public offering and $576,000 in 1997 relating to usage of the
aircraft in connection with the Merger. The Company believes that the rate paid
was equivalent to that charged by Longline/Excel to other unrelated companies
for similar services during 1996 and compared favorably to rates charged by
another unrelated charter service for similar aircraft.
OHE and Longline/Excel have begun negotiations regarding changes to these
lease arrangements. Because of unanticipated high usage of the Gulfstream
aircraft by OHE due to travel undertaken during the Company's initial public
offering and the Merger, Longline/Excel has been limited in its ability to
charter the aircraft.
INTERCOMPANY NOTES AND ACCOUNTS PAYABLE/RECEIVABLE AND CERTAIN LOANS
OHE held promissory notes, for money borrowed, in the principal amounts of
$100,000 and $130,000 from Mr. Thomas M. O'Gara. Each note bore interest at the
rate of 8.75% per annum and was due on December 31, 1996. In December 1996, Mr.
O'Gara repaid in full the $251,834 of principal and accrued interest outstanding
under these notes. Mr. Thomas M. O'Gara also was indebted, for money borrowed,
to OHE in the amount of $242,242, not represented by a promissory note; as of
March 13, 1998, $120,191 of this indebtedness remains outstanding.
OSN held a promissory note, for money borrowed, from Excel Metal Products,
Inc. ("Excel Metal"), a corporation wholly owned by Mr. Thomas M. O'Gara, in the
principal amount of $310,000, which bore interest at the rate of 8.5% and was
due on February 11, 1997. All principal and accrued interest outstanding
pursuant to this note, totalling $331,224, was repaid in December 1996.
During 1995 and 1996, OHE paid Silver Springs Land and Cattle Company, a
Nevada corporation of which Mr. Thomas M. O'Gara is the President and sole
shareholder, $11,082 and $3,177, respectively, for the use of its facilities for
corporate meetings. The use of these facilities by the Company has been
discontinued.
Until the Reorganization, OHE held a 49% beneficial interest in O'Gara
Overseas Services, S.A., a Swiss corporation ("OOS"), with the remaining 51%
held by Limited. As part of the Reorganization, OHE's interest in OOS was
exchanged for certain assets and liabilities of Limited, with the result being
that OOS is no longer affiliated with the Company. In addition, OHE fulfilled a
demand note, bearing interest at 3.0% per annum, that had been outstanding with
OOS in the amount of $90,930, which represented $88,685 in principle and $2,245
in interest. Also, subsequent to the Reorganization, Mr. Thomas M. O'Gara made
full payment on a 3.0% promissory note, which totalled $302,803 including
interest, held by OOS. OOS also had provided sales and marketing services for
OHE and OSN. During 1995 and 1996, $377,144 and $363,583, respectively, were
paid to OOS for these services. All arrangements with OOS were terminated in
connection with the Reorganization.
From its incorporation in 1988 until 1996, O'Gara Protective Services, a
Nevada corporation ("OPS") in which the former shareholders of OHE (including
Messrs. Thomas M. O'Gara, Wilfred T. O'Gara, Carpinello and Curotto) previously
owned approximately a 47% interest, but which was and is controlled by Mr.
Edward F. O'Gara, the brother of Messrs. Thomas M. and Wilfred T. O'Gara, was
provided certain medical and general liability insurance coverage under OHE's
insurance policies. These insurance programs were paid for by OPS through
monthly and annual premiums established by OHE's insurance provider. These
arrangements were terminated upon the consummation of the Company's initial
public offering.
Immediately prior to the Merger, KHI owed $6,349,813 to Mr. Kroll,
representing unpaid principal of $4,761,958 and accrued interest of $242,356 on
open account advances and loans which had been made by him to KHI from time to
time since 1989. An additional $286,308 previously had been repaid. Also
immediately prior to the Merger, Mr. Kroll owed KHI $1,420,756, representing
aggregate borrowings from KHI of $1,345,499 plus $75,257 in accrued interest. Of
the outstanding principal amounts, $4,380,849 owed by KHI to Mr. Kroll and
$748,000 owed by Mr. Kroll to KHI bore interest at an annual rate equal to the
prime rate plus 1%, $1,129,109 owed by KHI to Mr. Kroll bore interest at an
annual rate equal to the brokers' loan rate (7.625% at December 1, 1997) and
$597,499 owed by each of KHI and Mr. Kroll to the other bore
51
<PAGE> 53
interest at an annual rate of 7% (equal to the prime rate at the date of the
loan plus 1%). Immediately prior to the Merger, the principal and accrued
interest on all outstanding loans from KHI to Mr. Kroll were repaid in full and
loans (plus all accrued interest) from Mr. Kroll to KHI were repaid to the
extent of the amounts owed to KHI by Mr. Kroll. The remaining amount owed Mr.
Kroll is represented by a promissory note, issued by a subsidiary of KHI at the
time of the Merger, in the principal amount of $309,500, bearing interest at an
annual rate 1/2% below the prime rate. Also, upon consummation of the Merger,
all $6,040,313 of principal and accrued interest owed by KHI to Mr. Kroll for
open account advances was repaid.
In July 1995 AIG loaned $2,000,000 to KHI. These loans were evidenced by
demand promissory notes bearing interest at an annual rate equal to the Citibank
N.A. base rate in effect from time to time plus 2%. As of December 1, 1997,
principal and accrued interest in the aggregate amount of $2,035,583 was
outstanding under these notes. These notes were repaid in full upon the
consummation of the Merger.
During 1995, 1996 and 1997, the Company rendered risk management services,
including marketing support, and claims investigations services to AIG and its
subsidiaries. The Company billed AIG and its subsidiaries $3,868,967, $5,325,559
and $6,412,244 in 1995, 1996 and 1997, respectively, for such services. Included
in the 1996 and 1997 amounts are payments pursuant to an agreement under which
the Company provides certain AIG subsidiaries with crisis management and
marketing services through November 30, 1998. The agreement provides for an
annual retainer ($2,288,640 for 1997), subject to certain adjustments, and is
payable quarterly in advance. Since 1995, the Company has purchased certain of
its liability insurance, including Professional Errors and Omissions and
Directors and Officers liability insurance, from AIG's subsidiaries. AIG's
subsidiaries billed the Company $485,807, $824,348 and $814,154 for this
insurance during 1995, 1996 and 1997, respectively. The Company obtains the
coverage through an independent insurance broker and where possible obtains
competitive proposals from unrelated third parties.
BUILDING LEASE
OLG, Limited, an Ohio limited liability company of which Messrs. Thomas M.
O'Gara, Wilfred T. O'Gara, Allen, Carpinello, Curotto and Lennon own
approximately 91%, 5%, 1%, 1%, 1% and 1% of the outstanding capital stock, was
formed in March 1996 for the purpose of acquiring and leasing to OHE a facility
located at 4175 Mulhauser Road, Fairfield, Ohio. The building was purchased for
approximately $1.8 million and was leased to OHE for one year, ending March 31,
1997, for $468,000 (plus taxes, insurance and maintenance costs). OHE exercised
an option to renew the lease, at a base rent of $21,000 per month, through July
1997. Since August 1997, OHE has continued to utilize the facility on a month to
month basis. Previously used for manufacturing, the facility is currently used
for storage and general office purposes. OHE also has an option to purchase the
building for its fair market value.
CONSULTING AGREEMENTS
Excel Metal. OSN, Inc. had a consulting agreement with Excel Metal pursuant
to which Excel Metal provided management consulting services to OSN, Inc. during
calendar year 1996 for a fee of $6,000 per month plus reimbursement of expenses.
The arrangement terminated upon consummation of the Company's initial public
offering.
William S. Sessions. From time to time, Mr. Sessions has provided
consulting services to the Company or OHE. During 1995, 1996 and 1997, he
received $25,000, $5,000 and $7,500, respectively, for sales development
assistance related to OHE's commercial armored products.
Neil P. Saldin. Mr. Saldin was an executive officer of the Company until
June 30, 1997. Prior to becoming an executive officer of the Company, Mr. Saldin
was a consultant to OSN from October 1994 through September 1995. The consulting
services, which were managerial and related to the start up of OSN's operations,
were provided through a company controlled by Mr. Saldin, which was paid
$180,000.
Edward F. O'Gara. In 1995 and 1996, OHE guaranteed certain consulting
agreements between Longline/Excel and Cirrus Systems, Inc., a Delaware
corporation owned by Mr. Edward F. O'Gara. Such
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<PAGE> 54
agreements were for one year terms for a total of $120,000 per year and expired
December 31, 1996. Mr. Thomas M. O'Gara has agreed to indemnify OHE for any
claims made under such guarantees.
EXERCISE OF STOCK OPTIONS AND SALE OF SHARES
On August 23, 1996, Messrs. Thomas M. O'Gara, Wilfred T. O'Gara, Carpinello
and Curotto exercised options previously granted on December 31, 1993 to
purchase 138, 131, 91 and 85 shares of the common stock of OHE, respectively, at
a price of $1.00 per share. Giving effect to the Reorganization, the
corresponding numbers of shares of Common Stock of the Company were 37,667,
35,756, 24,838 and 23,201, respectively, at a price of $0.0037 per share.
On August 23, 1996, Mr. Thomas M. O'Gara sold 10 shares of the common stock
of OHE to Mr. Carpinello for a price of $468.00 per share (equivalent to 2,730
shares of Common Stock of the Company for a price of $1.71 per share). The
Company incurred a non-recurring, non-cash expense of approximately $19,890 in
the fourth quarter of 1996 in connection with this sale. This expense resulted
in a corresponding increase in additional paid-in capital, and no change in
total shareholders' equity. This expense was not tax deductible and represented
the difference between the net offering price and the net sales price of these
shares as if issued directly by the Company.
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<PAGE> 55
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock on March 13, 1998 (on an actual basis
and as adjusted to reflect the sale of shares offered by the Selling
Shareholders) by (i) each Selling Shareholder, (ii) each beneficial owner of
more than five percent of the Common Stock immediately prior to the Offering,
(iii) each director and named current executive officer individually and (iv)
all directors and executive officers of the Company as a group. Unless otherwise
indicated, all shares are owned directly and the indicated owner has sole voting
and dispositive power with respect to such shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED
OFFERING(1) AFTER OFFERING(1)
------------------------- SHARES TO BE --------------------
NAME NUMBER PERCENT SOLD IN OFFERING NUMBER PERCENT
---- -------------- ------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
Jules B. Kroll (2) (3) (4)....... 3,684,991 475,000 3,209,991
Thomas M. O'Gara (2) (4) (9)..... 2,882,935 296,500 2,586,435
Wilfred T. O'Gara................ 284,982 30,000 254,982
Gary W. Allen (5)................ 17,730 * -- 17,730 *
Michael G. Cherkasky............. 200,939 47,000 153,939
Marshall S. Cogan................ -- -- -- -- --
Richard L. Curotto (5)........... 41,087 * -- 41,087 *
Michael J. Lennon................ 20,530 * -- 20,530 *
Raymond E. Mabus................. 1,000 * -- 1,000 *
Nazzareno E. Paciotti............ 103,845 * -- 103,845 *
Hugh E. Price.................... 17,500 * -- 17,500 *
Jerry E. Ritter.................. 1,000 * -- 1,000 *
William S. Sessions.............. 1,000 * -- 1,000 *
Howard I. Smith (6).............. 1,444,212 -- 1,444,212
All directors and current
executive officers as a group
(14 persons) (5) (7)........... 8,721,233 848,500 7,872,733
American International Group,
Inc. (2)....................... 1,444,212 -- 1,444,212
Alian SARL (8)................... 376,579 45,000 331,579
Yakov Bratslavskiy............... 38,889 * 10,000 28,889 *
MeesPierson Management
(Guernsey) Ltd. (2) (4) (9).... 793,095 296,500 496,595
</TABLE>
54
<PAGE> 56
- ------------------
* Less than 1% of the outstanding Common Stock.
(1) Under the regulations of the Commission, shares are deemed to be
"beneficially owned" by a person if the person directly or indirectly has or
shares the power to vote or dispose of the shares, whether or not the person
has any pecuniary interest in the shares, or has or shares the right to
acquire the power to vote or dispose of the shares within 60 days, including
through the exercise of any option, warrant or right. Included in the shares
listed are the following numbers of shares of Common Stock which may be
acquired through the exercise of currently exercisable stock options or
stock options which become exercisable within 60 days after March 13, 1998:
Mr. Kroll, none; Mr. Thomas M. O'Gara, 7,716 shares; Mr. Wilfred T. O'Gara,
24,716 shares; Mr. Allen, 16,333 shares; Mr. Cherkasky, 90,529 shares; Mr.
Cogan, none; Mr. Curotto, 16,000 shares; Mr. Lennon, 18,666 shares; Mr.
Mabus, 1,000 shares; Mr. Paciotti, 90,529 shares; Mr. Price, 17,500 shares;
Mr. Ritter, none; Mr. Sessions, 1,000 shares; Mr. Smith, none; and all
directors and current executive officers as a group, 272,989 shares.
(2) Mr. Kroll's address is 900 Third Avenue, New York, New York 10022. Mr.
O'Gara's address is 9113 LeSaint Drive, Fairfield, Ohio 45014. AIG's address
is 70 Pine Street, New York, New York 10270. The address of MeesPierson
Management (Guernsey) Ltd. is Bordage House, No. 253, Le Bordage, St. Peter
Port, Guernsey, Channel Islands.
(3) Does not include 192,561 shares held by trusts for the benefit of Mr.
Kroll's adult children, in which Mr. Kroll disclaims any beneficial
interest.
(4) Mr. Kroll, Mr. Thomas M. O'Gara and MeesPierson Management (Guernsey) Ltd.
have granted to the Underwriters an over-allotment option to purchase up to
an aggregate of 660,000 shares of Common Stock at the Offering price, less
the underwriting discount and commissions set forth on the cover page of
this Prospectus. If the over-allotment option is exercised in full, the
numbers of shares beneficially owned after the Offering and the percentage
ownerships for Mr. Kroll, Mr. Thomas M. O'Gara and MeesPierson Management
(Guernsey) Ltd. will be 2,879,991 shares, 2,421,435 shares and 331,595
shares and %, % and %, respectively.
(5) Messrs. Allen and Curotto ceased to be executive officers of the Company on
December 1, 1997. Their shares are not included in those listed as held by
all directors and current executive officers as a group.
(6) Consists of 1,444,212 shares held by AIG. Mr. Smith disclaims any beneficial
interest in these shares.
(7) Includes 1,444,212 shares held by AIG which are deemed to be owned by Mr.
Smith and in which he disclaims any beneficial interest.
(8) Mr. Daniel Gautier, the sole shareholder of Alian SARL, is Chairman of the
Company's Labbe subsidiary and was a director of the Company until March 12,
1997.
(9) The shares shown for MeesPierson Management (Guernsey) Ltd. plus 373,524
shares held by Union Federal Corporation previously were aggregated with
those shown as owned by Mr. Thomas M. O'Gara. Although these shares no
longer are beneficially owned by Mr. Thomas M. O'Gara for purposes of
Section 13(d) of the Exchange Act, they remain aggregated with the shares
owned by Mr. Thomas M. O'Gara for purposes of Commission Rule 16a-1(a)(2).
55
<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.01 par value per share, of which shares are
outstanding as of the date of this Prospectus, and 1,000,000 shares of
undesignated preferred stock, $.01 par value per share, none of which is issued
or outstanding. The following description of the material terms of the capital
stock of the Company is qualified in its entirety by the provisions of the
Company's Amended and Restated Articles of Incorporation and Code of Regulations
and by the provisions of the Ohio General Corporation Law.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Shareholders do not
have the right to cumulate their votes in the election of directors.
Subject to preferences which have been and may be granted to holders of
preferred stock, holders of Common Stock are entitled to share in such dividends
as the Board of Directors, in its discretion, may validly declare from funds
legally available. In the event of liquidation, each outstanding share of Common
Stock entitles its holder to participate ratably in the assets remaining after
payment of liabilities and any preferred stock liquidation preferences.
Shareholders have no preemptive or other rights to subscribe for or
purchase additional shares of any class of stock or any other securities of the
Company. There are no redemption or sinking fund provisions with regard to the
Common Stock. All outstanding shares of Common Stock are fully paid, validly
issued and nonassessable.
The vote of holders of a majority of all outstanding shares of Common Stock
is required to amend the Amended and Restated Articles of Incorporation and to
approve mergers, reorganizations, and similar transactions.
PREFERRED STOCK
Up to 1,000,000 authorized shares of preferred stock may be issued from
time to time in series having such designations, preferences and rights,
qualifications and limitations as the Board of Directors may determine without
any approval of shareholders. Preferred stock could be given rights which would
adversely affect the equity of holders of Common Stock and could have preference
to Common Stock with respect to dividend and liquidation rights. Issuance of
preferred stock could have the effect of acting as an anti-takeover device to
prevent a change of control of the Company.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Ohio law governs the rights of shareholders of the Company. Chapter 1704 of
the Ohio Revised Code may be viewed as having an anti-takeover effect. This
statute, in general, prohibits an "issuing public corporation" (the definition
of which includes the Company) from entering into a "Chapter 1704 Transaction"
with the beneficial owner (or affiliates of such beneficial owner) of 10% or
more of the outstanding shares of the corporation (an "interested shareholder")
for at least three years following the date on which the interested shareholder
attains such 10% ownership, unless the board of directors of the corporation
approves, prior to such person becoming an interested shareholder, either the
transaction or the acquisition of shares resulting in a 10% ownership position.
A "Chapter 1704 Transaction" is broadly defined to include, among other things,
a merger or consolidation with, a sale of substantial assets to, or the receipt
of a loan, guaranty or other financial benefit (which is not proportionately
received by all shareholders) from the interested shareholder. Following the
expiration of such three-year period, a Chapter 1704 Transaction with the
interested shareholder is permitted only if either (i) the transaction is
approved by the holders of at least two-thirds of the voting power of the
corporation (or such different proportion as is set forth in the corporation's
articles of incorporation), including a majority of the outstanding shares
excluding those owned by the interested shareholder, or (ii) the business
combination results in the shareholders other than the interested
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<PAGE> 58
shareholder receiving a prescribed "fair price" for their shares. One
significant effect of Chapter 1704 is to encourage a person to negotiate with
the board of directors of a corporation prior to becoming an interested
shareholder.
In addition, Section 1707.043 of the Ohio Revised Code requires a person or
entity that makes a proposal to acquire the control of a corporation to repay to
that corporation any profits made from trades in the corporation's stock within
18 months after making the control proposal.
Section 1701.831 of the Ohio GCL (the "Control Share Acquisition Statute")
requires shareholder approval of any proposed "control share acquisition" of an
Ohio corporation. A "control share acquisition" is the acquisition, directly or
indirectly, by any person (including any individual, partnership, corporation,
limited liability company, society, association or two or more persons who have
a joint or common interest) of shares of a corporation that, when added to all
other shares of the corporation that may be voted, directly or indirectly, by
the acquiring person, would entitle such person to exercise or direct the
exercise of 20% or more (but less than 33 1/3%) of the voting power of the
corporation in the election of directors or 33 1/3% or more (but less than a
majority) of such voting power or a majority or more of such voting power. Under
the Control Share Acquisition Statute, the control share acquisition must be
approved in advance by the holders of a majority of the outstanding voting
shares represented at a meeting at which a quorum is present and by the holders
of a majority of the portion of the outstanding voting shares represented at
such a meeting excluding the voting shares owned by the acquiring shareholder
and certain "interested shares," including shares owned by officers elected or
appointed by the directors of the corporation and by directors of the
corporation who are also employees of the corporation.
The purpose of the Control Share Acquisition Statute is to give
shareholders of Ohio corporations a reasonable opportunity to express their
views on a proposed shift in control, thereby reducing the coercion inherent in
an unfriendly takeover. The provisions of the Control Share Acquisition Statute
grant to the shareholders of the Company the assurance that they will have
adequate time to evaluate the proposal of the acquiring person, that they will
be permitted to vote on the issue of authorizing the acquiring person's purchase
program to go forward in the same manner and with the same proxy information
that would be available to them if a proposed merger of the Company were before
them and, most importantly, that the interests of all shareholders will be taken
into account in connection with such vote and the probability will be increased
that they will be treated equally regarding the price to be offered for their
common shares if the implementation of the proposal is approved.
The Control Share Acquisition Statute applies not only to traditional
offers but also to open market purchases, privately negotiated transactions and
original issuances by an Ohio corporation, whether friendly or unfriendly. The
procedural requirements of the Control Share Acquisition Statute could render
approval of any control share acquisition difficult in that the transaction must
be authorized at a special meeting of shareholders, at which a quorum is
present, by the affirmative vote of the majority of the voting power represented
and by a majority of the portion of such voting power excluding "interested
shares." It is recognized that any corporate defense against persons seeking to
acquire control may have the effect of discouraging or preventing offers which
some shareholders might find financially attractive. On the other hand, the need
on the part of the acquiring person to convince the shareholders of the Company
of the value and validity of his offer may cause such offer to be more
financially attractive in order to gain shareholder approval.
While the Company believes that these provisions are in its best interests,
potential shareholders should be aware that such provisions could be
disadvantageous to them because the overall effect of these statutes may be to
render more difficult or discourage the removal of incumbent management or the
assumption of effective control by other persons.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for the Company's Common Stock is The
Fifth Third Bank, Cincinnati, Ohio.
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<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 16,798,125
outstanding shares of Common Stock. The 4,400,000 shares sold in the Offering
and any of the up to 660,000 shares sold upon exercise of the Underwriters'
over-allotment option, will be freely tradeable by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act, without restriction or registration under that Act. In addition,
other outstanding shares are freely tradeable. The remaining
shares (the "Restricted Shares") are beneficially owned primarily by certain of
the Company's executive officers, directors and pre-initial public offering
shareholders. The Restricted Shares may not be sold unless they are registered
under the Securities Act or sold pursuant to an applicable exemption from
registration, including an exemption pursuant to Rule 144. The Company and its
executive officers and directors have agreed not to offer, sell or otherwise
dispose of any shares of Common Stock, including the Restricted Shares, for a
period of 90 days from the date of this Prospectus, without the prior written
consent of SBC Warburg Dillon Read Inc.
Rule 144 governs the public sale in ordinary trading transactions of
"restricted securities" and of securities owned by "affiliates." Restricted
securities are securities acquired directly or indirectly from an issuer in a
transaction not involving a public offering. In general, under Rule 144, if a
holding period of at least one year has elapsed since the date the restricted
securities were acquired from the Company, then the holder of such restricted
securities (including an affiliate of the Company) is entitled, subject to
certain conditions, to sell within any three-month period a number of shares
which does not exceed the greater of (i) 1% of the Company's then outstanding
shares of Common Stock or (ii) the shares' average weekly trading volume during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and requirements as to notice and
the availability of current public information about the Company. Of the
Restricted Shares, currently are eligible for sale pursuant to Rule 144;
will be eligible for sale under Rule 144 upon expiration of the 90-day
lock-up period; will be eligible for sale under Rule 144 in ;
and the remainder will become eligible for sale under Rule 144 in .
AIG has a registration rights agreement with the Company that entitles AIG
to one "demand" and unlimited "piggyback" registration rights for any shares of
Common Stock held by it, at the expense of the Company (except for any
underwriting discounts), until December 1, 2000. The registration rights
agreement contains customary limitations with respect to underwriter cutbacks,
pending announcements or transactions involving the Company and certain other
terms and conditions. Another shareholder of the Company also has the right to
one "demand" registration (on Form S-3 only) for the approximately 19,500 shares
held by him. The holders of approximately 7.1 million other shares of Common
Stock have "piggyback" registration rights for so long as the resale of those
shares is restricted as to holding period or volume of sale under Rule 144;
of those shares are being sold in this Offering. All of the
registration rights arrangements were entered into in connection with
acquisitions made by the Company.
The Company has reserved up to 836,000 shares of its Common Stock for
issuance under its 1996 Stock Option Plan (the "Plan"). There currently are
options for shares of Common Stock outstanding under the Plan. In
addition, the Company has reserved 551,492 shares of Common Stock for issuance
upon exercise of options granted by KHI and assumed in the Merger. The Company
is registering the shares of Common Stock reserved for issuance under the Plan
and upon exercise of the KHI options. Subject to the expiration of the 90-day
lock-up period, and subject to compliance with Rule 144 by affiliates of the
Company and to Section 16 of the Securities Exchange Act of 1934 by directors,
officers and 10% beneficial owners, any shares issued upon exercise of options
granted under the Plan and assumed in the Merger will be freely tradeable.
Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and the Company's ability to raise
capital at favorable prices.
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<PAGE> 60
UNDERWRITING
The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares of Common Stock that each of them has agreed
to purchase from the Company and the Selling Shareholders, subject to the terms
and conditions specified in the Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
SBC Warburg Dillon Read Inc.................................
Bear, Stearns & Co. Inc.....................................
SunTrust Equitable Securities Corporation...................
-----------
Total.............................................
===========
</TABLE>
The Managing Underwriters are SBC Warburg Dillon Read Inc., Bear, Stearns &
Co. Inc., and SunTrust Equitable Securities Corporation.
If any shares of Common Stock offered hereby are purchased by the
Underwriters, all such shares will be so purchased. The Underwriting Agreement
contains certain provisions whereby, if any Underwriter defaults in its
obligation to purchase such shares, and the aggregate obligations of the
Underwriters so defaulting do not exceed ten percent of the shares offered
hereby, the remaining Underwriters, or some of them, must assume such
obligations.
The Common Stock offered hereby is being initially offered severally by the
Underwriters for sale at the price set forth on the cover page of this
Prospectus, or at such price less a concession not in excess of $ per
share on sales to certain dealers. The Underwriters may allow, and such dealers
may re-allow, a concession not to exceed $ per share on sales to
certain other dealers. The offering of shares is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the shares. After the
shares of Common Stock are released for sale to the public, the offering price
and such concessions may be changed by the Managing Underwriters.
Mr. Jules B. Kroll, MeesPierson Management (Guernsey) Ltd. and Mr. Thomas
M. O'Gara have granted to the Underwriters an over-allotment option to purchase
up to an aggregate of 660,000 additional shares of Common Stock at the public
offering price less the underwriting discount and commission set forth on the
cover page of this Prospectus. If the Underwriters exercise such option, each of
the Underwriters will be obligated, subject to certain conditions, to purchase
the number of additional shares of Common Stock proportionate to such
Underwriter's initial commitment. The Underwriters may exercise such option on
or before the thirtieth day from the date of the Underwriting Agreement and only
to cover over-allotments made of the shares in connection with the Offering.
The Company and the Selling Shareholders have agreed in the Underwriting
Agreement to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act, or to contribute to payments that the
Underwriters may be required to make in respect thereof.
The Company and each of its executive officers and directors (other than,
with respect to shares of Common Stock included in the Offering, the Selling
Shareholders) have agreed that they will not sell, contract to sell, grant any
option to sell or otherwise dispose of, directly or indirectly, any shares of
Common Stock, or securities convertible into or exercisable or exchangeable for,
any shares of Common Stock or warrants or other rights to purchase shares of
Common Stock, or permit the registration of any shares of Common Stock for a
period of 90 days after the date of this Prospectus, without the prior consent
of SBC Warburg Dillon Read Inc., except that the Company may issue shares of
Common Stock upon exercise of outstanding options and in connection with
acquisition transactions and may issue options to purchase shares of Common
Stock pursuant to its 1996 Stock Option Plan.
Dillon, Read & Co. Inc., a predecessor of SBC Warburg Dillon Read Inc.,
served as the lead managing underwriter for the Company's initial public
offering in November 1996 and as placement agent for the
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<PAGE> 61
Company's Senior Notes issued in June 1997. SBC Warburg Dillon Read Inc. acted
as financial advisor to the Company in connection with the Merger and provided a
fairness opinion to the Company in such capacity, for which it received
customary fees and reimbursement of expenses.
The Common Stock is listed on the Nasdaq under the symbol "OGAR." In
connection with this Offering, the Underwriters and selling group members may
engage in passive market making transactions in the Common Stock on the Nasdaq
immediately prior to the commencement of sales in this Offering, in accordance
with Rule 10b-6A under the Exchange Act. Passive market making consists of
displaying bids on the Nasdaq that are limited by the bid prices of independent
market makers and completing purchases in response to the order flow at prices
limited by such bids. Net purchases by a passive market maker on each day are
limited to a specific percentage of the passive market maker's average daily
trading volume in the shares of Common Stock during a specified prior period and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the shares of Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.
The Managing Underwriters, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the Managing
Underwriters to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Taft, Stettinius & Hollister LLP. Certain legal matters
in connection with the Offering will be passed upon for the Underwriters by
Cahill Gordon & Reindel, a partnership including a professional corporation.
EXPERTS
The consolidated financial statements included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as set forth in their report. In that
report, that firm states that with respect to certain subsidiaries, its opinion
is based on the reports of other independent public accountants, namely Deloitte
& Touche LLP for the year ended December 31, 1996 and KPMG Peat Marwick LLP for
the year ended December 31, 1995. The financial statements referred to above
have been included herein in reliance upon the authority of those firms as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement with the Securities and
Exchange Commission (the "Commission") covering the shares of Common Stock
offered by this Prospectus. This Prospectus does not contain all of the
information provided in the Registration Statement and its exhibits.
Additionally, this Prospectus includes summaries of certain contracts and other
documents that are filed as exhibits to the Registration Statement. The reader
should refer to the full Registration Statement, including its exhibits, for
additional information and the full text of summarized documents that are filed
as exhibits.
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<PAGE> 62
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act
and files reports, proxy statements and other information with the Commission.
These documents may be inspected and copied at the Commission's Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of these documents also may be obtained from the
Public Reference Section upon payment of the prescribed fees. The Commission
maintains an Internet World Wide Web site that contains reports, proxy
information and statements, and other information regarding registrants,
including the Company, that file electronically with the Commission. The Web
site address is http://www.sec.gov.
61
<PAGE> 63
THE KROLL-O'GARA COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Public Accountants
Report of Arthur Andersen LLP............................. F-2
Report of Deloitte & Touche LLP........................... F-3
Report of KPMG Peat Marwick LLP........................... F-4
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-5
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-7
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997.............. F-8
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-9
Notes to Consolidated Financial Statements.................. F-10
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
The Kroll-O'Gara Company:
We have audited the accompanying consolidated balance sheets of THE
KROLL-O'GARA COMPANY (Note 1) and subsidiaries as of December 31, 1996 and 1997
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the 1995 or 1996 financial statements of Kroll
Holdings, Inc., a company acquired during 1997 in a transaction accounted for as
a pooling of interests, as discussed in Note 1. Such statements are included in
the consolidated financial statements of The Kroll-O'Gara Company and reflect
total assets and total revenues of 46 percent and 46 percent, respectively, in
1996 and total revenues of 62 percent in 1995, of the consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us and our opinion, insofar as it relates to the amounts included for Kroll
Holdings, Inc. for those years, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Kroll-O'Gara Company and
subsidiaries as of December 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As explained in Note 2(o) to the consolidated financial statements,
effective in the fourth quarter of 1997, the Company changed its method of
accounting for costs incurred in connection with business process reengineering
activities.
/S/ ARTHUR ANDERSEN LLP
Cincinnati, Ohio
March 13, 1998
F-2
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
The Stockholders of
Kroll Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Kroll
Holdings, Inc. (the "Company") and subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year then ended (not presented separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries as
of December 31, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 13, 1997
(August 8, 1997 as to Notes 7 and 17)
F-3
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Kroll Holdings, Inc.:
We have audited the consolidated balance sheet of Kroll Holdings, Inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows (not presented
separately herein) for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kroll
Holdings, Inc. and subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
March 28, 1996
F-4
<PAGE> 67
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 4,761,464 $ 6,899,132
Marketable securities..................................... 47,500 22,969
Trade accounts receivable, net of allowance for doubtful
accounts of approximately $1,913,731 and $2,515,579 in
1996 and 1997, respectively (Notes 2 and 4)............ 22,941,065 37,649,259
Unbilled revenues (Note 2)................................ 4,150,307 3,081,481
Other receivables (Note 6)-
Advances to shareholders............................... 288,829 525,996
Affiliates............................................. 291,951 366,307
Employees.............................................. 490,881 47,591
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 4)......................... 15,326,548 12,078,464
Inventories (Note 4)...................................... 8,733,640 19,452,970
Prepaid expenses and other................................ 2,856,560 6,454,873
Deferred tax asset (Note 5)............................... -- 411,988
------------ ------------
Total current assets.............................. 59,888,745 86,991,030
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2 and 8):
Land...................................................... 901,079 1,636,939
Buildings and improvements................................ 3,772,295 6,223,250
Leasehold improvements.................................... 5,186,648 5,242,607
Furniture and fixtures.................................... 3,741,384 4,629,796
Machinery and equipment................................... 8,488,348 11,290,146
Construction-in-progress.................................. -- 1,037,528
------------ ------------
22,089,754 30,060,266
Less -- accumulated depreciation.......................... (13,526,406) (15,448,045)
------------ ------------
8,563,348 14,612,221
------------ ------------
DATABASES, net of accumulated amortization of $16,568,473
and $19,505,625 in 1996 and 1997, respectively (Note 2)... 7,415,449 8,335,211
COSTS IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $88,752 and $772,401 in 1996 and 1997,
respectively (Notes 2 and 3).............................. 2,316,004 17,852,392
OTHER ASSETS (Note 4)....................................... 3,050,425 6,179,862
------------ ------------
12,781,878 32,367,465
------------ ------------
$ 81,233,971 $133,970,716
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-5
<PAGE> 68
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit (Note 7)........................ $ 9,935,947 $ 559,112
Current portion of long-term debt (Note 8)................ 4,461,420 3,200,925
Shareholder payable (Note 6).............................. 2,000,000 309,500
Accounts payable
Trade.................................................. 15,997,708 31,585,862
Affiliates (Note 6).................................... 532,998 874,939
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 4)......................... 1,330,402 320,662
Accrued liabilities....................................... 9,628,915 13,928,653
Income taxes currently payable............................ 514,871 845,753
Deferred income taxes (Note 5)............................ 1,703,377 --
Customer deposits......................................... 3,183,564 3,839,770
------------ -------------
Total current liabilities......................... 49,289,202 55,465,176
OTHER LONG-TERM LIABILITIES................................. 2,057,197 1,532,730
SHAREHOLDER PAYABLE......................................... 5,048,266 --
DEFERRED INCOME TAXES (Note 5).............................. 2,002,779 2,154,758
LONG-TERM DEBT, net of current portion (Note 8)............. 5,969,092 46,863,591
------------ -------------
Total liabilities................................. 64,366,536 106,016,255
------------ -------------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
SHAREHOLDERS' EQUITY (Note 1):
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 12,593,432 and 13,590,525 shares issued and
outstanding in 1996
and 1997, respectively................................. 125,934 135,905
Additional paid-in-capital................................ 37,788,430 50,589,966
Retained deficit.......................................... (20,903,110) (22,387,500)
Unrealized appreciation of marketable securities.......... 14,167 10,469
Cumulative foreign currency translation adjustment (Note
2)..................................................... (157,986) (394,379)
------------ -------------
Total shareholders' equity........................ 16,867,435 27,954,461
------------ -------------
$ 81,233,971 $ 133,970,716
============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-6
<PAGE> 69
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ -------------
<S> <C> <C> <C>
NET SALES:
Security products and services................. $34,883,065 $ 79,155,974 $ 105,556,685
Investigations and intelligence................ 48,914,120 66,734,775 67,419,256
Voice and data security........................ 2,044,115 7,770,000 17,437,408
----------- ------------ -------------
Net sales.............................. 85,841,300 153,660,749 190,413,349
COST OF SALES:
Security products and services................. 26,769,685 58,718,188 75,539,848
Investigations and intelligence................ 33,709,055 47,116,851 41,781,284
Voice and data security........................ 1,635,329 5,623,423 14,323,254
----------- ------------ -------------
Cost of sales.......................... 62,114,069 111,458,462 131,644,386
----------- ------------ -------------
Gross profit........................... 23,727,231 42,202,287 58,768,963
----------- ------------ -------------
OPERATING EXPENSES:
Selling and marketing.......................... 9,448,495 9,762,911 14,371,081
General and administrative..................... 18,888,556 23,897,014 27,538,443
Merger related costs........................... -- -- 7,204,926
Amortization of costs in excess of assets
acquired.................................... 26,939 43,660 683,649
----------- ------------ -------------
Operating expenses..................... 28,363,990 33,703,585 49,798,099
----------- ------------ -------------
Operating income (loss)................ (4,636,759) 8,498,702 8,970,864
OTHER INCOME (EXPENSES):
Interest expense............................... (2,812,455) (3,139,914) (4,806,036)
Other, net..................................... (384,362) 336,810 (393,135)
----------- ------------ -------------
Income (loss) before minority interest,
provision (benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ (7,833,576) 5,695,598 3,771,693
Minority interest.............................. -- -- (156,223)
----------- ------------ -------------
Income (loss) before provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ (7,833,576) 5,695,598 3,615,470
Provision (benefit) for income taxes........... (1,297,837) (161,624) 2,351,729
----------- ------------ -------------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle................. (6,535,739) 5,857,222 1,263,741
Extraordinary loss, net of applicable tax
benefit of $129,250 (Note 7)................ -- -- (193,875)
----------- ------------ -------------
Income (loss) before cumulative effect
of change in accounting principle.... (6,535,739) 5,857,222 1,069,866
Cumulative effect of change in accounting
principle, net of applicable tax benefit of
$240,000 (Note 2(o))........................ -- -- (360,000)
----------- ------------ -------------
Net income (loss)...................... $(6,535,739) $ 5,857,222 $ 709,866
=========== ============ =============
Earnings (loss) per share (Note 2):
Basic....................................... $ (0.65) $ 0.55 $ 0.05
=========== ============ =============
Diluted..................................... $ (0.65) $ 0.51 $ 0.05
=========== ============ =============
Weighted average shares outstanding (Note 2):
Basic....................................... 10,020,777 10,742,131 13,060,818
=========== ============ =============
Diluted..................................... 10,020,777 11,160,157 13,720,556
=========== ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-7
<PAGE> 70
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CUMULATIVE
UNREALIZED FOREIGN
APPRECIATION CURRENCY
ADDITIONAL OF TRANSLATION
COMMON PAID-IN RETAINED MARKETABLE ADJUSTMENT
SHARES STOCK CAPITAL DEFICIT SECURITIES (NOTE 2) TOTAL
---------- -------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994, as
previously reported............. 3,568,008 $14,072 $ 2,482,140 $ (1,223,982) $ -- $ 493 $ 1,272,723
Adjustment for pooling of
interests....................... 5,529,894 55,299 19,309,745 (9,729,811) -- 167,320 9,802,553
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1994, as
restated........................ 9,097,902 69,371 21,791,885 (10,953,793) -- 167,813 11,075,276
Net loss.......................... -- -- -- (6,535,739) -- -- (6,535,739)
Aggregate translation
adjustment...................... -- -- -- -- -- 29,735 29,735
Incorporation of OSN.............. 922,375 1,163 248,837 -- -- -- 250,000
Distributions to shareholders..... -- -- -- (162,800) -- -- (162,800)
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1995........ 10,020,277 70,534 22,040,722 (17,652,332) -- 197,548 4,656,472
Net income........................ -- -- -- 5,857,222 -- -- 5,857,222
Aggregate translation
adjustment...................... -- -- -- -- -- (355,534) (355,534)
Distributions to shareholders,
prior to the offering........... -- -- -- (230,000) -- -- (230,000)
Sale of common stock between
shareholders prior to the
offering........................ -- -- 39,780 -- -- -- 39,780
Exercise of stock options, prior
to the offering (Note 11)....... 121,463 4 441 -- -- -- 445
Initial public offering of common
stock, net of issuance costs of
approximately $3,550,000
(Note 1)........................ 2,048,000 51,359 14,820,458 -- -- -- 14,871,817
Issuance of Kroll restricted stock
(Note 11(b)).................... 403,692 4,037 887,029 -- -- -- 891,066
Distribution of previously taxed S
Corp earnings to S Corp
shareholders (Note 1) .......... -- -- -- (9,000,000) -- -- (9,000,000)
Forgiveness of affiliate
obligation (Note 1)............. -- -- -- 122,000 -- -- 122,000
Unrealized appreciation of
marketable securities
(Note 2)........................ -- -- -- -- 14,167 -- 14,167
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1996........ 12,593,432 125,934 37,788,430 (20,903,110) 14,167 (157,986) 16,867,435
Net income........................ -- -- -- 709,866 -- -- 709,866
Aggregate translation
adjustment...................... -- -- -- -- -- (236,393) (236,393)
Issuance of stock bonus to certain
employees....................... 4,547 45 49,972 -- -- -- 50,017
Exercise of stock options (Note
11)............................. 4,200 42 43,152 -- -- -- 43,194
Issuance of stock in conjunction
with the acquisition of
businesses (Note 3)............. 753,806 7,538 8,452,231 -- -- -- 8,459,769
Issuance of stock in conjunction
with the purchase of minority
interest (Note 3(f)) ........... 69,565 696 1,242,778 -- -- -- 1,243,474
Issuance of Kroll restricted stock
(Note 11(b)).................... 424,011 4,240 1,352,040 -- -- -- 1,356,280
Tax benefit of restricted stock
vesting (Note 11(b))............ -- -- 2,160,341 -- -- -- 2,160,341
Purchase and retirement of common
stock (Note 11(d)).............. (259,036) (2,590) (498,978) (2,194,256) -- -- (2,695,824)
Unrealized depreciation of
marketable securities
(Note 2)........................ -- -- -- -- (3,698) -- (3,698)
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1997........ 13,590,525 $135,905 $50,589,966 $(22,387,500) $10,469 $(394,379) $27,954,461
========== ======== =========== ============ ======= ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-8
<PAGE> 71
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 16)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(6,535,739) $ 5,857,222 $ 709,866
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization........................... 1,334,829 1,602,415 2,105,440
Amortization of databases............................... 2,470,696 2,949,134 2,937,152
Amortization of costs in excess of assets acquired...... 26,939 26,992 683,649
Bad debt expense........................................ 3,050,310 8,108,976 2,043,080
Shareholder stock compensation.......................... -- 930,846 1,356,280
Loss on write-off of notes receivable................... 55,966 -- 35,434
Share in net (income) loss of joint ventures............ 224,789 (19,224) (121,650)
Loss on sale of property and equipment.................. 6,245 1,872 --
Gain on sale of marketable securities................... -- (108,646) (14,503)
Change in assets and liabilities, net of effects of
acquisitions-
Receivables............................................. (1,511,151) (4,367,583) (10,337,879)
Unbilled revenues....................................... 1,391,221 (2,334,527) 1,068,826
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (3,957,287) (7,626,473) 3,499,084
Inventories............................................. (1,590,370) (3,806,141) (5,498,203)
Deferred tax asset...................................... -- -- (411,988)
Prepaid expenses and other assets....................... (3,001,541) 480,484 (1,967,307)
Accounts payable and income taxes currently payable..... 5,846,271 1,539,162 8,101,579
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (43,150) (375,640) (1,009,740)
Customer deposits....................................... (340,877) 1,767,785 509,540
Amounts due to/from employees........................... 19,820 (294,471) 443,290
Deferred income taxes payable........................... (875,312) (405,380) 151,979
Accrued liabilities..................................... 1,017,909 4,090,422 737,044
Long-term liabilities................................... 149,740 (651,660) (561,467)
----------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... (2,260,692) 7,365,565 4,459,506
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net........... (1,127,676) (3,221,565) (4,417,574)
Proceeds from sale of property and equipment.............. 4,235 600 --
Additions to databases.................................... (2,985,409) (3,250,360) (3,856,914)
Decrease (increase) in notes receivable -- shareholder.... (233,253) 233,253 --
Acquisitions, net of cash acquired (Note 3)............... -- (814,710) (8,103,948)
Sale of marketable securities............................. -- 200,313 35,424
Other..................................................... (27,600) (66,711) 266,004
----------- ----------- -----------
Net cash used in investing activities.............. (4,369,703) (6,919,180) (16,077,008)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan financing fees....................................... -- -- (723,727)
Net borrowings (repayments) under revolving lines of
credit.................................................. 4,551,025 (252,818) (9,376,835)
Proceeds from long-term debt.............................. 41,608 50,899 42,406,179
Payments of long-term debt................................ (3,736,745) (5,000,668) (8,922,658)
Proceeds from notes payable -- shareholder................ 2,600,000 2,000,000 500,000
Repayment of notes payable -- shareholder................. (106,500) (803,745) (7,238,766)
Net proceeds from issuance of common stock................ 250,000 14,871,817 --
Purchase and retirement of common stock................... -- -- (2,695,824)
Foreign currency translation.............................. 922 (46,187) (160,462)
Distributions to shareholders............................. (162,800) (9,230,000) --
Proceeds from exercise of stock options................... -- 445 43,194
----------- ----------- -----------
Net cash provided by financing activities.......... 3,437,510 1,589,743 13,831,101
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............................. (3,192,885) 2,036,128 2,213,599
Effects of foreign currency exchange rates on cash.......... -- 34,032 (75,931)
----------- ----------- -----------
CASH, beginning of year..................................... 5,884,189 2,691,304 4,761,464
----------- ----------- -----------
CASH, end of year........................................... $ 2,691,304 $ 4,761,464 $ 6,899,132
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-9
<PAGE> 72
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(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 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 shares issued under the Kroll
restricted stock plan (see Note 11), 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 of Kroll were converted at the same exchange
factor into options to purchase 551,492 shares of Company common stock (see Note
11).
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.
There were no transactions between O'Gara and Kroll prior to the
combination, and immaterial adjustments were recorded to conform Kroll's
accounting policies. Certain reclassifications were made to the Kroll financial
statements to conform to the Company's presentations. The results of operations
for the separate companies and the combined amounts presented in the
consolidated financial statements follow:
<TABLE>
<CAPTION>
O'GARA KROLL COMBINED
----------- ----------- ------------
<S> <C> <C> <C>
Nine months ended September 30, 1997
(unaudited)
Revenue.................................. $82,567,200 $53,823,958 $136,391,158
Extraordinary item....................... (193,875) -- (193,875)
Net income............................... 4,181,387 1,796,124 5,977,511
Year ended December 31, 1996
Revenue.................................. 82,777,691 70,883,058 153,660,749
Net income (loss)........................ 6,658,962 (801,740) 5,857,222
Year ended December 31, 1995
Revenue.................................. 32,816,996 53,024,304 85,841,300
Net income (loss)........................ (1,122,052) (5,413,687) (6,535,739)
</TABLE>
In connection with the merger, the Company recorded, in the fourth quarter,
a charge to operating expenses of approximately $7.2 million ($5.7 million after
taxes, or $0.41 per diluted share) for direct and other merger-related costs
pertaining to the merger transaction. Merger transaction costs are nonrecurring
and include $0.8 million for stock-based compensation costs triggered by the
change in control of Kroll, $1.8 million for stay bonuses and severance and $4.6
million which consisted primarily of fees for investment bankers, attorneys,
accountants, financial printing, travel and other related charges.
F-10
<PAGE> 73
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company was formed originally in 1996 for the purposes of becoming a
holding company, effecting a reorganization and a combination of certain
affiliated entities and carrying out an initial public offering of common stock.
On October 28, 1996, various O'Gara entities (primarily O'Gara-Hess & Eisenhardt
Armoring Company (OHE)) and their related shareholders (primarily one
shareholder who owned or controlled approximately 86% to 88% of each entity)
entered into the reorganization plan. 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 O'Gara entities on a consolidated basis for all
periods presented.
On November 15, 1996, the Company completed its initial public offering of
common stock. The proceeds from the sale of 2,048,000 shares of common stock
were used by the Company for retirement of bank debt, payment of the AAA notes
described below, purchase of a manufacturing facility in Mexico, acquisition of
Palmer net assets (Note 3) and transaction costs associated with the offering.
On October 28, 1996 OHE distributed to its shareholders a dividend of
$9,000,000 in the form of long-term notes (the "AAA Notes") which represented
the undistributed previously taxed income of OHE as an S Corporation through the
effective date of the reorganization. During 1996 the Company recognized
approximately $27,000 in interest expense related to the AAA Notes.
In conjunction with the reorganization discussed above, the shareholders of
an affiliated entity forgave $122,000 owed by OHE for no consideration. As this
affiliated entity was controlled by a shareholder of the Company, this
transaction has been reflected as a contribution of capital in the accompanying
consolidated statement of shareholders' equity.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Consolidation -- The consolidated financial statements include the
accounts of O'Gara and Kroll and all their majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Investments in
20% to 50% owned entities are accounted for on the equity method and investments
in less than 20% owned entities are accounted for on the cost method. Affiliated
entities are not included in the accompanying consolidated financial statements,
and include entities that are directly or indirectly owned by current
shareholders or former shareholders of OHE but which were not included in the
O'Gara reorganization and combination.
(b) Revenue Recognition -- Revenue related to contracts for security
products (both government and commercial) results principally from long-term
fixed price contracts and is recognized on the percentage-of-completion method
calculated utilizing the cost-to-cost approach. The percent deemed to be
complete is calculated by comparing the costs incurred to date to estimated
total costs for each contract. This method is used because management considers
costs incurred to be the best available measure of progress on these contracts.
However, adjustments to this measurement are made when management believes that
costs incurred materially exceed effort expended. Contract costs include all
direct material and labor costs, along with certain direct overhead costs
related to contract production.
Provisions for any estimated total contract losses on uncompleted contracts
are recorded in the period in which it becomes known that such losses will
occur. Changes in estimated total contract costs will result in revisions to
contract revenue. These revisions are recognized when determined.
Revenue from investigations and intelligence services and security services
is recognized as the services are performed. The Company records either billed
or unbilled accounts receivable based on case-by-case invoicing determination.
F-11
<PAGE> 74
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue related to voice and data security 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.
(c) Marketable Securities -- The Company adopted the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities," for the year ended December
31, 1996. Under SFAS 115, the Company must classify its debt and marketable
securities as either trading, available-for-sale or held-to-maturity. The
Company has classified all equity securities as available-for-sale.
Unrealized holding gains and losses, net of the related income tax effect
on the available-for-sale securities, are excluded from earnings and are
reported as a separate component of shareholders' equity until realized. The
Company recorded an unrealized gain (loss) of $14,167 and $(3,698) as of
December 31, 1996 and 1997, respectively.
(d) Concentrations of Credit Risk -- Financial instruments that subject the
Company to credit risk consist principally of trade receivables. Concentrations
of credit risk with respect to accounts receivable are limited by the number of
clients that comprise the Company's client base, along with the different
industries and geographic regions in which the Company's clients operate or
reside. The Company does not generally require collateral or other security to
support client receivables, although the Company does require retainers,
up-front deposits or irrevocable letters-of-credit in many situations. The
Company has established an allowance for doubtful accounts based upon facts
surrounding the credit risk of specific clients and past history. Management
does not anticipate incurring losses on its trade receivables in excess of
established allowances.
(e) Property, Plant and Equipment -- Property, plant and equipment are
stated at cost. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings and improvements............................. 5-40 years
Furniture and fixtures................................. 5- 7 years
Machinery and equipment................................ 5- 7 years
Leasehold improvements................................. Life of lease
</TABLE>
(f) Databases -- Databases are capitalized costs incurred to obtain
information from third party providers. The Company relies on this information
to create and maintain its proprietary and non-proprietary databases. Because of
the continuing accessibility of the information and its usefulness to future
investigative procedures, the cost of acquiring the information is capitalized
and amortized over a five year period.
(g) Costs in Excess of Assets Acquired -- Costs in excess of assets
acquired represent the excess of the purchase cost over the fair value of net
assets acquired in a purchase business combination. Amortization is recorded on
a straight-line basis over periods ranging from 15 to 40 years. The Company
periodically reviews the carrying value of these assets and other long-lived
assets and impairments are recognized when the expected undiscounted future cash
flows are less than the carrying amount of the asset. Based on its most recent
analysis, the Company believes no impairment exists at December 31, 1997.
(h) Foreign Currency Translation -- Assets and liabilities of foreign
operations are translated using year-end exchange rates and revenues and
expenses are translated using exchange rates prevailing during the year, with
gains or losses resulting from translation included in a separate component of
shareholders' equity.
Gains or losses resulting from foreign currency transactions are translated
to local currency at the rates of exchange prevailing at the dates of the
transactions. Amounts receivable or payable in foreign currencies, other than
the subsidiary's local currency, are translated at the rates of exchange
prevailing at the balance
F-12
<PAGE> 75
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sheet date. The effect of transactional gains or losses is included in other
income (expense) in the accompanying consolidated statements of operations.
(i) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(j) Research and Development -- Research and development costs are expensed
as incurred. The Company incurred approximately $91,000, $130,000 and $136,000
for the years ended December 31, 1995, 1996 and 1997, respectively, for research
and development. These costs are included in general and administrative expenses
in the accompanying consolidated statements of operations.
(k) Advertising -- The Company expenses the cost of advertising as
incurred. Advertising expenses for the years ended December 31, 1995, 1996 and
1997 were $340,000, $715,000 and $1,497,000, respectively.
(l) Earnings Per Share -- In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). In
accordance with SFAS 128, basic earnings per share are computed by 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 years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS..................................... $(6,535,739) 10,020,277 $(0.65)
======
Effect of dilutive securities:
Options..................................... -- --
Restricted stock............................ -- --
----------- -----------
Diluted EPS................................... $(6,535,739) 10,020,277 $(0.65)
=========== =========== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS..................................... $ 5,857,222 10,742,131 $ 0.55
======
Effect of dilutive securities:
Options..................................... -- 130,544
Restricted stock............................ (162,443) 287,482
----------- -----------
Diluted EPS................................... $ 5,694,779 11,160,157 $ 0.51
=========== =========== ======
</TABLE>
F-13
<PAGE> 76
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS..................................... $ 709,866 13,060,818 $ 0.05
======
Effect of dilutive securities:
Options..................................... -- 216,586
Restricted stock............................ -- 443,152
----------- -----------
Diluted EPS................................... $ 709,866 13,720,556 $ 0.05
=========== =========== ======
</TABLE>
Basic and diluted earnings per share based on net income before
extraordinary item and cumulative effect of change in accounting principle were
$0.10 and $0.09 for the year ended December 31, 1997. The basic and diluted
earnings per share impact of the extraordinary item was $0.01 and the basic and
diluted earnings per share impact of the change in accounting principle was
$0.03.
(m) SFAS 130 "Reporting Comprehensive Income" -- In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130), which requires
comprehensive income and the associated income tax expense or benefit be
reported in a financial statement that is displayed with the same prominence as
other financial statements with an aggregate amount of comprehensive income
reported in that same financial statement. "Other Comprehensive Income" refers
to revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but not in net income. This
statement, which the Company intends to adopt in the first quarter of fiscal
1998, expands or modifies disclosures and, accordingly, will have no impact on
the Company's reported consolidated financial position, results of operations or
cash flows.
(n) Stock-Based Compensation -- The Company has elected to account for
the cost of its employee stock options and other forms of employee stock-based
compensation plans utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25) as allowed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). APB 25 requires compensation cost for stock-based compensation plans to be
recognized based on the difference, if any, between the fair market value of the
stock on the date of grant and the option exercise price. SFAS 123 established a
fair value-based method of accounting for compensation cost related to stock
options and other forms of stockbased compensation plans. SFAS 123 allows an
entity to continue to measure compensation cost using the principles of APB 25
if certain pro forma disclosures are made. The pro forma disclosures required by
SFAS 123 are presented in Note 11(f).
(o) Change in Accounting Principle -- In the fourth quarter of 1997, the
Company changed its method of accounting for costs incurred in connection with
business process reengineering activities relating to information technology
transformation. Consistent with a consensus reached by the Emerging Issues Task
Force (EITF) under Issue 97-13 in late November 1997, the Company expensed costs
previously capitalized in earlier quarters of 1997 (approximately $360,000, net
of tax benefit of $240,000) as a cumulative change in accounting principle.
(p) Reclassifications -- Certain reclassifications have been reflected
in 1995 and 1996 to conform with the current period presentation.
(q) 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
F-14
<PAGE> 77
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(3) ACQUISITIONS
The Company has completed the following acquisitions, all of which were
accounted for as purchases:
(a) Palmer Associates, S.C. -- In October 1996, the Company purchased
substantially all of the assets and certain liabilities of Palmer Associates,
S.C. (Palmer), a security services provider, for approximately $1,000,000, which
resulted in goodwill (amortized over fifteen years) and intangible assets equal
to the purchase price. The purchase price was payable $500,000 at the closing of
the Company's initial public offering and $250,000 each in November 1997 and
1998. The former owner also entered into a four year non-competition agreement,
payable in annual installments of $50,000, and a two year employment agreement.
(b) Next Destination Limited -- On February 5, 1997, the Company
acquired all of the shares of Next Destination Limited (Next) for $3.5 million,
consisting of approximately $1.9 million in shares of the Company's common stock
(170,234 shares) and approximately $1.6 million in seller-provided financing in
the form of secured three-year 6% notes. Next, headquartered in Salisbury, the
United Kingdom (UK), is a distributor of high technology communication equipment
for the consumer electronic, marine, aviation, professional and leisure markets
in both the UK and Europe. The former managing director and founder of Next
agreed to continue to manage the business and entered into a three year
non-competition agreement. For accounting purposes, the acquisition was
effective on February 1, 1997 and the results of operations of Next are included
in the consolidated results of operations of the Company from that date forward.
The resulting goodwill from this transaction is being amortized over fifteen
years.
(c) Labbe, S.A. -- On February 12, 1997, the Company acquired all the
shares of Labbe, S.A. (Labbe) for approximately $14.2 million, consisting of
$10.7 million in cash and 376,597 shares of the Company's common stock valued at
approximately $3.5 million. Labbe, headquartered in Lamballe, France, provides
vehicle armoring systems for commercial customers located mainly in Western
Europe. The former shareholders are subject to certain non-competition
agreements upon their leaving the employment of the Company. For accounting
purposes, the acquisition was effective on January 1, 1997 and the results of
operations of Labbe are included in the consolidated results of operations of
the Company from that date forward. The resulting goodwill from this transaction
is being amortized over thirty years.
The following unaudited proforma combined results of operations for the
year ended December 31, 1996 assumes the Labbe acquisition occurred as of
January 1, 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Sales................................................ $177,779
Net income........................................... $ 6,052
Earnings per share:
Basic.............................................. $ 0.56
Diluted............................................ $ 0.54
</TABLE>
(d) International Training, Incorporated -- On March 24, 1997, the Company
acquired all of the shares of International Training, Incorporated (ITI) for
approximately $2.5 million, consisting of approximately $800,000 in shares of
the Company's common stock (68,086 shares), $500,000 in cash and approximately
$1.2 million in seller-provided financing in the form of unsecured two-year 10%
notes. ITI, headquartered near Washington D.C., provides advanced security
training. For accounting purposes, the acquisition was effective on 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. The resulting
goodwill from this transaction is being amortized over fifteen years.
F-15
<PAGE> 78
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) ZAO IMEA -- On December 2, 1997, the Company acquired all of the shares
of ZAO IMEA (IMEA), a Russian corporation, and certain assets, liabilities and a
twenty year non-competition agreement in Russia from Acorn Communication Group,
Inc. (Acorn) for an aggregate of approximately $3.0 million, consisting of
$600,000 in cash and 138,889 shares of the Company's common stock valued at
approximately $2.4 million. IMEA provides vehicle armoring systems and other
equipment for commercial customers located in Russia. IMEA and Acorn had
substantially common ownership prior to the acquisition. The former shareholders
of IMEA also entered into employment agreements, which include non-competition
clauses, for periods of six months to three years. The allocation of the
purchase price was based on preliminary estimates and may be revised at a later
date pending the completion of certain appraisals and other analysis. For
accounting purposes, the acquisition was effective on 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. The resulting goodwill from
this transaction is being amortized over fifteen years.
In connection with the acquisitions of Labbe, Next, ITI and IMEA, assets
were acquired and liabilities were assumed as follows:
<TABLE>
<CAPTION>
NEXT LABBE ITI IMEA
------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash........................................... $ -- $ 3,501 $ 123 $ 2
Accounts receivable............................ 1,830 4,689 231 11
Inventories.................................... 1,276 3,392 -- 553
Costs and estimated earnings in excess of
billings on uncompleted contracts........... -- 251 -- --
Prepaid expenses............................... -- 65 4 7
Property, plant & equipment.................... 80 3,360 216 82
Intangible assets.............................. -- 140 -- 1,467
Other non-current assets....................... -- 2,357 -- 4
Goodwill....................................... 3,459 7,662 2,061 1,820
------- -------- ------- -------
6,645 25,417 2,635 3,946
Less: Cash paid for net assets................ -- (10,730) (500) (500)
Fair value of debt issued............... (1,575) -- (1,231) (100)
Fair value of stock issued.............. (1,851) (3,431) (800) (2,378)
------- -------- ------- -------
$ 3,219 $ 11,256 $ 104 $ 968
======= ======== ======= =======
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition costs...... $ 3,219 $ 9,287 $ 85 $ 968
Debt........................................... -- 1,969 19 --
------- -------- ------- -------
$ 3,219 $ 11,256 $ 104 $ 968
======= ======== ======= =======
</TABLE>
(f) Purchase of Minority Interest -- During 1997, the Company exercised its
option to acquire the minority interest in its O'Gara Brazilian subsidiary for
69,565 shares of common stock valued at approximately $1.2 million.
F-16
<PAGE> 79
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) BALANCE SHEET ACCOUNTS
(a) Trade Accounts Receivable and Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts -- The following summarizes the components of
trade accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
United States Military:
Billed receivables...................................... $ 1,461,491 $ 3,756,035
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 10,189,891 9,253,872
----------- -----------
Total United States Military.................... $11,651,382 $13,009,907
=========== ===========
Other contracts:
Billed receivables...................................... $21,479,574 $33,893,224
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 5,136,657 2,824,592
----------- -----------
Total other contracts........................... $26,616,231 $36,717,816
=========== ===========
Total trade accounts receivable........................... $22,941,065 $37,649,259
=========== ===========
Total costs and estimated earnings in excess of billings
on uncompleted contracts................................ $15,326,548 $12,078,464
=========== ===========
</TABLE>
Costs and estimated earnings in excess of billings on uncompleted contracts
are net of $66,180,434 and $89,875,813 of progress billings to the United States
Military at December 31, 1996 and 1997, respectively.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized on long-term contracts in excess of billings
because amounts were not billable at the balance sheet date. It is anticipated
such unbilled amounts attributable to the United States Military will generally
be billed over the next 180 days as contracts are substantially completed.
Amounts receivable on other contracts are generally billed as shipments are
made. It is estimated that substantially all of such amounts will be billed
within one year, although contract extensions may delay certain collections
beyond one year.
The following summarizes activity in the allowance for doubtful accounts on
trade accounts receivable:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995..... $3,189,798 $3,102,310 $(3,731,814) $2,560,294
Year ended December 31, 1996..... $2,560,294 $3,259,976 $(3,906,539) $1,913,731
Year ended December 31, 1997..... $1,913,731 $2,043,080 $(1,441,232) $2,515,579
</TABLE>
(b) Inventories -- Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method and include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Raw materials.............................................. $4,782,321 $ 9,441,223
Vehicle costs and work-in-process.......................... 3,951,319 10,011,747
---------- -----------
$8,733,640 $19,452,970
========== ===========
</TABLE>
F-17
<PAGE> 80
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes activity in valuation reserves for inventory
obsolescence:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1995.......... $ -- $ -- $ -- $ --
Year ended December 31, 1996.......... $ -- $264,114 $ -- $264,114
Year ended December 31, 1997.......... $264,114 $113,567 $(23,782) $353,899
</TABLE>
(c) Other Assets -- Other assets are stated at cost less accumulated
amortization and are being amortized on a straight line basis over their
estimated useful lives, as applicable. Other assets consist of the following:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIFE ------------------------
DESCRIPTION (YEARS) 1996 1997
----------- ------- ---------- ----------
<S> <C> <C> <C>
Advance to vendor.................................. -- $1,825,207 $1,275,437
Deferred costs..................................... -- -- 610,376
Security deposits.................................. -- 326,376 471,859
Long-term receivable............................... -- -- 380,000
Non-refundable deposit on an equipment lease with a
related party.................................... 10 503,858 297,025
Deferred financing fees............................ 7-30 152,940 876,667
Non-compete agreements............................. 5 165,000 1,581,667
Long-term investments.............................. -- 180,998 101,630
Other long-term assets............................. -- 186,753 865,031
---------- ----------
3,341,132 6,459,692
(290,707) (279,830)
---------- ----------
$3,050,425 $6,179,862
========== ==========
</TABLE>
Costs applicable to bids in process are deferred when management believes
it is probable that future contracts will be obtained. These costs are
transferred to contract costs when contracts are awarded or are expensed when
the contract award is no longer considered probable.
(d) Accrued Liabilities -- Accrued liabilities consist of the following at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
DESCRIPTION 1996 1997
----------- ---------- -----------
<S> <C> <C>
Payroll and related benefits............................... $5,574,621 $ 7,794,598
Property, sales and other taxes payable.................... 590,648 773,846
Accrued interest........................................... 268,605 564,168
Accrued satellite time..................................... 680,835 1,009,162
Other accruals............................................. 2,514,206 3,786,879
---------- -----------
$9,628,915 $13,928,653
========== ===========
</TABLE>
(5) INCOME TAXES
Prior to October 28, 1996, OHE was an S Corporation and generally was not
responsible for payment of income taxes. Rather, the respective OHE shareholders
were taxed on OHE's taxable income at the respective individual federal and
state income tax rates. Therefore, the income generated by OHE was not subject
to
F-18
<PAGE> 81
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
federal, state or certain foreign income taxes prior to the date of OHE's
reorganization on October 28, 1996. Accordingly, the accompanying consolidated
financial statements only reflect a provision (benefit) for income taxes for
Kroll, a C Corporation, for all periods prior to October 28, 1996.
The Company accounts for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred tax liabilities and assets are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities using enacted tax rates.
The Company's provision (benefit) for income taxes, excluding extraordinary
item and the cumulative effect of a change in accounting principle, for all
periods is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- --------- -----------
<S> <C> <C> <C>
Currently payable:
Federal.................................... $ (159,569) $(110,988) $ 2,109,804
State and local............................ (262,956) 271,744 372,318
Foreign.................................... -- 83,000 1,364,873
----------- --------- -----------
(422,525) 243,756 3,846,995
----------- --------- -----------
Deferred:
Federal.................................... (576,910) (259,443) (1,270,976)
State and local............................ (298,402) (145,937) (224,290)
Foreign.................................... -- -- --
----------- --------- -----------
(875,312) (405,380) (1,495,266)
----------- --------- -----------
$(1,297,837) $(161,624) $ 2,351,729
=========== ========= ===========
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- ------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ----- ----------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) for income
taxes at the federal statutory
rate............................ $(2,663,416) (34.0)% $ 1,936,504 34.0% $1,229,260 34.0%
State and local income taxes, net
of federal benefit.............. (370,496) (4.7) 82,756 1.5 155,895 4.3
Impact of S Corp income/loss,
prior to reorganization......... 381,498 4.9 (2,087,529) (36.6) -- --
Impact of foreign income, prior to
reorganization.................. -- -- (199,095) (3.5) -- --
Nondeductible expenses............ -- -- -- -- 1,390,163 38.4
Change in valuation allowance..... 1,338,113 17.1 109,303 1.9 (755,044) (20.9)
Effect of foreign income/loss..... 105,693 1.3 (8,768) (0.2) 577,743 16.0
Other............................. (89,229) (1.1) 5,205 0.1 (246,288) (6.8)
----------- ----- ----------- ----- ---------- -----
Provision (benefit) for
income taxes.......... $(1,297,837) (16.5)% $ (161,624) (2.8)% $2,351,729 65.0%
=========== ===== =========== ===== ========== =====
</TABLE>
F-19
<PAGE> 82
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's consolidated deferred income tax assets and
liabilities as of December 31 are summarized below:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts............... $ 547,247 $ 648,773 $ 710,441
Fixed assets, depreciation and amortization
differences................................ 591,319 576,996 606,777
Accrual for restricted stock plan............. 464,347 164,794 --
Net operating loss carryforwards.............. 1,365,895 1,423,336 1,839,743
Payroll and other benefits.................... -- 220,000 594,401
Other accruals................................ -- 206,000 278,253
Acquisition costs............................. -- -- 440,000
Other......................................... 65,087 394,000 981,610
----------- ----------- -----------
3,033,895 3,633,899 5,451,225
Valuation allowance........................... (1,338,113) (2,303,336) (2,126,035)
----------- ----------- -----------
Net deferred tax assets............... 1,695,782 1,330,563 3,325,190
----------- ----------- -----------
Deferred tax liabilities:
Nonaccrual service fee receivable............. (219,560) (219,560) (212,079)
Deferred revenue.............................. (1,678,846) (2,072,590) (1,903,975)
Database capitalization....................... (2,644,120) (2,738,824) (2,779,790)
S to C conversion............................. (1,264,792) (5,745) (5,223)
Other......................................... -- -- (166,893)
----------- ----------- -----------
(5,807,318) (5,036,719) (5,067,960)
----------- ----------- -----------
Net deferred tax liability............ $(4,111,536) $(3,706,156) $(1,742,770)
=========== =========== ===========
</TABLE>
The Company has certain foreign net operating loss carryforwards, primarily
in the United Kingdom and France, which approximate $1.4 million and $1.8
million at December 31, 1996 and 1997, respectively. The carryforwards expire
beginning in 2001. A valuation allowance for the full amount of all existing
foreign carryforwards has been provided as it is not certain that the tax
benefit will be realized in the foreseeable future. Adjustments to the valuation
allowance, if any, will be recorded in the periods in which it is determined the
asset is realizable.
(6) RELATED PARTY TRANSACTIONS
(a) Advances to Shareholders -- The Company historically made advances to
certain employee-shareholders. Such advances are due on demand and are
non-interest bearing. An outstanding advance to a major shareholder of the
Company totalled $120,191 at both December 31, 1996 and 1997, respectively. At
December 31, 1996 and 1997, the Company also had advances to certain minority
shareholders in the amount of $168,638 and $405,805, respectively.
(b) Notes Payable -- Shareholders -- OHE had certain notes payable to
shareholders, which were repaid upon the completion of the Company's initial
public offering in 1996. Interest expense associated with these obligations
approximated $33,000 and $27,000 for the years ended December 31, 1995 and 1996,
respectively.
F-20
<PAGE> 83
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Kroll has certain amounts due to/from shareholders of the Company which
include the following amounts at December 31:
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C> <C>
Amounts due from a certain shareholder............. $ 1,345,499 $ --
----------- ---------
Amounts due to certain shareholders................ (8,393,765) (309,500)
----------- ---------
Net due to shareholders.................. $(7,048,266) $(309,500)
=========== =========
</TABLE>
Balances included in amounts due to/from shareholders are classified as
open advance accounts or term loans. The net due to shareholders under the term
loans was $2,309,500 at December 31, 1996. Substantially all amounts due to and
due from shareholders were paid off in connection with the merger except for a
loan payable of $309,500 which is due on demand and bears interest at prime less
0.5%.
(c) Sales -- Shareholder -- During 1995, 1996 and 1997, the Company
rendered services to a corporation which is also a shareholder of the Company.
Total revenue recognized for the years ended December 31, 1995, 1996 and 1997
was $3,868,967, $5,325,559 and $6,412,244, respectively. Additionally, this
corporation provided certain services to the Company which have been included in
cost of sales and operating expenses in the accompanying consolidated statements
of operations. These costs were approximately $485,807, $824,348 and $814,154
for the years ended December 31, 1995, 1996 and 1997, respectively. The year end
accounts receivable balance for this customer was approximately $857,820 and
$897,361 at December 31, 1996 and 1997, respectively.
(d) Purchases and Sales -- Affiliated Entities -- The Company had the
following purchase and sale transactions with affiliated entities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- ---------- --------
<S> <C> <C> <C>
Purchases from affiliated entities........ $557,000 $1,176,000 $411,000
Sales to affiliated entities.............. 208,000 236,000 21,000
</TABLE>
(e) Building and Equipment Leases -- Affiliated Entities -- The Company
currently leases a corporate aircraft from an affiliated entity under a ten year
lease agreement which began in February 1995. The lease stipulates minimum
monthly payments of $35,200, with additional charges accruing for usage in
excess of established base limits. The terms of the lease required a
non-refundable deposit. The original deposit of approximately $504,000 is being
amortized as rental expense over the existing lease period. Rental expense,
including amortization recognized, approximated $414,000, $422,000 and $234,000
for the years ended December 31, 1995, 1996 and 1997, respectively. The Company
also paid this affiliated entity $327,000 in fiscal 1996 for usage of the
aircraft during the roadshow for the initial public offering and included such
amount in issuance costs. Additionally, the Company paid $576,000 in fiscal 1997
for usage of the aircraft in connection with the merger with Kroll and included
such amount in merger-related costs. Management is of the opinion that the
hourly rate paid by the Company was equivalent to the rate charged by the
affiliated entity to other unrelated companies for similar services and it was
favorably comparable to rates charged by another unrelated charter service for
similar aircraft. Also, the Company has recorded $152,000 in prepaid expenses
related to payments made for the future use of the aircraft at December 31,
1997.
OHE is also currently leasing equipment and a manufacturing facility from
two affiliated entities under various three year and month-to-month lease
agreements which began in July 1995. Rental expense approximated $17,000,
$757,000 and $579,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
(f) Consulting and Commission Services -- Various affiliated entities and a
former minority shareholder of the Company provided certain consulting,
commission, sales and marketing services for the Company.
F-21
<PAGE> 84
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective with the reorganization (Note 1), these services were terminated. The
Company recognized expense of $526,000 and $466,000 for the years ended December
31, 1995 and 1996, respectively, for these services.
In 1995, prior to joining the Company, a minority shareholder was paid
$135,000, in conjunction with a consulting agreement. These payments were
recognized in selling and marketing expenses in the accompanying consolidated
statements of operations.
(g) Sale of Receivables -- During the year ended December 31, 1995, Kroll
entered into agreements to sell, without recourse, accounts receivable in the
amount of $4,507,800 to a shareholder. A discount of $225,390, or 5%, was
applied to the sales. Under the terms of the agreements, a portion of the sales
proceeds was withheld by the purchaser subject to a final determination of the
specific account receivables to be included in the sale. At December 31, 1995,
all obligations to the purchaser, pursuant to the agreements, were satisfied.
(h) Other -- During 1995 and 1996, OHE recognized approximately $11,000 and
$3,000, respectively, in expense relating to payments made to an affiliated
entity for use of its facilities for corporate meetings. There were no such
payments in 1997.
(i) Summary of Related Party Transactions -- The following summarizes
transactions with related parties:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Sales
to shareholder............................... $3,868,967 $5,325,559 $6,412,244
to affiliated entities....................... 208,000 236,000 21,000
Purchases
from shareholder............................. 485,807 824,348 814,157
from affiliated entities..................... 557,000 1,176,000 411,000
Lease expense to affiliated entities........... 431,000 1,179,000 813,000
Consulting and commission services expense
provided by affiliated entities.............. 377,000 348,000 --
provided by minority shareholders............ 284,000 118,000 --
Facility service fees paid to affiliated
entity....................................... 11,000 3,000 --
Receivables sale to shareholder................ 4,507,800 -- --
Charter fees included in offering or merger
costs........................................ -- 327,000 576,000
</TABLE>
(7) REVOLVING LINES OF CREDIT
The Company had a $12,000,000 revolving line of credit with a bank at
December 31, 1996, which was replaced during 1997. Borrowings under this line of
credit were $9,935,947 at December 31, 1996.
On December 1, 1997 the Company amended and restated its credit agreement
to provide for a revolving line of credit of $7.0 million maturing on May 31,
1999, a letter of credit facility of approximately $7.7 million and a term note
of $7.0 million which matures on January 4, 1999. The revolving credit facility
bears interest at rates ranging from prime less 0.5% to prime or, at the
Company's option, at LIBOR plus 2.0% to LIBOR plus 2.5%, dependent upon amounts
outstanding. Average borrowings under the revolving line of credit and its
predecessors were $6,530,260, $9,915,663 and $4,568,994 during 1995, 1996 and
1997, respectively, at an approximate weighted average interest rate of 8.82%,
8.27% and 8.46%, respectively. The maximum borrowings outstanding during 1995,
1996 and 1997 were $8,216,000, $12,145,000 and $11,600,000, respectively.
Borrowings under this line of credit were $559,112 at December 31, 1997.
F-22
<PAGE> 85
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with a refinancing in 1997, the Company fully amortized the
remaining deferred financing costs from a previous agreement, resulting in a one
time extraordinary charge to the Company's net income of $193,875, after income
tax benefits of $129,250, or $0.01 per diluted share.
The credit agreement includes certain financial covenants which, among
other restrictions, require the maintenance of certain financial ratios,
including fixed charge coverage and net worth, and impose limitations on foreign
investment, total intangible assets, additional indebtedness and capital
expenditures. The Company was not in compliance with certain of these covenants
as of December 31, 1997. These events of non-compliance have been waived by the
lender.
F-23
<PAGE> 86
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) LONG-TERM DEBT-
The components of long-term debt are as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Senior unsecured notes payable to various institutions,
interest at 9.56% payable semi-annually, principal payable
at maturity in May 2004, subject to prepayment
penalties................................................. $ -- $35,000,000
Development Bonds, variable interest rate approximating 85%
of the bond equivalent yield of 13 week U.S. Treasury
bills (not to exceed 12%), which approximated 3.9% at
December 31, 1997, payable in scheduled installments
through September 2016, subject to optional tender by the
bondholders and a corresponding re-marketing agreement ,
secured by the property, plant and equipment of OHE, and a
bank letter of credit (Note 12)........................... 1,525,000 1,432,224
Note payable to insurance company, interest payable
semi-annually at 10.95%, principal payable semi-annually
totaling at a minimum $2,500,000 subject to additional
principal payments based on cash flows, subject to certain
prepayment penalties, maturing December 15, 1999, repaid
in full in December, 1997................................. 8,125,000 --
Notes payable to former shareholders of Next, stated
interest at 6%, imputed interest at 10%, payable in
scheduled installments through February 2000, principal
due at maturity, secured by assets of Next................ -- 1,614,375
Note payable to bank, interest at prime or LIBOR plus 2.5%,
payable monthly, principal due upon maturity on January 4,
1999, secured by substantially all of the Company's
domestic personal property (Note 7)....................... -- 7,000,000
Note payable to former shareholder of Palmer, interest at
7%, payable in scheduled installments through November
1998...................................................... 505,834 500,000
Mortgage note to bank, interest at 8.68%, payable in monthly
installments of $2,349, including interest, through April
2003, secured by real estate and the guaranty of OHE's
former majority shareholder............................... 195,723 --
Note payable to former shareholder of the Company's Mexican
subsidiary, interest imputed at 9%, due October 1, 1997... 45,000 --
Note payable to former shareholder of Kroll, non-interest
bearing, maturing January 1998............................ -- 1,255,402
Notes payable to former shareholders of ITI, interest at
10%, payable in scheduled installments through July
1999...................................................... -- 1,231,614
Other notes payable, interest at 7.75% to 10.9%, payable in
scheduled installments through September 2007, a portion
of which is secured by various equipment.................. 33,955 2,030,901
---------- -----------
10,430,512 50,064,516
Less-current portion........................................ 4,461,420 3,200,925
---------- -----------
$5,969,092 $46,863,591
========== ===========
</TABLE>
F-24
<PAGE> 87
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's $35 million of senior unsecured notes payable also contains
financial covenants, which among other restrictions, require the maintenance of
net worth and fixed charge coverage ratios.
Scheduled maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 3,200,925
1999........................................................ 7,787,203
2000........................................................ 1,948,940
2001........................................................ 208,690
2002........................................................ 167,223
Thereafter.................................................. 36,751,535
-----------
$50,064,516
===========
</TABLE>
(9) OPERATING LEASES
The Company leases office space and certain equipment under agreements with
terms from one to ten years. The following is a schedule, by year, of
approximate future minimum rental or usage payments required under operating
leases that have initial or non-cancelable lease terms in excess of one year as
of December 31, 1997:
<TABLE>
<CAPTION>
AFFILIATED
ENTITIES OTHER TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
1998..................................... $ 703,265 $ 4,574,331 $ 5,277,596
1999..................................... 439,600 3,571,406 4,011,006
2000..................................... 422,400 2,711,017 3,133,417
2001..................................... 422,400 2,166,347 2,588,747
2002..................................... 422,400 1,834,362 2,256,762
Thereafter............................... 1,126,400 8,508,128 9,634,528
---------- ----------- -----------
$3,536,465 $23,365,591 $26,902,056
========== =========== ===========
</TABLE>
Rental expense charged against current operations amounted to approximately
$3,317,000, $4,595,000 and $4,115,000, for the years ended December 31, 1995,
1996 and 1997, respectively.
(10) DEFINED CONTRIBUTION AND BONUS PLANS
As of December 31, 1997, the Company had the following employee benefit
plans in place:
(a) Defined Contribution Plans -- The Company and its subsidiaries have
established various non-contributory profit sharing/401(k) plans covering
substantially all of the Company's employees. Contributions to the plans are
discretionary and are determined annually by the Company's Board of Directors.
Certain plans also offer a matching contribution whereby the Company will
contribute a percentage of the amount a participant contributes, limited to
certain maximum amounts. Plan contribution expense charged against current
operations for all such plans amounted to approximately $1,083,000, $1,243,000
and $1,211,140 for the years ended December 31, 1995, 1996 and 1997,
respectively.
(b) Profit and Revenue Sharing Plans -- In 1991, Kroll adopted a Profit and
Revenue Sharing Plan to give Kroll employees an annual cash incentive bonus
based on Kroll's performance. The plan made a portion of most employees'
compensation (except administrative personnel, who have a guaranteed bonus)
contingent upon the achievement of certain performance incentives. There were
two plans under the Profit and Revenue Sharing Plan umbrella -- the Profit and
Revenue Sharing Plan for Managing Directors and the Bonus Plan for Professionals
and Senior Administrative Employees.
F-25
<PAGE> 88
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Profit and Revenue Sharing Plan for Managing Directors
The managing directors' bonus plan is based on a matrix of Kroll revenue
and a percentage of operating profit. The maximum bonus opportunity for managing
directors was 50%, 15% and 35% of salary in 1995, 1996 and 1997, respectively.
The administrator may amend, modify or terminate the plan at any time.
Bonus Plan for Professional and Senior Administrative Staff
Similar to the managing directors' bonus plan, the plan for the
professional staff is based on a matrix of Kroll revenue and a percentage of
operating profit. The maximum bonus opportunity for this group ranged from 18%
to 26% of salary in 1995, from 15% of salary in 1996, and from 15% of salary in
1997, depending on the employee's level in Kroll. The administrator may amend,
modify or terminate the plan at any time.
The Company expensed approximately $314,000, $2,288,000 and $516,000
associated with the profit and revenue sharing plans in 1995, 1996 and 1997,
respectively.
(11) EQUITY ARRANGEMENTS
(a) Stock Option Plans -- In 1996, the Company adopted a stock option plan
(the 1996 Plan) for employees and nonemployee directors. The Company may grant
options for up to 836,000 shares under the 1996 Plan. Options for 180,000 and
482,050 shares were granted during 1996 and 1997, respectively. Options granted
under the 1996 Plan are generally granted at fair market value at the date of
grant and are exercisable over periods not exceeding ten years.
In January 1995, Kroll established the Kroll Holdings, Inc. Management
Stock Option Plan (the "Management Stock Option Plan"). Options granted under
the Management Stock Option Plan are nonqualified stock options. Options to
purchase 380,747 and 33,448 shares of common stock were granted under the
Management Stock Option Plan in 1995 and 1996, respectively. In addition, during
1996, options to purchase 137,294 shares of common stock were granted to two key
employees with an exercise price above market price. There were no option grants
under the Management Stock Option Plan during 1997.
(b) Restricted Stock Plan -- Kroll adopted a long-term incentive plan
designed to give managing directors and other key employees of the Kroll
division a stake in the long-term success of Kroll through grants of phantom
stock options. Each option gave the right to receive a payment equal to the
appreciation in the price of the option at the payment determination date.
Effective June 14, 1993, Kroll replaced the long-term incentive plan with a
restricted stock plan. The restricted stock plan provided for cliff vesting
after a five-year period from the date the stock was awarded. Participants who
were awarded stock under the long-term incentive plan prior to or in January
1991 vested in three years, as they received a two-year credit toward vesting.
Participants who were awarded stock under the long-term incentive plan after
January 1, 1991 and prior to, or in January 1992, vested in four years, as they
received a one-year credit toward vesting. Under the provisions of the plan, a
participant had the ability to put the stock back to Kroll and receive cash for
the then fair value of the stock. In addition, the plan included a provision
which resulted in accelerated vesting of all shares in the event of a change in
control of Kroll. The Company has accounted for this plan as a fixed plan and,
accordingly, compensation expense was based on the fair market value as
determined by independent appraisal at the date of grant.
During 1996, 259,271 shares of restricted stock fully vested and were
issued. Based on a valuation of Kroll, the total value assigned to these shares
was $572,286. As a result of the merger in December 1997, all remaining shares
associated with the restricted stock plan vested and all restrictions lapsed on
the merger date. In connection with this accelerated vesting, the Company
recognized compensation expense of approximately $800,000 in 1997, which is
included with merger related costs in the accompanying consolidated statement of
operations. In addition to the regular tax benefit based on compensation expense
recognized, the Company will
F-26
<PAGE> 89
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
also realize a tax benefit for the fair market value of all restricted shares
which became fully vested in 1997. This benefit of approximately $2.2 million
has been recognized as an increase to additional paid-in-capital in the
accompanying consolidated statement of shareholders' equity. This balance
represents the spread between cumulative compensation expense recognized by the
Company for accounting purposes and the cumulative compensation expense
recognized for tax purposes based on the fair market value of the shares. No
shares are outstanding under the plan as of December 31, 1997 and, effective
January 2, 1998, further issuances under the plan were ceased by a board
resolution.
(c) Kroll Supplemental Executive Award Agreements -- The Company entered
into agreements with certain senior Kroll executives which provided additional
benefits to the participants. During 1996, all 144,421 previously granted shares
fully vested and were issued. Based on a valuation of the Company, the total
value assigned to the shares on the vesting date equaled $318,780.
(d) Purchase and Retirement of Common Stock -- In accordance with Kroll's
historical bylaws, restricted stock and stock option agreements, Kroll acquired
259,036 shares (representing shares and shares under options) of a former
director for approximately $2.7 million upon his leaving the employment of Kroll
in January 1997.
(e) OHE Executive Bonus Plan -- During 1993, OHE adopted an executive bonus
plan, which covered four individuals. The plan awarded a bonus based on the
attainment of goals stipulated in the five year business plan, ranging from 50%
to 120% of the executives' base compensation. The bonus amounts were distributed
50% in cash and 50% in non-qualified stock options to purchase stock of OHE.
Subject to the executives' ability to elect a decrease in the percentage of cash
payments and to increase the percentage of stock options, 50% of the bonus
amount was payable in cash, and the remainder in stock options. OHE issued
121,463 options in 1994 based on 1993's operating results. No options were
issued in 1995 or 1996. In August 1996 the 121,463 options were exercised for
121,463 shares of common stock of the Company for $445 and the executive bonus
plan was terminated.
(f) Stock Based Compensation Disclosure -- With respect to the 1996 Plan
and the Management Stock Option Plan, SFAS No. 123 requires, at a minimum, pro
forma disclosures of expense for stock-based awards based on their fair values.
Had compensation cost for these plans been determined consistent with SFAS 123,
the Company's net income (loss) and diluted earnings (loss) per share for the
years ended December 31, 1996 and 1997 would have been as follows:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Net income (loss):
As reported........................................ $5,857,222 $709,866
Pro forma.......................................... $5,834,572 $(81,481)
Diluted earnings (loss) per share:
As reported........................................ $ 0.52 $ 0.05
Pro forma.......................................... $ 0.52 $ (0.01)
</TABLE>
Had compensation cost for the Company's stock options issued in 1995 and
1996 under the Management Stock Option Plan been determined consistent with SFAS
No. 123, there would have been no effect on the Company's net loss or diluted
loss per share as these options were determined to have a fair value of $0.
F-27
<PAGE> 90
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
Dividend yield......................................... 0% 0%
Expected volatility.................................... 39.3% 40.5%
Risk-free interest rate................................ 6.5% 5.96% - 6.76%
Expected lives......................................... 7.5 years 7.5 years
</TABLE>
At December 31, 1996, the 180,000 options granted during 1996 under the
1996 Plan to employees and non-employee directors have an exercise price of $9,
a fair value of $4.98 per option and remaining contractual lives of 9 years. The
482,050 options granted during 1997 to employees and non-employee directors have
exercise prices between $9.88 and $17.25, fair values ranging from $5.56 to
$9.48 per option and remaining contractual lives of 10 years.
A summary of the status of the Company's stock option plans at December 31,
1995, 1996 and 1997, and the change during the years then ended is presented in
the table below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
year............... -- $ -- 380,747 $6.40 731,489 $ 6.11
Granted.............. 380,747 6.40 350,742 5.79 482,050 15.52
Exercised............ -- -- -- -- (4,200) 9.00
Forfeited/Expired.... -- -- -- -- (37,950) 9.46
------- ----- ------- ----- --------- ------
Outstanding, end of
year............... 380,747 $6.40 731,489 $6.11 1,171,389 $ 9.95
======= ===== ======= ===== ========= ======
Exercisable, end of
year............... 95,218 $6.40 235,263 $5.23 698,239 $ 6.16
======= ===== ======= ===== ========= ======
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
(a) Letters of Credit -- Under the terms of the Economic Development
Revenue Bonds Agreement, OHE is required to maintain a letter of credit
supporting the debt. The Company's lender is committed to providing this letter
of credit through September 1, 1999. As of December 31, 1997, the Company had an
outstanding letter of credit in the amount of $1,681,750.
At December 31, 1997, the Company had standby and purchase letters of
credit, issued by two financial institutions, in the aggregate amount of
$4,776,502.
(b) Purchase Agreement -- In June 1995, the Company entered into a firm
purchase agreement with Glocom, Inc. ("Glocom"). The agreement provided for an
irrevocable purchase order for the purchase of 4,000 units of the Compact-M
portable satellite telecommunication unit for approximately $12,000,000. In
October 1997, the agreement was amended to provide certain pricing concessions
to the Company and to provide a reduction in the quantity of units that must be
purchased. The amendment also provided certain licensing rights to the Company.
At December 31, 1997, the Company was committed to purchase approximately 250
units at a total cost of approximately $0.7 million. In accordance with the
original agreement, the Company advanced a total of $3,000,000 to Glocom for the
funding of the related production
F-28
<PAGE> 91
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs. As of December 31, 1996 and 1997, the Company had advances to the above
vendor of $2,320,307 and $1,673,123, respectively.
(c) Employment Agreements -- On December 1, 1997, the Company entered into
employment agreements with seven key officers and five key employees with annual
compensation ranging in value from $65,000 to $375,000, ending on November 30,
2000. Each of these officers also is eligible for an annual bonus plan. Five of
the officers were granted options to purchase shares of the Company's common
stock at the then existing market value, with the number of shares ranging from
10,000 to 75,000 (see Note 11(f)). In the event of termination without cause,
the terminated individual shall continue to receive his salary for the greater
of the remainder of the agreement or one year. If an agreement is not renewed,
the officer shall receive one year's salary. Each officer also has agreed to
certain non-competition clauses.
As of December 31, 1997, the remaining aggregate commitment under these
employment agreements if all individuals were terminated without cause was
approximately $6.8 million.
(d) Legal Matters -- The Company is party to various legal proceedings
arising from its operations. Management of the Company believes that the outcome
of these proceedings, individually and in the aggregate, will have no material
adverse effect on the Company's financial position, results of operations or its
cash flows.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of significant current assets, current liabilities and
long-term debt approximate their respective historical carrying amounts.
(14) CUSTOMER AND SEGMENT DATA
(a) Segment Data -- The Company operates in three business segments, the
Security Products and Services Group, the Investigations and Intelligence Group
and the Voice and Data Security Group.
F-29
<PAGE> 92
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes information about the Company's business segments:
<TABLE>
<CAPTION>
INVESTIGATIONS
SECURITY AND
PRODUCTS AND INTELLIGENCE VOICE AND DATA
SERVICES GROUP GROUP SECURITY GROUP CONSOLIDATED
-------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Net sales to unaffiliated
customers................... $ 34,883 $48,914 $ 2,044 $ 85,841
======== ======= ======= ========
Operating income (loss)....... $ (430) $(3,618) $ (589) $ (4,637)
======== ======= ======= ========
Identifiable assets at
year-end.................... $ 26,490 $35,678 $ 3,324 $ 65,492
======== ======= =======
Corporate assets.............. 1,275
--------
Total assets at year end...... $ 66,767
========
1996
Net sales to unaffiliated
customers................... $ 79,156 $66,735 $ 7,770 $153,661
======== ======= ======= ========
Operating income.............. $ 6,953 $ 1,008 $ 538 $ 8,499
======== ======= ======= ========
Identifiable assets at
year-end.................... $ 38,380 $34,681 $ 6,816 $ 79,877
======== ======= =======
Corporate assets.............. 1,357
--------
Total assets at year-end...... $ 81,234
========
1997
Net sales to unaffiliated
customers................... $105,557 $67,419 $17,437 $190,413
======== ======= ======= ========
Operating income.............. $ 8,014 $ 665 $ 292 $ 8,971
======== ======= ======= ========
Identifiable assets at
year-end.................... $ 74,283 $36,955 $13,449 $124,687
======== ======= =======
Corporate assets.............. 9,284
--------
Total assets at year-end...... $133,971
========
</TABLE>
Total net sales by segment includes sales to unaffiliated customers.
Intersegment sales are nominal. Operating income (loss) is total net sales less
operating expenses. Operating income (loss) does not include the following
items: interest expense, other expenses and income taxes. Depreciation expense
and capital
F-30
<PAGE> 93
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expenditures for each of the Company's business segments for the years ended
December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
INVESTIGATIONS
SECURITY AND
PRODUCTS AND INTELLIGENCE VOICE AND DATA
SERVICES GROUP GROUP SECURITY GROUP CONSOLIDATED
-------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Depreciation expense................ $ 462 $ 791 $-- $1,253
====== ====== === ======
Capital expenditures................ $ 755 $ 373 $-- $1,128
====== ====== === ======
1996
Depreciation expense................ $ 841 $ 690 $-- $1,531
====== ====== === ======
Capital expenditures................ $2,627 $ 603 $-- $3,230
====== ====== === ======
1997
Depreciation expense................ $1,427 $ 774 $16 $2,217
====== ====== === ======
Capital expenditures................ $3,149 $1,663 $43 $4,855
====== ====== === ======
</TABLE>
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets are principally cash,
certain intangible assets and certain prepaid expenses.
The following summarizes information about the Company's different
geographic areas:
<TABLE>
<CAPTION>
UNITED OTHER
STATES FRANCE FOREIGN ELIMINATIONS CONSOLIDATED
------- ------- ------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1995
Net sales to unaffiliated
customers.......................... $70,509 $ 1,708 $13,624 $ -- $85,841
Intercompany......................... 908 276 1,542 (2,726) --
------- ------- ------- ------- -------
Total net sales............ $71,417 $ 1,984 $15,166 $(2,726) $85,841
======= ======= ======= ======= =======
Operating income (loss).............. $(3,429) $ (860) $ (348) $ -- $(4,637)
======= ======= ======= ======= =======
Identifiable assets.................. $57,450 $ 1,338 $ 6,704 $ -- $65,492
======= ======= ======= =======
Corporate assets..................... 1,275
-------
Total assets at year-end............. $66,767
=======
</TABLE>
F-31
<PAGE> 94
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UNITED OTHER ELIMI- CONSOLI-
STATES FRANCE FOREIGN NATIONS DATED
-------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
1996
Net sales to unaffiliated
customers...................... $129,290 $ 2,142 $22,229 $ -- $153,661
Intercompany..................... 3,584 316 2,804 (6,704) --
-------- ------- ------- -------- --------
Total net sales........ $132,874 $ 2,458 $25,033 $ (6,704) $153,661
======== ======= ======= ======== ========
Operating income................. $ 6,451 $ (118) $ 2,166 $ -- $ 8,499
======== ======= ======= ======== ========
Identifiable assets.............. $ 64,739 $ 1,205 $13,933 $ -- $ 79,877
======== ======= ======= ========
Corporate assets................. 1,357
--------
Total assets at
year-end............. $ 81,234
========
1997
Net sales to unaffiliated
customers...................... $119,112 $24,004 $47,297 $ -- $190,413
Intercompany..................... 7,413 208 5,624 (13,245) --
-------- ------- ------- -------- --------
Total net sales........ $126,525 $24,212 $52,921 $(13,245) $190,413
======== ======= ======= ======== ========
Operating income................. $ 3,810 $ 1,382 $ 3,779 $ -- $ 8,971
======== ======= ======= ======== ========
Identifiable assets.............. $ 69,610 $23,706 $31,371 $ -- $124,687
======== ======= ======= ========
Corporate assets................. 9,284
--------
Total assets at
year-end............. $133,971
========
</TABLE>
The Company accounts for transfers between geographic areas at cost plus a
proportionate share of operating profit.
The following summarizes the Company's sales in the United States and
foreign locations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales to unaffiliated customers:
U.S. Government................................... $11,514 $ 51,505 $ 43,719
Other United States............................... 45,124 61,080 58,158
Middle East....................................... 8,582 7,598 5,887
Europe............................................ 8,831 11,798 44,022
Asia.............................................. 6,729 8,946 10,697
Central & South America........................... 1,050 5,807 20,123
Other Foreign..................................... 4,011 6,927 7,807
------- -------- --------
$85,841 $153,661 $190,413
======= ======== ========
</TABLE>
Export sales by the Company's domestic operations were approximately 11%,
15% and 16% of net sales for the years ended December 31, 1995, 1996 and 1997,
respectively.
The Company is subject to audit and investigation by various agencies which
oversee contract performance in connection with the Company's contracts with the
U.S. Government. Management believes that potential claims from such audits and
investigations will not have a material adverse effect on the consolidated
financial statements. In addition, contracts with the U.S. Government may
contain cost or
F-32
<PAGE> 95
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
performance incentives or both based on stated targets or other criteria. Cost
or performance incentives are recorded at the time there is sufficient
information to relate actual performance to targets or other criteria.
The Company has foreign operations and assets in France, the United
Kingdom, China, Brazil, Mexico, the Philippines, Russia, India, Australia,
Japan, Saudi Arabia, Singapore, Switzerland, and Italy. In addition, the Company
sells its products and services in other foreign countries and continues to
increase its level of international activity. Accordingly, the Company is
subject to various risks including, among others, foreign currency restrictions,
exchange rate fluctuations, government instability and complexities of local
laws and regulations.
(b) Major Customers -- During the years ended December 31, 1995, 1996 and
1997, sales to the U.S. Government approximated 13%, 34%, and 23% of the
Company's net sales, respectively. In addition, the year-end accounts receivable
balance of the U.S. Government approximated 10% and 6% of the Company's accounts
receivable balance as of December 31, 1996 and 1997, respectively.
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company has entered into four foreign currency exchange contracts to
effectively hedge its exposure to certain foreign currency rate fluctuations on
a demand loan to a subsidiary which is denominated in the foreign currency. By
virtue of these contracts, the Company has fixed the total dollar amount which
they will receive under the aforementioned subsidiary loan through the maturity
dates of the contracts regardless of the fluctuations in the exchange rate. The
total notional amount of the contracts, which mature between January 1998 and
July 1999, is $15.5 million. The Company's cumulative foreign currency
translation adjustment component of shareholders' equity was increased by
$346,000 in 1997 as a result of these agreements.
The Company has estimated the fair value of their foreign exchange
contracts based on information obtained from the counterparty of the amount the
Company would receive at December 31, 1997 in order to terminate the agreements.
As of December 31, 1997, the Company would have received approximately $534,000
upon cancellation of all contracts.
F-33
<PAGE> 96
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) SUPPLEMENTAL CASH FLOWS DISCLOSURES
The following is a summary of cash paid related to certain items:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................... $2,636,061 $4,293,970 $4,579,261
---------- ---------- ----------
Cash paid for taxes.............................. $ 123,686 $ 97,629 $2,645,474
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Issuance of restricted stock..................... $ -- $ 891,066 $1,356,280
---------- ---------- ----------
Note payable for purchase of Palmer net assets... $ -- $ 505,834 $ --
---------- ---------- ----------
Affiliate obligation forgiven in connection with
the reorganization............................ $ -- $ 122,000 $ --
---------- ---------- ----------
Exchange of note receivable for trade
receivables................................... $ 60,000 $ -- $ --
---------- ---------- ----------
Exchange of stock in an unaffiliated company for
trade receivables............................. $ 125,000 $ -- $ --
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of Next........................... $ -- $ -- $1,851,284
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of Labbe.......................... $ -- $ -- $3,431,000
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of ITI............................ $ -- $ -- $ 800,011
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of IMEA........................... $ -- $ -- $2,378,474
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of minority interest.............. $ -- $ -- $1,243,474
---------- ---------- ----------
Notes issued in connection with acquisition of
Next.......................................... $ -- $ -- $1,575,000
---------- ---------- ----------
Notes issued in connection with acquisition of
ITI........................................... $ -- $ -- $1,231,513
---------- ---------- ----------
Notes issued in connection with acquisition of
IMEA.......................................... $ -- $ -- $ 100,000
---------- ---------- ----------
Tax benefit of restricted stock vesting.......... $ -- $ -- $2,160,341
---------- ---------- ----------
</TABLE>
F-34
<PAGE> 97
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Net sales......................................... $41,239 $47,360 $47,791 $54,023
Gross profit...................................... 13,405 15,585 14,481 15,298
Net income (loss)................................. 1,529 2,292 2,156 (5,267)
Earnings (loss) per share:
Basic........................................... $ 0.12 $ 0.17 $ 0.17 $ (0.40)
Diluted......................................... $ 0.09 $ 0.15 $ 0.14 $ (0.40)
1996
Net sales......................................... $36,229 $38,666 $36,959 $41,807
Gross profit...................................... 11,183 9,625 14,204 7,190
Net income (loss)................................. 3,177 818 3,968 (2,106)
Earnings (loss) per share:........................
Basic........................................... $ 0.30 $ 0.08 $ 0.38 $ (0.18)
Diluted......................................... $ 0.27 $ 0.05 $ 0.35 $ (0.18)
</TABLE>
F-35
<PAGE> 98
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[INSIDE BACK COVER]
<TABLE>
<S> <C>
[Picture of corporate logo; a KROLL-O'GARA
square with the letter K within THE RISK MITIGATION COMPANY
the letter G within the
letter O].
</TABLE>
[Picture of world map labelled "Worldwide Network" and indicating
offices at: New York, New York; Washington, D.C.; Fairfield, Ohio;
Chicago, Illinois; San Francisco and Los Angeles, California; San
Antonio, Texas; Miami, Florida; Mexico City, Mexico; Sao Paulo,
Brazil; Lamballe and Paris, France; London and Salisbury, the United
Kingdom; Moscow, Russia; Ryhad, Saudi Arabia; Hong Kong and Beijing,
China; Tokyo, Japan; Sydney, Australia; Singapore, Singapore; New
Delhi, India; Manila, the Philippines; Torino, Italy; and Geneva,
Switzerland.]
O'GARA-HESS & EISENHARDT(TM), KROLL-O'GARA(TM) AND COMPACT-M(TM) ARE TRADEMARKS
OF THE COMPANY. KROLL(R) AND O'GARA SATELLITE NETWORKS(R) ARE REGISTERED
TRADEMARKS OF THE COMPANY. GENERAL MOTORS(TM), CHEVROLET(R), CADILLAC(R),
GMC(TM), SUBURBAN(R) AND OMEGA(TM) ARE TRADEMARKS OF GENERAL MOTORS CORPORATION.
JEEP CHEROKEE(TM) IS A TRADEMARK OF CHRYSLER CORPORATION AND JETTA(R) IS A
REGISTERED TRADEMARK OF VOLKSWAGENWERK A.G. MERCEDES BENZ(R) IS A REGISTERED
TRADEMARK OF MERCEDES-BENZ A.G. AND SL(R) AND DAIMLER-BENZ(R) ARE REGISTERED
TRADEMARKS OF DAIMLER-BENZ. AMSC(R) IS A REGISTERED TRADEMARK OF AMERICAN MOBILE
SATELLITE CORPORATION. BRINK'S(R) IS A REGISTERED TRADEMARK OF BRINK'S
INCORPORATED. S90(R) IS A TRADEMARK OF VOLVO AB. ALL OTHER TRADEMARKS APPEARING
IN THIS PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
<PAGE> 99
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer contained herein, and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company, the Selling Shareholders or any Underwriter. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, shares of Common Stock in any jurisdiction to any person to whom it is
not lawful to make such offer or solicitation in such jurisdiction or in which
the person making such offer or solicitation is not qualified to do so. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that there has been no change in the
affairs of the Company since the date hereof.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 7
Use of Proceeds........................... 13
Price Range of Common Stock and Dividend
Policy.................................. 14
Capitalization............................ 15
Selected Consolidated Financial Data...... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 18
Business.................................. 28
Management................................ 44
Certain Relationships and Related Party
Transactions............................ 49
Principal and Selling Shareholders........ 54
Description of Capital Stock.............. 56
Shares Eligible for Future Sale........... 58
Underwriting.............................. 59
Legal Matters............................. 60
Experts................................... 60
Additional Information.................... 60
Available Information..................... 61
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
PRELIMINARY PROSPECTUS , 1998
KROLL-O'GARA LOGO
4,400,000 Shares
The Kroll-O'Gara Company
Common Stock
SBC WARBURG DILLON READ INC.
BEAR, STEARNS & CO. INC.
SUNTRUST EQUITABLE SECURITIES
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of anticipated expenses in connection with the
issuance and distribution of the shares of Common Stock being registered, all of
which will be paid by the Company and all of which (other than the SEC, NASD and
Nasdaq fees) are estimated:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee........................................ $ 27,428
NASD fee.................................................... 9,735
Nasdaq National Market listing fee..........................
Printing costs..............................................
Legal fees..................................................
Accounting fees.............................................
Transfer agent fees.........................................
Miscellaneous...............................................
----------
$
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The information required by this Item is incorporated by reference from
Part II, Item 14 of the Registrant's Registration Statement on Form S-1, No.
333-11093.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The information required by this Item is incorporated by reference from
Part II, Item 15 of the Registrant's Registration Statement on Form S-1, No.
333-11093, from Part II, Item 2 of the Registrant's quarterly reports on Form
10-Q for the quarters ended March 31, June 30 and September 30, 1997, and from
Part II, Item 5 of the Registrant's annual report on Form 10-K for the year
ended December 31, 1997.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The list of exhibits is set forth beginning on page II-5 of
this Registration Statement and is incorporated herein by reference.
(b) Financial Statement Schedules. All financial statement schedules are
omitted due to the absence of conditions under which they are required or
because the information is shown in the consolidated financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS.
*(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-1
<PAGE> 101
*(i) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
* Paragraph references correspond to those of Regulation S-K, Item 512.
II-2
<PAGE> 102
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CINCINNATI, STATE OF
OHIO, AS OF THE 16TH DAY OF MARCH, 1998.
THE KROLL-O'GARA COMPANY
By: /s/ JULES B. KROLL
--------------------------------------
Jules B. Kroll
Chairman and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AS OF THE 16TH DAY OF MARCH, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ JULES B. KROLL Chairman of the Board and Chief
- ------------------------------------------------ Executive Officer (principal executive officer)
Jules B. Kroll
/s/ THOMAS M. O'GARA* Vice Chairman of the Board
- ------------------------------------------------
Thomas M. O'Gara
/s/ WILFRED T. O'GARA* Director
- ------------------------------------------------
Wilfred T. O'Gara
/s/ NAZZARENO E. PACIOTTI Chief Financial Officer
- ------------------------------------------------ (principal financial officer)
Nazzareno E. Paciotti
/s/ NICHOLAS P. CARPINELLO Controller and Treasurer
- ------------------------------------------------ (principal accounting officer)
Nicholas P. Carpinello
/s/ MICHAEL G. CHERKASKY* Director
- ------------------------------------------------
Michael G. Cherkasky
/s/ MARSHALL S. COGAN* Director
- ------------------------------------------------
Marshall S. Cogan
/s/ MICHAEL J. LENNON* Director
- ------------------------------------------------
Michael J. Lennon
/s/ RAYMOND E. MABUS* Director
- ------------------------------------------------
Raymond E. Mabus
/s/ HUGH E. PRICE* Director
- ------------------------------------------------
Hugh E. Price
/s/ JERRY E. RITTER* Director
- ------------------------------------------------
Jerry E. Ritter
</TABLE>
II-3
<PAGE> 103
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ WILLIAM S. SESSIONS* Director
- ------------------------------------------------
William S. Sessions
/s/ HOWARD I. SMITH* Director
- ------------------------------------------------
Howard I. Smith
* Pursuant to Power of Attorney
By: /s/ ABRAM S. GORDON
---------------------------------------------------------------------------------------------------
Abram S. Gordon
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 104
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Articles of Incorporation of the
Company
3.2 Code of Regulations of the Company (1)
4.1 Note Purchase Agreement, dated as of May 30, 1997, between
and among the Company, Connecticut General Life Insurance
Company, Life Insurance Company of North America,
Massachusetts Mutual Life Insurance Company, The Traveler's
Insurance Company, and the Guardian Life Insurance Company
of America (2)
5.1 Opinion of Taft, Stettinius & Hollister LLP *
10.1 Agreement to armor HMMWVs between the Company and the United
States Army Tank and Automotive Command, dated May 12, 1994,
as amended (1)
10.2 Systems Technical Support Agreement between the Company and
the United States Army, dated January 20, 1997 (3)
10.3 Lease of Mulhauser Road facility between O'Gara-Hess &
Eisenhardt Armoring Company and OLG, Limited, dated March
12, 1996, as amended (1)
10.4 Aircraft Lease between O'Gara-Hess & Eisenhardt Armoring
Company and Longline Leasing, Inc. and Excel Armor Products,
Inc., dated February 13, 1995, as amended (1)
10.5 Terms of Lease (English Translation) of Sao Paulo, Brazil
facility between O'Gara-Hess & Eisenhardt Armoring Company
do Brazil and Piero Balducci and Elvira Miriam Cob Balducci,
dated March 8, 1996 (1)
10.6 1996 Stock Option Plan, as amended
10.7 Employment Agreement between O'Gara-Hess & Eisenhardt
Armoring Company and Richard L. Curotto, dated August 23,
1996 (1)
10.8 Employment Agreement between the Company and Thomas M.
O'Gara, dated August 23, 1996 (1)
10.9 Employment Agreement between the Company and Wilfred T.
O'Gara, dated August 23, 1996 (1)
10.10 Employment Agreement between the Company and Nicholas P.
Carpinello, dated August 23, 1996 (1)
10.11 Employment Agreement between O'Gara-Hess & Eisenhardt
Armoring Company and Gary W. Allen, dated August 23, 1996 (1)
10.12 Employment Agreement between O'Gara-Hess & Eisenhardt
Armoring Company and Michael J. Lennon, dated August 23,
1996 (1)
10.13 Form of Accumulated Adjustments Account ("AAA") promissory
notes to shareholders (1)
10.14 License agreement between O'Gara Satellite Networks Limited
and Morsviasputnik, dated March 21, 1995 (1)
10.15 Plan and Agreement to Merge, dated as of August 8, 1997, by
and among The O'Gara Company, VDE, Inc., Kroll Holdings,
Inc. and Jules B. Kroll (7)
10.16 Acquisition Agreement between the Company and Labbe, S.A.,
dated January 21, 1997 (4)
10.17 Amended and Restated Loan Agreement, dated as of December 1,
1997, between The O'Gara Company, O'Gara-Hess & Eisenhardt
Armoring Company, Kroll Holdings, Inc., Kroll Associates,
Inc. and KeyBank National Association
10.18 Supplemental Agreement Modification to acquire 360
additional armored HMMWVs between United States Army Tank
and Automotive Armaments Command and O'Gara-Hess and
Eisenhardt Armoring Company, dated March 31, 1997 (5)
10.19 Second Lease Amendment, dated March 31, 1997 between OLG
Limited and O'Gara-Hess & Eisenhardt Armoring Company (6)
</TABLE>
II-5
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.20 Stock Option and Stockholders' Agreement, dated January 29,
1996, among Kroll Holdings, Inc., Jules B. Kroll and Michael
Cherkasky (7)
10.21 Stock Option and Stockholders' Agreement, dated January 29,
1996, among Kroll Holdings, Inc., Jules B. Kroll and
Nazzareno E. Paciotti (7)
10.22 AUI Retainer Agreement (7)
10.23 Amended and Restated Lease of office space in New York, New
York between Progress Partners and Kroll Associates, Inc. (7)
10.24 Registration Rights Agreement, dated August 8, 1997, among
Thomas M. O'Gara, Jules B. Kroll and the Company (7)
10.25 Registration Rights Agreement between American International
Group, Inc. and the Company
10.26 Employment Agreement, dated October 17, 1997, between the
Company and Jules B. Kroll (7)
10.27 Employment Agreement, dated October 17, 1997, between the
Company and Nazzareno E. Paciotti (7)
10.28 Employment Agreement, dated October 17, 1997, between the
Company and Abram S. Gordon (7)
10.29 Amendment to Employment Agreement, dated October 17, 1997,
between O'Gara-Hess & Eisenhardt Armoring Company and
Michael J. Lennon (7)
10.30 Amendment to Employment Agreement, dated October 17, 1997,
between the Company and Thomas M. O'Gara (7)
10.31 Amendment to Employment Agreement, dated October 17, 1997,
between the Company and Wilfred T. O'Gara (7)
10.32 Amendment to Employment Agreement, dated October 17, 1997,
between the Company and Nicholas P. Carpinello (7)
10.33 Form of Promissory Note between Jules B. Kroll and Kroll
Associates, Inc. (7)
21.1 Subsidiaries of the Company
23.1 Consent of Taft, Stettinius & Hollister LLP (contained in
Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney
27.1 Financial Data Schedule
</TABLE>
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* To be filed by amendment.
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1, No.
333-11093 and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Current Report on Form 8-K (Date of
Report: May 30, 1997) and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Current Report on Form 8-K (Date of
Report: February 12, 1997) and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 and incorporated herein by reference.
II-6
<PAGE> 106
(7) Filed as an exhibit to the Company's Registration Statement on Form S-4, No.
333-35845 and incorporated herein by reference.
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The Company will furnish to the Commission, upon request, any long-term debt
instruments not listed above.
II-7
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
FIRST. The name of the corporation is THE KROLL-O'GARA COMPANY (the
"Corporation").
SECOND. The place in the State of Ohio where the Corporation's
principal office is to be located is the City of Fairfield in Butler County,
Ohio.
THIRD. The purpose for which the Corporation is organized shall be to
engage in any lawful act or activity for which corporations may be formed under
the Ohio General Corporation Law, Ohio Revised Code ss.ss.1701.01 et seq.
FOURTH. The aggregate number of shares of stock which the Corporation
shall have authority to issue is Fifty-One Million (51,000,000) shares, which
shall be divided into two classes, consisting of:
(a) Fifty Million (50,000,000) shares of common stock ("Common
Stock") with a par value of $.01 per share.
(b) One Million (1,000,000) shares of preferred stock
("Preferred Stock") with a par value of $.01 per share.
PART ONE: COMMON STOCK
The shares of Common Stock may be issued at any time or from time to
time for such amount of lawful consideration as may be fixed by the Board of
Directors. Each holder of Common Stock shall be entitled to one (1) vote for
each share of Common Stock held by such holder.
PART TWO: PREFERRED STOCK
Clause 1. Except as otherwise provided by this Article Fourth or by the
amendment or amendments adopted by the Board of Directors providing for the
issue of any series of Preferred Stock, the Preferred Stock may be issued at any
time or from time to time in any amount, not exceeding in the aggregate,
including all shares of any and all series thereof theretofore issued, the One
Million (1,000,000) shares of Preferred Stock hereinabove authorized, as
Preferred Stock of one or more series, as hereinafter provided, and for such
lawful consideration as shall be fixed from time to time by the Board of
Directors.
Clause 2. Authority is hereby expressly granted to the Board of
Directors from time to time to adopt amendments to these Articles of
Incorporation providing for the issue in one more series of any unissued or
treasury shares of the Preferred Stock, and providing, to the fullest extent now
or hereafter permitted by the laws of the State of Ohio and notwithstanding the
provisions of any other Article of these Articles of
<PAGE> 2
Incorporation of the Corporation, in respect of the matters set forth in the
following subdivisions (i) to (ix), inclusive, as well as any other rights or
matters pertaining to such series:
(i) The designation and number of shares of such series;
(ii) Voting rights (to the fullest extent now or hereafter
permitted by the laws of the State of Ohio);
(iii) The dividend rate or rates of such series (which may be
a variable rate and which may be cumulative);
(iv) The dividend payment date or dates of such series;
(v) Redemption rights (to the fullest extent now or hereafter
permitted by the laws of the State of Ohio), including the price or
prices at which shares of such series may be redeemed;
(vi) The amount of the sinking fund, if any, to be applied to
the purchase or redemption of shares of such series and the manner of
its application;
(vii) The liquidation price or prices of such series;
(viii) Whether or not the shares of such series shall be made
convertible into, or exchangeable for, shares of any other class or
classes or of any other series of the same class of stock of the
Corporation or any other property, and if made so convertible or
exchangeable, the conversion price or prices, or the rates of exchange
at which such conversation or exchange may be made and the adjustments
thereto, if any; and,
(ix) Whether or not the issue of any additional shares of such
series or any future series in addition to such series shall be subject
to any restrictions and, if so, the nature of such restrictions.
Any of the voting rights, dividend rate or rates, dividend payment date or
dates, redemption rights and price or prices, sinking fund requirements,
liquidation price or prices, conversion or exchange rights and restrictions on
issuance of shares of any such series of Preferred Stock may, to the fullest
extent now or hereafter permitted by the laws of the State of Ohio, be made
dependent upon facts ascertainable outside these Articles of Incorporation or
outside the amendment or amendments providing for the issue of such Preferred
Stock adopted by the Board of Directors pursuant to authority expressly vested
in it by this Article Fourth. If the then-applicable laws of the State of Ohio
do not permit the Board of Directors to fix, by the amendment creating a series
of Preferred Stock, the voting rights of shares of such series, each holder of a
share of such series of Preferred Stock shall, except as may be otherwise
provided by
<PAGE> 3
law, be entitled to one (1) vote for each share of Preferred Stock of such
series held by such holder.
Clause 3. Before any dividends shall be declared or paid upon or set
apart for, or distribution made on, the Common Stock and before any sum shall be
paid or set apart for the purchase or redemption of Preferred Stock of any
series or for the purchase of the Common Stock, the holders of Preferred Stock
of each series shall be entitled to receive accrued dividends declared by the
Board of Directors, payable at the rate or rates fixed for such series in
accordance with the provisions of this Article Fourth, and no more, from the
dividend payment date thereof, or preceding dividend payment date or dates fixed
from time to time by the Board of Directors.
Clause 4. If upon any dissolution, liquidation or winding up of the
Corporation or reduction of its capital stock, the assets so to be distributed
among the holders of the Preferred Stock pursuant to the provisions of this
Article Fourth or of the amendment or amendments providing for the issue of such
Preferred Stock adopted by the Board of Directors pursuant to authority
expressly vested in it by this Article Fourth shall be insufficient to permit
the payment to such holders of the full preferential amounts aforesaid, then the
entire assets of the Corporation shall be distributed ratably among the holders
of the Preferred Stock in proportion to the full preferential amounts to which
they are respectively entitled as aforesaid.
Clause 5. The term "accrued dividends", whenever used herein with
respect to the Preferred Stock of any series, shall be deemed to mean that
amount which would have been paid as dividends declared on the Preferred Stock
of such series to date had full dividends been paid thereon at the rate fixed
for such series in accordance with the provisions of this Article Fourth, less
in each case the amount of all dividends declared paid upon the shares of such
series.
FIFTH. The Corporation shall have the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation or any
provision that may be added or inserted in these Articles of Incorporation,
provided that:
(a) Such amendment, alteration, change, repeal, addition or
insertion is consistent with law and is accomplished in the manner now
or hereafter prescribed by statute or these Articles; and
(b) Any provision of these Articles of Incorporation which
requires, or the change of which requires, the vote or consent of all
or a specific number or percentage of the holders of shares of any
class or series shall not be amended, altered changed or repealed by
any lesser amount, number or percentage of votes or consents of such
class or series. Any rights at any time conferred upon the
<PAGE> 4
shareholders of the Corporation are granted subject to the provisions
of this Article.
SIXTH. Subject to the provisions of Article Fifth hereof, the
affirmative vote of shareholders entitled to exercise a majority of the voting
power of the Corporation shall be required to amend these Articles of
Incorporation, approve mergers and to take any other action which by law must be
approved by a specified percentage of the voting power of the Corporation or of
all outstanding shares entitled to vote.
SEVENTH. No holder of any shares of the Corporation shall have any
preemptive rights to subscribe for or to purchase any shares of the Corporation
of any class, whether such shares or such class be now or hereafter authorized,
or to purchase or subscribe for any security convertible into, or exchangeable
for, shares of any class or to which shall be attached or appertained any
warrants or rights entitling the holder thereof to purchase or subscribe for
shares of any class.
EIGHTH. Subject to the provisions of Article Fourth hereof, the
Corporation, through its Board of Directors, shall have the right and power to
purchase any of its outstanding shares at such price and upon such terms as may
be agreed upon between the Corporation and any selling shareholder.
NINTH. No shareholder shall have the right to vote cumulatively in the
election of directors.
TENTH. These Amended and Restated Articles of Incorporation shall take
the place of and supersede the existing Amended and Restated Articles of
Incorporation.
<PAGE> 1
Exhibit 10.6
THE KROLL-O'GARA COMPANY
1996 Stock Option Plan
(as amended through November 21, 1997)
ARTICLE I
OBJECTIVES
1.1 The objectives of this Stock Option Plan (the "Plan") are
to enable The Kroll-O'Gara Company ("TKOC") to compete successfully in retaining
and attracting employees and directors of outstanding ability, to stimulate the
efforts of employees and directors toward TKOC's objectives and to encourage
ownership of shares of TKOC's Common Stock by its employees and directors.
ARTICLE II
DEFINITIONS
2.1 For purposes of the Plan each of the following terms shall
have the definition which is attributed to it, unless another definition is
clearly indicated by a particular usage and context.
A. "BOARD" means the Board of Directors of TKOC.
B. "CODE" means the Internal Revenue Code of 1986, as
amended. Reference to any Section of the Code includes the
provisions of that Section as it may be amended or replaced by
any other section(s) of like intent and purpose and also
includes any regulations or rulings promulgated thereunder.
C. "COMPANY" means TKOC and any subsidiary of TKOC,
as the term "subsidiary" is defined in Section 424(f) of the
Code.
D. "DISABILITY" means permanent and total disability
as defined in Section 22(e)(3) of the Code.
E. "EFFECTIVE DATE OF GRANT" means the date on which,
or such later date as of which, the Board makes an award of an
Option.
F. "ELIGIBLE EMPLOYEE" means any individual (other
than one who receives retirement benefits, stipends,
consulting
<PAGE> 2
fees, honorariums and the like) who performs services for the
Company and is included on the regular payroll of the Company.
A director of the Company who does not otherwise qualify as an
Eligible Employee pursuant to the previous sentence shall
nonetheless be considered an Eligible Employee with respect to
the grant of Nonqualified Stock Options.
G. "EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended.
H. "FAIR MARKET VALUE" means the last sale price
reported on The Nasdaq Stock Market, or on any stock exchange
on which the Shares are traded, on a specified date or, if
there are no reported sales on such date, then the last
reported sales price on the next preceding day on which such a
sale was transacted. If the Shares are not then traded as
described in the preceding sentence, then the average of the
closing bid and asked prices on the specified date or last
preceding day on which bid and asked prices were reported, or
such other method as the Board may select, shall be used in
determining Fair Market Value for a Share.
I. "INCENTIVE STOCK OPTION" shall have the same
meaning as is given to that term by Section 422 of the Code.
J. "MATURE SHARES" means Shares which have been fully
paid and held, of record or beneficially, by the holder of an
Option for at least six months.
K. "NONQUALIFIED STOCK OPTION" means any Option other
than an Incentive Stock Option.
L. "OPTION" means the right, subject to the terms of
this Plan and to such other terms and conditions as the Board
may establish, to purchase from TKOC a stated number of Shares
at a specified price.
M. "OPTION PRICE" means the purchase price per Share
subject to an Option. The Option Price shall not be (i) less
than 85% of the Fair Market Value of a Share on the Effective
Date of Grant in the case of a Nonqualified Stock Option,
except that no Nonqualified Stock Option which is intended to
result in compensation that qualifies for exclusion from the
deduction limitation of Code Section 162(m) shall be granted
with an Option Price of less than 100% of the Fair Market
Value of a Share on the Effective Date of Grant, or (ii) less
than 100% of the Fair Market Value of a Share on the Effective
Date of Grant in the case of an
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<PAGE> 3
Incentive Stock Option, except as otherwise provided in
Section 8.1.
N. "SHARE" means one share of the Common Stock, $.01
par value, of TKOC.
ARTICLE III
ADMINISTRATION
3.1 ADMINISTRATION. The Plan shall be administered by the
Board. Subject to and consistent with the provisions of the Plan, the Board
shall establish such rules and regulations as it deems necessary or appropriate
for the proper administration of the Plan, shall interpret the provisions of the
Plan, shall decide all questions of fact arising in the application of Plan
provisions and shall make such other determinations and take such actions in
connection with the Plan and the Options granted hereunder as it deems necessary
or advisable. At any time, or from time to time, the Board may appoint a
committee of at least three directors (the "Committee") to administer, or to
approve transactions pursuant to, the Plan. For the purpose of option grants to
and approval of other transactions with persons who are subject to Section 16 of
the Exchange Act with respect to TKOC, each member of the Committee shall be a
"Non-Employee Director" as defined in Rule 16b-3 under the Exchange Act. To the
extent that it is desired that compensation resulting from the grant of a
particular Option be excluded from the deduction limitation of Section 162(m) of
the Code, all directors comprising the Committee granting such Option also shall
be "outside directors" within the meaning of Code Section 162(m). In the event a
Committee is so appointed, it may carry out all of the functions of the Board
with respect to the Plan, except for amendments to or suspension or termination
of the Plan.
3.2 Except as specifically limited by the provisions of the
Plan, the Board shall have authority to:
A. Determine which Eligible Employees shall be
granted Options;
B. Determine the number of Shares which may be
subject to each Option;
C. Determine the term and the Option Price of each
Option;
D. Determine whether an Option is an Incentive Stock
Option or a Nonqualified Stock Option;
E. Determine the time or times when Options will be
granted; and
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<PAGE> 4
F. Determine all other terms and conditions of each
Option, including (but not limited to) the terms of any Option
agreement. The Board may, in its discretion, determine as a
condition of any Option that a stated percentage of Shares
covered by such Option shall be exercisable in any one year or
other stated period of time. The Board may also waive or amend
the terms and conditions of, or accelerate the vesting of, an
Option under circumstances selected by the Board.
3.3 Any action, decision, interpretation or determination by
the Board with respect to the application or administration of this Plan shall
be final and binding upon all persons, and need not be uniform with respect to
its determination of recipients, amount, timing, form, terms or provisions of
Options.
3.4 No member of the Board shall be liable for any action or
determination taken or made in good faith with respect to the Plan or any Option
granted hereunder and, to the extent not prohibited by applicable law, all
members shall be indemnified by the Company for any liability and expenses which
they may incur as a result of any claim or cause of action, or threatened claim
or cause of action, arising in connection with the administration of this Plan
or the grant of any Option hereunder.
ARTICLE IV
SHARES ISSUABLE
4.1 Except as provided in Article XI, the number of Shares
which may be issued under the Plan shall not exceed 836,000 Shares in the
aggregate and Options for no more than 125,000 Shares may be granted to any
individual Eligible Employee during any period of twelve (12) consecutive
months. If any Option expires or terminates for any reason without being
completely exercised, the Shares with respect to which such Option was not
exercised may again be subject to other Options. Shares tendered as payment for
the Option Price pursuant to Section 7.1 shall be available for issuance under
the Plan. The Board may make such other determinations regarding the counting of
Shares issued pursuant to the Plan as it deems necessary or advisable, provided
that such determinations shall be permitted by law.
ARTICLE V
GRANTING OF OPTIONS
5.1 Subject to the terms and conditions of the Plan, the Board
may, from time to time, grant Options to Eligible Employees on such terms and
conditions as it shall determine. More than one Option and more than one form of
Option may be granted to the same individual.
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<PAGE> 5
ARTICLE VI
EXERCISE OF OPTIONS
6.1 Any person entitled to exercise an Option may do so,
without the need for further approval pursuant to Exchange Act Rule 16b-3, in
whole or in part by delivering to TKOC, attention: Stock Option Plan
Administrator, at its principal office, a written notice of exercise. The
written notice shall specify the number of Shares for which an Option is being
exercised and shall be accompanied by full payment of the Option Price for the
Shares being purchased.
ARTICLE VII
PAYMENT OF OPTION PRICE
7.1 Subject to such administrative requirements as the Board
may impose, payment of the Option Price may be made, at the election of the
holder of an Option, in cash or by the tender of Mature Shares or by a
combination of the foregoing. If payment by the tender of Mature Shares is
selected, the value of each Mature Share shall be deemed to be the Fair Market
Value of a Share on the day the Mature Shares are tendered for payment, which
shall be the date on which the Mature Shares, duly endorsed or accompanied by a
stock power duly endorsed for transfer to TKOC, are received by TKOC. An
Option's exercise price also may be paid pursuant to a "cashless" exercise/sale
procedure involving a simultaneous sale by a broker, in which case the exercise
date shall be the trade date, provided that proceeds of such sale in full
payment of the Option Price are received by TKOC on such date.
ARTICLE VIII
INCENTIVE STOCK OPTIONS AND NONQUALIFIED STOCK OPTIONS
8.1 Any option designated as an Incentive Stock Option will be
subject to the general provisions applicable to all Options granted under the
Plan. In addition, an Incentive Stock Option shall be subject to the following
specific provisions:
A. No Incentive Stock Option may be exercised after
the expiration of ten years from the Effective Date of Grant.
B. At the time the Incentive Stock Option is granted,
if the Eligible Employee owns, directly or indirectly, stock
representing more than 10% of the total combined voting power
of all classes of stock of the Company then:
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<PAGE> 6
(i) The Option Price must equal at least
110% of the Fair Market Value on the Effective Date
of Grant; and
(ii) The term of the Option shall not be
greater than five years from the Effective Date of
Grant.
C. The aggregate Fair Market Value (determined as of
the Effective Date of Grant) of the Shares with respect to
which Incentive Stock Options are exercisable for the first
time by any holder during any calendar year (under all plans
of the Company) shall not exceed $100,000.
8.2 If any Option is not granted, exercised or held pursuant
to the provisions of Code Section 422, it will be considered to be a
Nonqualified Stock Option to the extent that any or all of the grant is in
conflict with those provisions.
ARTICLE IX
TRANSFERABILITY OF OPTIONS
9.1 During the lifetime of an Eligible Employee to whom an
Option has been granted, such Option is non-assignable and non-transferable and
may be exercised only by such individual or that individual's legal
representative or guardian, except that a Nonqualified Stock Option may be
transferred (A) pursuant to a "domestic relations order" as defined in Section
414(p)(1)(B) of the Code or (B) under such other circumstances and in accordance
with such other terms and conditions as may be established by the Board. In the
event of the death of an Eligible Employee to whom an Option has been granted,
the Option shall be transferable pursuant to the holder's Will or by the laws of
descent and distribution and may thereafter be exercised by the transferee(s) as
provided in Section 10.1(C).
ARTICLE X
TERMINATION OF OPTIONS
10.1 Unless earlier terminated pursuant to Article XIII, an
Option granted to an Eligible Employee will terminate as follows:
A. During the period of the Eligible Employee's
continuous employment with, or service as a director of, the
Company, the Option will terminate upon the earlier of the
date on which it has been fully exercised, it expires by its
terms or it is
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<PAGE> 7
terminated by the mutual agreement of the Company and the
Eligible Employee.
B. Upon termination of the Eligible Employee's
employment with, or service as a director of, the Company for
any reason any unexercisable Option shall immediately
terminate. Except as provided in Section 10.1(C), any Option
which is exercisable on the date of termination of employment,
or service as a director, will terminate upon the earlier of
its full exercise, the expiration of the Option by its terms
or the end of the three-month period following the date of
termination. For purposes of the Plan, a leave of absence
approved by the Company shall not be deemed to be termination
of employment.
C. If an Eligible Employee to whom an Option was
granted dies or becomes subject to a Disability while employed
by, or serving as a director of, the Company or within three
months of termination of employment or service as a director,
for any reason, the Option may be exercised at any time within
one year after the date of death or the commencement of
Disability, to the extent that the Eligible Employee shall
have been entitled to exercise it at the time of death or the
commencement of Disability, by the Eligible Employee or the
Eligible Employee's legal representative or guardian or by the
representative(s) of the Eligible Employee's estate or the
person(s) to whom the Option may have been transferred by Will
or by the laws of descent and distribution.
10.2 The provisions of Section 10.1 above shall apply
irrespective of whether an Option has been transferred to a person or entity
other than the Eligible Employee to whom the Option was granted.
10.3 The Board, at its discretion, may extend the periods for
Option exercise set forth in this Article X.
ARTICLE XI
ADJUSTMENTS TO SHARES AND OPTION PRICE
11.1 The Board shall make appropriate adjustments in the
number of Shares available for issuance under the Plan, the number of Shares
subject to outstanding Options and the Option Price of optioned Shares in order
to give effect to changes in the Shares as a result of any merger,
consolidation, recapitalization, reclassification, combination, stock dividend,
stock split, or other similar event. The determination as to the method and
extent of such adjustments shall be within the sole discretion of the Board.
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<PAGE> 8
ARTICLE XII
AMENDMENT OR TERMINATION OF PLAN
12.1 The Board may at any time amend, suspend or terminate the
Plan; provided, however, that shareholder approval shall be required for any
amendment if such approval is required pursuant to the Code or the Exchange Act,
or any rule or regulation thereunder, as such may be in effect and be
interpreted from time to time.
12.2 No amendment to the Plan shall alter or impair any Option
granted under the Plan without the consent of the holder thereof.
ARTICLE XIII
CERTAIN EVENTS
13.1 In the event TKOC shall consolidate with, merge into, or
transfer all or substantially all of its assets to another corporation or
corporations (a "successor corporation"), such successor corporation may
obligate itself to continue this Plan and to assume all obligations under the
Plan. In the event that such successor corporation does not obligate itself to
continue this Plan as above provided, the Plan shall terminate effective upon
such consolidation, merger or transfer, and, except as provided in Section 13.3,
any Option previously granted hereunder shall terminate. If practical, TKOC
shall give each holder of an Option twenty (20) days prior notice of any
possible transaction which might terminate this Plan and the Options previously
granted hereunder.
13.2 In the event of the execution of an agreement of
reorganization, merger or consolidation of TKOC with one or more corporations as
a result of which TKOC is not to be the surviving corporation (whether or not
TKOC shall be dissolved or liquidated) or the execution of an agreement of sale
or transfer of all or substantially all of the assets of TKOC, then all Options
which are outstanding at the time of such event shall immediately become
exercisable in full.
13.3 In the event of any of the transactions referred to in
Section 13.2 hereof, any holder of one or more Options who is subject to the
reporting requirements of Section 16(a) of the Exchange Act with respect to TKOC
shall be entitled to tender such Options to the Company and to receive from the
Company a payment of cash equal to the difference between the aggregate "Fair
Value" of Shares subject to the holder's Options which are outstanding and not
exercised immediately prior to the time of consummation of the transaction and
the aggregate Option Price of such Shares. For this purpose, "Fair Value" shall
mean the cash value per Share to be paid to shareholders pursuant to such
agreement, or if cash value is not to be paid, the highest Fair Market Value of
a Share during the 60-day period immediately preceding the date of the
consummation of the transaction. The foregoing payment under this Section 13.3
shall be made in lieu of and in full discharge of any and all obligations of the
Company in respect of all subject Options of the holder.
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<PAGE> 9
13.4 The grant of Options under the Plan shall in no way
affect the right of TKOC to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
13.5 Notwithstanding the foregoing, in the event the amounts
deemed payable under this Article XIII when added to all other payments to the
holder of an Option by the Company, would, if made, constitute Excess Parachute
Payments within the meaning of Sections 280G and 4999 of the Code, the amounts
deemed payable by the Company under this Article shall be reduced by the amount
deemed necessary to cause the holder to receive $1,000.00 less than three times
the holder's Base Amount (as that term is defined in Code Section 280G) from all
such payments to the holder from the Company. In the event the amount of the
payments exceeds the amount subsequently determined to have been due, the excess
benefits over three times the Base Amount shall constitute a loan by the Company
to the holder, payable on demand by the Company, with interest at a rate equal
to 120% of the applicable federal rate determined under Section 1274 of the
Code, compounded semi-annually.
ARTICLE XIV
EFFECTIVE DATE
14.1 This Plan became effective on October 23, 1996. No Option
shall be granted pursuant to this Plan subsequent to October 22, 2006 or
subsequent to any earlier date as of which this Plan is terminated.
ARTICLE XV
MISCELLANEOUS
15.1 Nothing contained in this Plan shall constitute the
granting of an Option. Each Option shall be represented by a written Option
agreement executed by both the Eligible Employee and TKOC.
15.2 Certificates for Shares purchased through exercise of
Options will be issued in regular course after exercise of the Option and
payment therefor as called for by the terms of the Option. No person holding an
Option or entitled to exercise an Option granted under this Plan shall have any
rights or privileges of a shareholder of TKOC with respect to any Shares
issuable upon exercise of such Option until certificates representing such
Shares shall have been issued and delivered. No Option may be transferred, and
no Option shall be exercisable or Shares issued and delivered upon exercise of
an Option, unless and until TKOC has complied with any and all applicable
federal and state securities laws, listing requirements of any market or
national securities exchange on which TKOC's Shares may then be traded and other
requirements of law. Any certificate representing Shares acquired upon exercise
of an Option may bear such
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<PAGE> 10
legends as the Company deems advisable to assure compliance with all applicable
laws and regulations.
15.3 Nothing contained in this Plan or in any Option granted
pursuant to it shall confer upon any person any right to continue in the employ
of or as a director of the Company or to interfere in any way with the right of
the Company to terminate a person's employment or status as a director at any
time. So long as a holder of an Option shall continue to be an employee of the
Company, the Option shall not be affected by any change of the employee's duties
or position.
15.4 This Plan shall be construed and administered in
accordance with and governed by the laws of the State of Ohio.
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<PAGE> 1
Exhibit 10.17
AMENDED AND RESTATED
LOAN AGREEMENT
THE KROLL-O'GARA COMPANY, formerly known as The O'Gara Company
("TKOGC"), O'GARA-HESS & EISENHARDT ARMORING COMPANY ("OGHEAC"), KROLL HOLDINGS,
INC. ("KHI") and KROLL ASSOCIATES, INC. ("KAI") (TKOGC, OGHEAC, KHI and KAI are
sometimes hereinafter individually and collectively referred to as the
"Borrower"), and KEYBANK NATIONAL ASSOCIATION ("Lender"), hereby agree as set
forth below. This Agreement amends and restates that certain Loan Agreement
dated as of May 30, 1997 between The O'Gara Company and O'Gara-Hess & Eisenhardt
Armoring Company and Lender (the "Prior Agreement"). All Loans, accrued interest
and fees outstanding under the Prior Agreement will be deemed to be outstanding
under this Agreement.
1. RECITALS.
1.1 On May 30, 1997, The O'Gara Company and O'Gara-Hess & Eisenhardt
Armoring Company and Lender entered into the Prior Agreement.
1.2 Borrower and Lender desire to amend and restate the Prior
Agreement, pursuant to this Amended and Restated Loan Agreement (this
"Agreement" or the "Loan Agreement").
2. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein
will have the meanings given those terms in the second to last section of this
Agreement.
3. CREDIT FACILITIES.
3.1 REVOLVING CREDIT LOAN.
3.1.1 TOTAL FACILITY. Lender will make available to Borrower a line
of credit of up to $7,000,000 ("Total Facility"), subject to the terms and
conditions and made upon the representations and warranties of Borrower set
forth in this Agreement. Amounts outstanding under the line of credit from time
to time will be referred to as the "Revolving Credit Loan". The Revolving Credit
Loan will be represented by the promissory note of Borrower of even date
herewith and all amendments, extensions and renewals thereto and restatements
and replacements thereof ("Revolving Credit Note"). The Revolving Credit Loan
will bear interest and will be payable in the manner set forth in the Revolving
Credit Note, the terms of which are incorporated herein by reference.
3.1.2 ADVANCES. Advances will be made as specified in the Revolving
Credit Note.
3.1.3 EXTENSIONS. After the initial term of the Revolving Credit
Note, Lender in its sole discretion may extend or renew the Total Facility and
the Revolving Credit
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Note by accepting from Borrower one or more new notes, each of which will be
deemed to be the Revolving Credit Note under this Agreement. In no event will
Lender be under any obligation to extend or renew the Total Facility or the
Revolving Credit Note beyond the initial term thereof.
3.1.4 COMMITMENT FEE. Borrower will pay to Lender a commitment fee
from the date on which all of the conditions precedent set forth in Section 9.1,
below are satisfied, computed at the rate of 0.5% per annum, on the average
daily difference between: (i) the outstanding amount of the Note and (ii) the
Total Facility, such Commitment Fee to be payable quarterly in arrears on the
last day of each September, December, March and June and upon the maturity date
of the Note and/or the date this Agreement is terminated.
3.2 TRANSACTION LOAN.
3.2.1 TRANSACTION FACILITY. Upon the execution of this Agreement to
facilitate the closing of the merger of a wholly owned subsidiary of TKOGC into
Kroll Holdings, Inc., Lender will lend to Borrower and Borrower will borrow from
Lender the sum of $7,000,000 ("Transaction Loan"), subject to the terms and
conditions and upon the representations and warranties of Borrower set forth in
this Agreement. The Transaction Loan will be evidenced by the promissory note of
Borrower of even date herewith and all amendments, extensions and renewals
thereto and replacements and restatements thereof ("Transaction Note"). The
Transaction Loan will bear interest and will be repayable in the manner set
forth in the Transaction Note, the terms of which are incorporated herein by
reference.
3.2.2 LOAN FEE. Borrower agrees to pay to Lender a fee equal to 1
percent of the principal amount of the Transaction Loan ($70,000) (the
"Transaction Fee"). The Transaction Fee will be paid to the Lender at Closing.
Lender acknowledges receipt of $25,000 from Borrower, which will be credited
against the Transaction Fee on the Closing Date.
3.2.3 TERMINATION OR EXPIRATION. If the Revolving Credit Loan
terminates or expires prior to the maturity date specified in the Transaction
Note, Borrower will prepay in full the Transaction Note on such termination or
expiration date.
3.2.4 CONSENT. Lender hereby consents to the transactions
contemplated by the Proxy Statement/Prospectus.
3.3 ISSUANCE OF LETTERS OF CREDIT.
3.3.1 ALTERNATE LETTER OF CREDIT. Lender has issued for the account
of Borrower its letter of credit ("Alternate Letter of Credit") in substitution
of the letter of credit issued by PNC Bank, Ohio, National Association ("PNC
Letter of Credit") in connection with Borrower's $2,300,000 Variable Rate Demand
Economic Development Revenue Bonds, Series 1986 (O'Gara Hess & Eisenhardt
Armoring Company Limited Partnership Project) ("Bonds"), which Alternate Letter
of Credit is in the amount of $1,681,750.
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3.3.2 TRANSACTIONAL LETTERS OF CREDIT. In consideration of the terms
and conditions of this Agreement, Lender from time to time at the request and on
the instructions of Borrower, has and will continue to issue for the account of
Borrower, Lender's acceptance and/or letters of credit and renewals, extensions
and amendments thereto (collectively, "Transactional Letters of Credit"). The
specific terms with respect to each Transactional Letter of Credit will be as
requested by Borrower; PROVIDED that (i) the requested Transactional Letter of
Credit satisfies the requirements of Section 3.3.3 below, and (ii) the maximum
stated amount of the Transactional Letters of Credit outstanding at any time may
not exceed $6,000,000. Borrower acknowledges that as to each Transactional
Letter of Credit, Borrower: (a) will independently determine that it is in its
best interest to enter into the transaction to which the Transactional Letter of
Credit relates and to cause the Transactional Letter of Credit to be issued to
the beneficiary, (b) is responsible for the terms and wording of the
Transactional Letter of Credit, including but not limited to the conditions of
drawing contained therein, and (c) is not relying on Lender in any manner with
respect to the items described in clauses (a) and (b) above, and has sought
independent legal or other advice with respect thereto to the extent it deemed
necessary.
3.3.3 TERMS OF TRANSACTIONAL LETTERS OF CREDIT. All Transactional
Letters of Credit shall be issued on Lender's standard forms therefor (or in
such other form as Lender and Borrower may agree) for the account of Borrower
and shall be, unless otherwise agreed by Lender in its discretion, denominated
in United States Dollars. Unless Lender agrees otherwise, no Transactional
Letter of Credit shall be issued or renewed with a maturity date beyond May 31,
1999.
3.3.4 PROCEDURE FOR TRANSACTIONAL LETTERS OF CREDIT. Borrower shall
give Lender written notice (or telephone advice thereof promptly confirmed in
writing but in no event later than 11:00 a.m. Cincinnati time on the day on
which such telephonic notice is given) of its request for a Transactional Letter
of Credit at least five (5) Business Days prior to the date on which a
Transactional Letter of Credit is requested to be issued. Such notice shall be
accompanied by all Letter of Credit Documents reasonably required by Lender,
duly executed, and shall specify: (a) the name and address of the beneficiary of
the Transactional Letter of Credit, (b) the type and amount of the Transactional
Letter of Credit, (c) whether the Transactional Letter of Credit is revocable or
irrevocable, (d) the Business Day on which the Transactional Letter of Credit is
to be issued and the date on which the Transactional Letter of Credit is to
expire, (e) the terms of payment of any draft or drafts which may be drawn under
the Transactional Letter of Credit, and (f) any other terms or provisions
Borrower desires to be contained in the Transactional Letter of Credit. In the
event of any conflict between the provisions of this Agreement and the
provisions of any applicable Letter of Credit Documents, the provisions of this
Agreement shall prevail and control unless otherwise expressly provided in the
Letter of Credit Documents. Lender will, subject to the terms and conditions of
this Credit Agreement, make such Transactional Letter of Credit available to
Borrower at Lender's office.
3.3.5 LETTER OF CREDIT FEES AND EXPENSES. In consideration of the
issuance by Lender of each of the Letters of Credit, Borrower will pay to Lender
(a)
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commissions with respect to each Letter of Credit so long as Lender is obligated
under the applicable Letter of Credit, computed on such amounts and: (i) as to
Letters of Credit that are standby letters of credit, at the rate of one percent
(1%) per annum of the stated amount of each Letter of Credit, payable quarterly
for Letters of Credit then outstanding in advance and calculated on the basis of
a year of 360 days and the actual number of days elapsed, with a $300 minimum
per Letter of Credit per annum and an additional issuance fee of $150 per Letter
of Credit, such minimum fees and issuance fees to be adjusted from time to time
to Lender's standard rates and with respect to Letters of Credit when the
minimum fee is charged the fee will be collected upon its issuance, and (ii) as
to Letters of Credit that are import/export letters of credit, at the rate of
one quarter of one percent (.25%) of the stated amount of each Letter of Credit,
payable upon issuance, with a $75 minimum per Letter of Credit and an additional
issuance fee of $50 per Letter of Credit, such minimum fees and issuance fees to
be adjusted from time to time to Lender's standard rates and (b) all expenses
that Lender reasonably incurs in connection with any Letter of Credit (including
but not limited to attorney's fees, wire transfer charges, fees of correspondent
and confirming banks, foreign exchange fees, etc.). Lender will credit Borrower
on a pro-rata basis for Letters of Credit commissions with respect to Letters of
Credit paid or terminated prior to its stated maturity date.
3.3.6 REIMBURSEMENT FOR DRAWINGS. Borrower will reimburse Lender for
any drawing under a Letter of Credit on the day on which payment of such drawing
is made by Lender unless otherwise agreed to in writing by the Lender. All
payments hereunder will be made in United States Dollars and as to any drafts or
acceptances payable in currency other than United States Dollars, Borrower will
pay Lender the equivalent of the amount paid by Lender in United States Dollars.
Equivalent United States Dollar amounts will be determined at the selling rate
of exchange then offered at the time of payment by Lender for cable transfers to
the place of payment in the currency in which the acceptance or draft is
payable, plus any payments made by Lender to comply with any governmental
exchange regulations applicable to the purchase of such foreign currency. All
delinquent reimbursement payments will bear interest at the Default Rate.
3.3.7 METHOD AND PLACE OF PAYMENT. All payments by Borrower to
Lender under this Agreement will be made to Lender in lawful currency of the
United States and in immediately available funds at its office at 525 Vine
Street, Cincinnati, Ohio 45202, until otherwise notified in writing by Lender.
In the event the date specified for any payment is not a Business Day, such
payment will be made on the next following Business Day and interest after such
Business Day (and after the expiration of any applicable grace period, if any)
will accrue at a rate equal to the Default Rate until paid.
3.3.8 LIABILITY AND INDEMNIFICATION OF LENDER.
Any action taken or omitted by Lender, any correspondent bank
or confirming bank, under or in connection with the Letters of Credit or drafts
or documents relating thereto, if taken or omitted without negligence or willful
misconduct, will be binding upon Borrower and will not result in Lender or any
correspondent bank or confirming bank
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being under any liability to Borrower. Lender, any correspondent bank or
confirming bank or any of their officers, directors or employees will not be
liable or responsible for: (a) the use which may be made of the Letters of
Credit or for any acts or omissions of any beneficiaries or any transferees in
connection therewith; (b) the validity, sufficiency or genuineness of documents,
or of any endorsement(s) thereon, even if such documents should in fact prove to
be in any or all respects invalid, insufficient, fraudulent or forged; (c) if
through the actions of shippers or any other party, any documents fail to reach
their destination in due time; (d) the kind, quality, quantity, delivery or
existence of property represented by any documents; (e) the sufficiency,
coverage or validity of any insurance, the financial standing or responsibility
of any insurer, or any other risk connected with insurance on any property; (f)
delay in giving or the failure to give notice of arrival or any other notice;
(g) failure of any draft to bear any reference or adequate reference to any of
the Letters of Credit; (h) any delay or deviation from instructions in regard to
shipment or any delay or deviation from instructions in regard to payment other
than on a Letter of Credit; (i) any variation between invoices and insurance
documents or between invoices and bills of lading, warehouse receipts or other
documents; (j) any negligence or fraud of any shipper, inspector, forwarding
agent or other party; (k) errors, omissions, interruptions or delays in
transmission or delivery of any messages or documents by mail, telex or other
means; or (l) any other circumstances whatsoever in making or failing to make
payment under any of the Letters of Credit, except only damages which Borrower
proves were caused by Lender, any correspondent bank or confirming bank or any
of their officers, directors or employees under either of the following
circumstances and in those cases Borrower will have a claim only against the
entity or its officers, directors or employees that actually committed the acts
giving rise to such claim: (i) negligence or willful misconduct in determining
whether a draft or other documents presented under any Letter of Credit complies
with the terms of the Letter of Credit or (ii) the willful or negligent failure
to pay under a Letter of Credit after the presentation to it by any beneficiary
or transferee of a draft and documents strictly complying with the terms and
conditions of the Letter of Credit. In furtherance of and not in limitation of
the foregoing, Lender, its correspondent banks and confirming banks may accept
documents that appear on their face to be in order, without responsibility for
further investigation, regardless of any notice or information to the contrary
and any action taken or omitted in good faith in connection with any of the
Letters of Credit or any documents or property related to any of the Letters of
Credit will be binding on Borrower and will not result in any liability of
Lender, its correspondent banks and confirming banks will not be liable for any
failure or inability to perform in accordance with the terms of any of the
Letters of Credit by reason of any censorship, law, control or restriction
rightfully or wrongfully exercised by any de facto or de jure government or
group exercising or exerting governmental powers, or for any other act or
omission for which banks are relieved of responsibility under applicable law
and/or the Uniform Customs, as that term is defined below.
Borrower hereby agrees at all times to indemnify, defend and
hold harmless Lender and its correspondent banks and confirming banks, and all
directors, officers, employees, agents and attorneys thereof, from and against
any and all claims, suits and other legal proceedings, and from and against any
and all demands, liabilities, judgments, losses, claims, damages, attorney fees,
court costs, interest and penalties, costs and other expenses which Lender or
any such indemnified party jointly or severally may, at any time, sustain or
incur by reason of
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or in consequence of or arising out of this Agreement or any of the Letters of
Credit or the use (or the proposed or potential use) of the proceeds hereunder
or thereunder, including but not limited to any of the foregoing arising out of
any legal proceeding seeking to enjoin or require any payment under any of the
Letters of Credit; provided that Borrower is not required to indemnify Lender,
correspondent banks or confirming banks for any claims, damages, losses,
liabilities, costs or expenses to the extent, but only to the extent, caused by
(a) the willful misconduct or negligence of such entity in determining whether a
draft or other documents presented under any of the Letters of Credit complied
with the terms of the Letter of Credit or (b) the willful or negligent failure
of such entity to pay under any of the Letters of Credit after the presentation
to it by the beneficiary or any transferee of a draft and documents strictly
complying with the terms and conditions of any of the Letters of Credit. Without
limiting the generality of the foregoing but also subject to the terms and
conditions of the foregoing, Borrower agrees that if, after receipt by Lender of
any payment of all or any part of the Letter of Credit obligations, demand is
made at any time upon Lender, or any correspondent or confirming bank for the
repayment or recovery of any amount or amounts received by it in payment or on
account of any of the Letter of Credit obligations and it repays all or any part
of such amount or amounts by reason of any final and non-appealable judgment,
decree or order of any court or administrative body that Lender has defended in
good faith, or by reason of any settlement or compromise of any such demand
entered into in good faith and on reasonable grounds, this Agreement will
continue in full force and effect and Borrower will be liable, and will
indemnify, defend and hold harmless Lender and any correspondent or confirming
bank for the amount or amounts so repaid. The provisions of this Section will be
and remain effective notwithstanding any contrary action so taken will be
without prejudice to the rights of Lender and any correspondent or confirming
bank under this Agreement and will be deemed to have been conditioned upon such
payment having become final and irrevocable.
The provisions of this SECTION 3.3.8 will survive the
termination of this Agreement.
3.3.9 DOCUMENTATION. Lender may accept or honor as complying with
any Letter of Credit any draft or other document otherwise in order which has
been signed or issued by or to the administrator, executor or trustee in
bankruptcy of or any receiver for any of the property of any party designated in
any of the Letters of Credit or in Borrower's instructions, in the place of the
name, signature or act of such party.
3.4 ADDITIONAL COSTS.
3.4.1 TAXES, RESERVE REQUIREMENTS, ETC. In the event that any
applicable law, treaty, rule or regulation (whether domestic or foreign) now or
hereafter in effect and whether or not presently applicable to Lender, or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof, or compliance by Lender with
any guideline, request or directive of any such authority (whether or not having
the force of law), will: (a) affect the basis of taxation of payments to Lender
of any amounts payable by Borrower under this Agreement (other than taxes
imposed on the overall net income of Lender, by any jurisdiction, or by any
political subdivision or taxing
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authority of any such jurisdiction, in which Lender has its principal office),
(b) impose, modify or deem applicable any reserve, special deposit or similar
requirement against assets of, deposits with or for the account of, or credit
extended by Lender, or (c) impose any other condition with respect to this
Agreement, any Note executed in connection with this Agreement or any of the
Security Documents, and the result of any of the foregoing is to increase the
cost of making, funding or maintaining any such Note or to reduce the amount of
any sum receivable by Lender thereon, then Borrower will pay to Lender from time
to time, upon request by Lender, additional amounts sufficient to compensate
Lender for such increased cost or reduced sum receivable provided, however, that
Borrower will be responsible for such payment only if Lender requires such
payments from other similarly situated Persons to whom Lender extends credit
that are obligated to Lender pursuant to provisions similar to this Section.
3.4.2 CAPITAL ADEQUACY. If either: (a) the introduction of, or any
change in, or in the interpretation of, any United States or foreign law, rule
or regulation or (b) compliance with any directive, guidelines or request from
any central bank or other United States or foreign governmental authority
(whether or not having the force of law) promulgated, made, or that becomes
effective (in whole or in part) after the date hereof affects or would affect
the amount of capital required or expected to be maintained by Lender or any
corporation directly or indirectly owning or controlling Lender and Lender
determines that such introduction, change or compliance has or would have the
effect of reducing the rate of return on Lender capital or on the capital of
such owning or controlling corporation as a consequence of its obligations
hereunder or under any Note or any commitment to lend thereunder to a level
below that which Lender or such owning or controlling corporation could have
achieved but for such introduction, change or compliance (after taking into
account Lender's policies or the policies of such owning or controlling
corporation, as the case may be, regarding capital adequacy) by an amount deemed
by Lender (in its sole discretion) to be material, then, from time to time,
Borrower will pay to Lender such additional amount or amounts as will compensate
Lender for such reduction provided, however, that Borrower will be responsible
for such payment only if Lender requires such payments from other similarly
situated Persons to whom Lender extends credit that are obligated to Lender
pursuant to provisions similar to this Section.
3.4.3 CERTIFICATE OF LENDER. A certificate of Lender setting forth
such amount or amounts as will be necessary to compensate Lender as specified
above will be delivered to Borrower and will be conclusive absent manifest
error. Borrower will pay Lender the amount shown as due on any such certificate
within 10 days after its receipt of the same; provided, however that Lender will
deliver such certificate to Borrower within six months of Lender' obtaining
knowledge of the occurrence of an event for which Borrower is responsible
hereunder. The protection of this Section will be available to Lender regardless
of any possible contention of invalidity or inapplicability of the law,
regulation, etc., that results in the claim for compensation under this Section.
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4. COLLATERAL.
4.1 The Collateral for the repayment of the obligations with respect to
the Transaction Loan will be that granted pursuant to the Security Documents
other than the Mortgage.
4.2 The Collateral for the reimbursement obligations with respect to
the Alternate Letter of Credit is the Mortgage.
5. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into this Agreement
and to make the advances herein contemplated, Borrower hereby represents and
warrants as to itself and each Guarantor as follows:
5.1 ORGANIZATION. It is a corporation duly organized and in good
standing under the laws of the state of its incorporation, is duly qualified in
all jurisdictions where required by the conduct of it business or ownership of
its assets except where the failure to so qualify would not have a material
adverse effect on its condition, financial or otherwise, and has the power and
authority to own and operate its assets and to conduct its business as is now
done.
5.2 LATEST FINANCIALS. Its Current Financial Statements dated September
30, 1997 as delivered to Lender are true, complete and accurate in all material
respects and fairly present its financial condition, assets and liabilities,
whether accrued, absolute, contingent or otherwise and the results of its
operations for the periods specified therein. The annual financial statements of
all business entities included in the Current Financial Statements have been
prepared in accordance with generally accepted accounting principles applied
consistently with preceding periods subject to any comments and notes contained
therein.
5.3 RECENT ADVERSE CHANGES. Except as specifically disclosed in the
Disclosure Schedule, since the dates of the most recent of its Current Financial
Statements, it has not suffered any damage, destruction or loss which has
materially and adversely affected its business or assets and no event or
condition of any character has occurred which has materially and adversely
affected TKOGC and its Subsidiaries' assets, liabilities, business or financial
condition taken as a whole, and it has no knowledge of any event or condition
currently existing or threatened which may materially and adversely affect TKOGC
and its Subsidiaries' assets, liabilities, business or financial condition taken
as a whole.
5.4 RECENT ACTIONS. Except as disclosed in the Disclosure Schedule
and/or the Proxy Statement/Prospectus, since the dates of the most recent of its
Current Financial Statements, its business has been conducted in the ordinary
course and it has not: (a) incurred any obligations or liabilities, whether
accrued, absolute, contingent or otherwise, other than liabilities incurred and
obligations under contracts entered into in the ordinary course of business and
other than liabilities to Lender; (b) discharged or satisfied any lien or
encumbrance or paid any obligations, absolute or contingent, other than current
liabilities, in the ordinary course of business; (c) mortgaged, pledged or
subjected to lien or any other encumbrance any of its assets, tangible or
intangible, or cancelled any debts or claims except in the ordinary course of
business and except for Permitted Liens; or (d) made any loans, other
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than to Subsidiaries as permitted under this Agreement, or otherwise conducted
its business other than in the ordinary course.
5.5 TITLE. It has good and marketable title to the assets reflected on
the most recent of its Current Financial Statements, free and clear from all
liens and encumbrances except for: (a) current taxes and assessments not yet due
and payable, (b) liens and encumbrances, if any, reflected or noted on said
balance sheet or notes, (c) any security interests, pledges or mortgages to
Lender in connection with the closing of this Agreement, (d) assets disposed of
in the ordinary course of business, and (e) Permitted Liens.
5.6 LITIGATION, ETC. Except as disclosed on the Disclosure Schedule
and/or the Proxy Statement/Prospectus, as of the date hereof, there are no
actions, suits, proceedings or governmental investigations pending or, to its
knowledge, threatened against it and there is no basis known to it for any such
actions, suits, proceedings or investigations which, if adversely determined,
could result in a material and adverse change in the financial condition,
business or assets of TKOGC and its Subsidiaries taken as a whole.
5.7 TAXES. Except as to taxes not yet due and payable, it has filed all
returns and reports that are now required to be filed by it in connection with
any federal, state or local tax, duty or charge levied, assessed or imposed upon
it or its property, including unemployment, social security and similar taxes;
and all of such taxes have been either paid or adequate reserve or other
provision has been made therefor. It has filed for no extension of time for the
payment of any tax or for the filing of any tax return, other than the filing
for extensions that may be filed after the Closing Date.
5.8 AUTHORITY. It has full power and authority to enter into the
transactions provided for in this Agreement. The documents to be executed by it
in connection with this Agreement, when executed and delivered by it will
constitute the legal, valid and binding obligations of it enforceable in
accordance with their respective terms except as such enforceability may be
limited by applicable bankruptcy, reorganization, insolvency, moratorium or
similar laws in effect from time to time affecting the rights of creditors
generally and except as such enforceability may be subject to general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in law or in equity).
5.9 OTHER DEFAULTS. There does not now exist any default or violation
by it of or under any of the terms, conditions or obligations of: (a) as to
corporate entities only, its Articles or Certificate of Incorporation and
Regulations or Bylaws, as applicable; (b) any indenture, mortgage, deed of
trust, franchise, permit, contract, agreement, or other instrument to which it
is a party or by which it is bound; or (c) any law, regulation, ruling, order,
injunction, decree, condition or other requirement applicable to or imposed upon
it by any law or by any governmental authority, court or agency; and the
transactions contemplated by this Agreement and the Security Documents will not
result in any such default or violation.
5.10 LICENSES, ETC. It has obtained any and all material licenses,
permits, franchises or other governmental authorizations necessary for the
ownership of its properties and the conduct of its business. It possesses
adequate licenses, patents, patent applications, copyrights,
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trademarks, trademark applications, and trade names to continue to conduct its
business as heretofore conducted by it, without any conflict with the rights of
any other person or entity.
5.11 SUFFICIENT CAPITAL. It now has capital sufficient to carry on its
business, all business and transactions in which it is about to engage, and is
now solvent and able to pay its debts as they mature. It now owns property
having a value, both at fair valuation and at present fair saleable value,
greater than the amount required to pay its debts.
5.12 ERISA. It and each of its ERISA Affiliates are in compliance in
all material respects with the applicable provisions of ERISA and the
regulations and published interpretations thereunder. No Reportable Event has
occurred as to which it or any such ERISA Affiliate was required to file a
report with the PBGC, and, as of the Closing Date, the present value of all
benefit liabilities under all the Plans (based on those assumptions used to fund
such Plans) did not, as of the last annual valuation date applicable thereto,
exceed by more than $25,000 the aggregate value of the assets of such Plans.
Neither it nor any such ERISA Affiliate has incurred any Withdrawal Liability
that materially adversely affects the financial condition of it and its ERISA
Affiliates taken as a whole. Neither it nor any such ERISA Affiliate has
received any notification that any Multiemployer Plan is in reorganization or
has been terminated, within the meaning of Title IV of ERISA, and no
Multiemployer Plan is reasonably expected to be in reorganization or to be
terminated, where such reorganization has resulted or can reasonably be expected
to result in an increase in the contributions required to be made to such Plan
that would materially and adversely affect the financial condition of it and its
ERISA Affiliates taken as a whole.
5.13 REGULATION U. No part of the proceeds of any Loans will be used to
purchase or carry any margin stock (as such term is defined in Regulation U of
the Board of Governors of the Federal Reserve System).
5.14 ENVIRONMENTAL MATTERS. Qualified, however, as to SECTION 5.14.3,
below, by those matters, if any, set forth in the Environmental Report:
5.14.1 Borrower and the activities or operations on any of the real
estate that Borrower owns or occupies (the "Property") are in compliance in all
material respects with all applicable material federal, state and local,
statutes, laws, regulations, ordinances, policies and orders relating to
regulation of the environment, health or safety, or contamination or cleanup of
the environment (collectively "Environmental Laws").
5.14.2 Borrower has obtained all material approvals, permits,
licenses, certificates, or satisfactory clearances from all governmental
authorities required under Environmental Laws with respect to the Property and
any activities or operations at the Property.
5.14.3 To the best of Borrower's knowledge, after an investigation
meeting the standard set forth at 42 U.S.C. Section 9601 (35)(B)(1986) and any
similar standards for environmental investigations under state Environmental
Laws ("Due Investigation"), there have not been and are not now any solid waste,
hazardous waste, hazardous or toxic substances,
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pollutants, contaminants, or petroleum in, on, under or about the Property in
violation of any applicable law. The use which Borrower makes and intends to
make of the Property will not result in the deposit or other release of any
hazardous or toxic substances, solid waste, pollutants, contaminants or
petroleum on, to or from the Property.
5.14.4 To the best of Borrower's knowledge, after Due Investigation,
there have been no complaints, citations, claims, notices, information requests,
orders or directives on environmental grounds or under Environmental Laws
(collectively "Environmental Claims") made or delivered to, pending or served
on, or anticipated by Borrower or its agents, or of which Borrower or its
agents, are aware or should be aware (i) issued by any governmental department
or agency having jurisdiction over the Property or the activities or operations
at the Property, or (ii) issued or claimed by any third party relating to the
Property or the activities or operations at the Property.
5.15 LABOR MATTERS. There are no material strikes or other material
labor disputes against it pending or, to its knowledge, threatened. The hours
worked and payment made to its employees in all material respects have not been
in violation of the Fair Labor Standards Act or any other applicable law dealing
with such matters. All payments due from it, or for which any claim may be made
against it, on account of wages and employee health and welfare insurance and
other benefits, have been paid or accrued as a liability on its books. The
consummation of the transactions contemplated herein will not give rise to a
right of termination or right of renegotiation on the part of any union under
any collective bargaining agreement to which it is a party or by which it is
bound.
6. AFFIRMATIVE COVENANTS. From the date of execution of this Agreement until all
Obligations to Lender have been fully paid and this Agreement terminated,
Borrower will and will cause each Guarantor to:
6.1 BOOKS, RECORDS AND ACCESS TO THE COLLATERAL. Maintain proper books
of account and other records and enter therein complete and accurate entries and
records of all of its transactions and give representatives of Lender access
thereto at all reasonable times, including permission to examine, copy and make
abstracts from any of such books and records and such other information as it
may from time to time reasonably request. It will give Lender reasonable access
to the Collateral for the purposes of examining the Collateral and verifying its
existence. It will make available to Lender for examination copies of any
reports, statements or returns which it may make to or file with any
governmental department, bureau or agency, federal or state, and will furnish to
Lender copies of any reports, statements or returns and exhibits thereto that
Borrower may make to or file with the Securities Exchange Commission. In
addition, it will be available to Lender, or cause its officers or general
partners, as applicable, to be available from time to time upon reasonable
notice to discuss the status of the Loans, its business and any statements,
records or documents furnished or made available to Lender in connection with
this Agreement.
6.2 MONTHLY STATEMENTS. Furnish Lender within 30 days after the end of
each calendar month internally prepared financial statements of TKOGC with
respect to such month,
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which financial statements will be in the form prepared by TKOGC for its own
internal purposes and will include financial statements broken down by
geographic region for all entities being acquired through the transaction
contemplated by the Proxy Statement/Prospectus and by lines of business for all
other entities.
6.3 QUARTERLY STATEMENTS. Furnish Lender within 45 days after the end
of each calendar quarter internally prepared financial statements of TKOGC with
respect to such calendar quarter, which financial statements will: (a) be in
reasonable detail and in form reasonably satisfactory to Lender; (b) be
accompanied by a Compliance Certificate; (c) include a balance sheet as of the
end of such period, profit and loss and surplus statements for such period and a
statement of cash flows for such period; (d) include prior year comparisons; and
(e) be on a consolidated basis for TKOGC and its Subsidiaries. The delivery by
TKOGC of its quarterly report on Form 10-Q prepared in compliance with the
requirements therefor and filed with the Securities and Exchange Commission will
be deemed to satisfy the financial statement delivery requirements of this
Section.
6.4 ANNUAL STATEMENTS. Furnish Lender within 105 days after the end of
each fiscal year of TKOGC annual audited financial statements which will; (a)
include a balance sheet as of the end of such year, profit and loss and surplus
statements and a statement of cash flows for such year; (b) be on a consolidated
basis with TKOGC and its Subsidiaries; (c) be accompanied by a Compliance
Certificate, and (d) contain the unqualified opinion of an independent certified
public accountant acceptable to Lender and its examination will have been made
in accordance with generally accepted auditing standards and such opinion will
contain a report reasonably satisfactory to Lender of any inconsistency in the
application of generally accepted accounting principles with the preceding
years' statements, if any. The delivery by TKOGC of its annual report on Form
10-K prepared in compliance with the requirements therefor and filed with the
Securities and Exchange Commission will be deemed to satisfy the financial
statement delivery requirements of this Section.
6.5 AUDITOR'S LETTERS, ETC. Furnish any letter, other than routine
correspondence, directed to it by its auditors or independent accountants,
relating to its financial statements, accounting procedures, financial
condition, tax returns or the like since the date of the most recent of its
Current Financial Statements to Lender.
6.6 TAXES. Pay and discharge when due all indebtedness and all taxes,
assessments, charges, levies and other liabilities imposed upon it, its income,
profits, property or business, except those which currently are being contested
in good faith by appropriate proceedings and for which it has set aside adequate
reserves or made other adequate provision with respect thereto, but any such
disputed item will be paid forthwith upon the commencement of any proceeding for
the foreclosure of any lien which may have attached with respect thereto, unless
Borrower has set aside with Lender cash reserves to cover the amount in dispute.
6.7 OPERATIONS. Continue its business operations in substantially the
same manner as at present, except where such operations are rendered impossible
by a fire, strike or other events beyond its control; keep its real and personal
properties in good operating condition and repair; make all necessary and proper
repairs, renewals, replacements, additions and improvements thereto and comply
with the provisions of all leases to which it is party or under
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which it occupies or holds real or personal property so as to prevent any loss
or forfeiture thereof or thereunder.
6.8 INSURANCE. Keep its insurable real and personal property insured
with responsible insurance companies against loss or damage by fire, windstorm
and other hazards which are commonly insured against in an extended coverage
endorsement in an amount equal to not less than 80% of the insurable value
thereof on a replacement cost basis and also maintain public liability insurance
in a reasonable amount. Schedules of all insurance will be submitted to Lender
upon request. Such schedules will contain a description of the risks covered,
the amounts of insurance carried on each risk, the name of the insurer and the
cost of such insurance. Such schedules will be supplemented from time to time
promptly to reflect any change in insurance coverage.
6.9 COMPLIANCE WITH LAWS. Comply in all material respects with all
material laws and regulations applicable to it and to the operation of its
business, including without limitation those relating to environmental and
health matters, and do all things necessary to maintain, renew and keep in full
force and effect all rights, permits, licenses, certificates, satisfactory
clearances and franchises necessary to enable it to continue its business.
6.10 ENVIRONMENTAL VIOLATIONS.
6.10.1 In the event that any hazardous or toxic substances,
pollutants, contaminants, solid waste or hazardous waste, or petroleum are
released (as that term is defined under Environmental Laws) at the Property, or
are otherwise found to be in, on, under or about the Property in violation of
Environmental Laws or in excess of cleanup levels established under
Environmental Laws, immediately will notify Lender in writing and will commence
such action as may be required with respect to such items, including, but not
limited to, removal and cleanup thereof, and deposit with Lender cash
collateral, letter of credit, bond or other assurance of performance in form,
substance and amount reasonably acceptable to Lender to cover the cost of such
action. Upon request, Borrower will provide Lender with updates on the status of
Borrower's actions to resolve or otherwise address such items.
6.10.2 In the event Borrower receives notice of an Environmental
Claim from any governmental agency or other third party alleging a violation of
or liability under Environmental Laws with respect to the Property or Borrower's
activities or operations at the Property, immediately notify Lender in writing
and will commence such action as may be required with respect to such
Environmental Claim. Upon request, Borrower will provide Lender with updates on
the status of Borrower's actions to resolve or otherwise address such
Environmental Claim.
6.11 ACCOUNTS. So long as any of the Loans are in effect: (i) maintain
Lender as TKOGC's and OGHEAC's primary bank of account; (ii) TKOGC and OGHEAC
will maintain all operating accounts, investment accounts and cash management
services at Lender and (iii) KHI and KAI will use their best efforts to move
their accounts to Lender and maintain all
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operating accounts, investment accounts and cash management services at Lender
in a reasonably timely manner provided Lender makes a satisfactory service
proposal.
6.12 ERISA COMPLIANCE. Comply in all material respects with the
applicable provisions of ERISA and furnish to Lender: (i) as soon as possible,
and in any event within 30 days after any officer of it or any ERISA Affiliate
knows or has reason to know that any Reportable Event has occurred that alone or
together with any other Reportable Event could reasonably be expected to result
in liability of it to the PBGC in an aggregate amount exceeding $25,000, a
statement of a financial officer setting forth details as to such Reportable
Event and the action that it proposes to take with respect thereto, together
with a copy of the notice of such Reportable Event, if any, given to the PBGC,
(ii) promptly after receipt thereof, a copy of any notice it or any ERISA
Affiliate may receive from the PBGC relating to the intention of the PBGC to
terminate any Plan or Plans (other than a Plan maintained by an ERISA Affiliate
which is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of
Code Section 414) or to appoint a trustee to administer any such Plan, (iii)
within 10 days after the due date for filing with the PBGC pursuant to Section
412(n) of the Code of a notice of failure to make a required installment or
other payment with respect to a Plan, a statement of its financial officer
setting forth details as to such failure and the action that it proposes to take
with respect thereto together with a copy of any such notice given to the PBGC
and (iv) promptly and in any event within 30 days after receipt thereof by
Borrower or any ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy
of each notice received by Borrower or any ERISA Affiliate concerning (A) the
imposition of Withdrawal Liability in an amount exceeding $25,000, or (B) a
determination that a Multiemployer Plan is, or is expected to be, terminated or
in reorganization, both within the meaning of Title IV of ERISA, and which, in
each case, is expected to result in an increase in annual contributions of it or
an ERISA Affiliate to such Multiemployer Plan in an amount exceeding $25,000.
6.13 NOTICE OF DEFAULT. Notify Lender in writing within five days after
it knows or has reason to know of the occurrence of an Event of Default.
6.14 SALE AND LEASEBACK. Not directly or indirectly enter into any
arrangement to sell or transfer all or any part of its assets then owned by it
and thereupon or within one year thereafter rent or lease any of the assets so
sold or transferred.
6.15 WAIVERS. Unless Borrower receives reasonably equivalent value in
exchange therefor, not waive any right or rights of substantial value which,
singly or in the aggregate, is or are material to its condition (financial or
other), properties or business.
7. NEGATIVE COVENANTS. From the date of execution of this Agreement until all of
the Obligations have been fully paid, Borrower will not without Lender's prior
written consent:
7.1 DEBT. Incur any Indebtedness other than: (a) the Loans and any
subsequent Indebtedness to Lender; (b) open account obligations incurred in the
ordinary course of business having maturities of less than 90 days; (c) rental
and lease payments for real or personal property whose aggregate annual rental
payments would exceed $4,800,000 when
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added to Borrower's rental or lease agreements existing on the date hereof; (d)
the Senior Notes; and (e) the obligation to Jules B. Kroll in the amount of
approximately $310,000.
7.2 ACQUISITIONS. Acquire the stock or assets of any other Persons,
without the prior written consent of the Lender except for the pending
acquisition of Acorn Communications Group, Inc., and Imea, a Russian corporation
and the pending merger between a wholly owned subsidiary of The O'Gara Company
and Kroll Holdings, Inc., under terms and conditions materially the same as
presented by Borrower to Lender as of the date hereof.
7.3 LIENS. Incur, create, assume, become or be liable in any way, or
suffer to exist any mortgage, pledge, lien, charge or other encumbrance of any
nature whatsoever on any of its assets, now or hereafter owned, other than
Permitted Liens. In addition, Borrower will not permit any of the TKOGC
Subsidiaries to incur Indebtedness that is secured by any lien or encumbrance
other than by Permitted Liens. In addition, the Borrower will not agree to or
permit its Subsidiaries to agree to a negative pledge with respect to its assets
except as provided in the Note Purchase Agreement executed in connection with
the Senior Notes.
7.4 GUARANTEES. Other than with respect to the Senior Notes, guarantee,
endorse or become contingently liable for the obligations of any person, firm or
corporation, except in connection with the endorsement and deposit of checks in
the ordinary course of business for collection or accounts payable incurred by
Subsidiaries in the ordinary course of business.
7.5 FIXED CHARGE COVERAGE. Permit the ratio of: (i) the sum of
consolidated net income before depreciation, amortization, taxes, interest
expense and operating lease payments for the four most recently completed fiscal
quarters to (ii) the sum of current maturities of long-term debt including
capitalized lease payments for the same four fiscal quarters plus interest
expense and operating lease payments for the same four fiscal quarters to be
less than as follows: 2 to 1 for the period beginning with the date of execution
of this Agreement and continuing through December 31, 1997; 2.5 to 1 for the
period beginning January 1, 1998 and continuing through December 31, 1998; and 3
to 1 beginning January 1, 1999 and as of the end of each quarter thereafter.
7.6 MANAGEMENT. Fail to give Lender notice within 5 days and pay to
Lender upon Lender's written demand given within 60 days after receipt of notice
and payable 90 days after such demand without any other grace period or notice,
the entire unpaid balance of all of the Obligations, if Thomas M. O'Gara, Vice
Chairman of the Board; Wilfred T. O'Gara, President and Chief Operating Officer;
Nicholas P. Carpinello, Controller and Treasurer; and Abram S. Gordon, Vice
President, Secretary and General Counsel, each is no longer involved directly in
the management of Borrower.
7.7 NET WORTH MAINTENANCE. Fail to maintain at all times a minimum
consolidated Net Worth of not less than $25,000,000 plus: (i) 65% of positive
consolidated net income (with no deductions for net losses) for all periods
subsequent to December 31, 1997, plus (ii) 75% of the net proceeds of any cash
equity offerings, calculated in accordance with generally accepted accounting
principles on a cumulative basis for all periods subsequent to December 31,
1997.
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7.8 DEBT TO CAPITALIZATION.
7.8.1 Permit its ratio of Debt to Capitalization to exceed the
following amounts:
RATIO FROM TO
----- ---- --
70.00% Closing 12/31/97
70.00% 1/1/98 12/31/98
65.00% 1/1/99 and at all times thereafter
7.9 Permit its ratio of Debt to Capitalization to exceed 60% at any
time after it makes a Substantial Equity Offering.
7.10 INTANGIBLES. Permit the total amount of patents, trademarks, trade
names, organizational expenses, capitalized database expenditures and other
intangible items of similar nature and goodwill, which appear on the asset side
of such balance sheet, to exceed $25,000,000.
7.11 CAPITAL EXPENDITURES.
7.11.1 Make capital expenditures or acquisitions, including the
capitalized value of any leases in the aggregate, which, when calculated in
accordance with generally accepted accounting principles, would exceed the
following amounts:
AMOUNT PERIOD
------ ------
$3,700,000 1997 Fiscal Year
$4,200,000 1998 Fiscal Year
$3,500,000 1999 Fiscal Year
7.11.2 Make capitalized database expenditures, which, when
calculated in accordance with generally accepted accounting principles, would
exceed $3,750,000 in the aggregate in any fiscal year.
7.11.3 Unexpended amounts from the prior fiscal year may not be
carried forward to the next fiscal year. Capital Expenditures as a result of
acquisitions made in compliance with this Agreement will be disregarded for
purposes of determining compliance with this covenant.
7.12 FOREIGN INVESTMENT. Permit foreign investment (which for purposes
hereof will not be deemed to limit acquisitions) in the aggregate, including
loans payable, accounts payable and advances to TKOGC Subsidiaries, to exceed
$11,000,000, but for purposes hereof
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excluding the loan by TKOGC to O'Gara-France, S.A. of F80,000,000 for the
purpose of acquiring Labbe, S.A.
7.13 CASH BALANCES HELD BY SUBSIDIARIES. Permit the TKOGC Subsidiaries,
other than OGHEAC and KAI, to hold cash balances for any reason other than to
fund working capital.
7.14 REDEMPTIONS. Purchase, retire, redeem or otherwise acquire for
value, directly or indirectly, any shares of its capital stock now or hereafter
outstanding.
7.15 INVESTMENTS. Purchase or hold beneficially any stock, other
securities or evidences of indebtedness of, or make any investment or acquire
any interest whatsoever in, any other person, firm or corporation other than
short term investments of excess working capital invested in one or more of the
following:
7.15.1 Investments in a Borrower;
7.15.2 Investments in one or more TKOGC Subsidiaries or in any
Person that concurrently with such Investment becomes a TKOGC Subsidiary;
provided that such Investments are in compliance with Section 7.12, above and as
to an Investment in domestic TKOGC Subsidiaries (other than a Borrower or any
Guarantor), such Investments do not exceed $1,000,000 in the aggregate in any
fiscal year;
7.15.3 Investments in United States Governmental Securities,
provided that such obligations mature within 365 days from the date of
acquisition thereof;
7.15.4 Investments in securities issued by Federal Farm Credit Bank,
Federal National Mortgage Association, Federal Home Loan Mortgage Corp., Federal
Home Loan Bank, Student Loan Marketing Association, and Tennessee Valley
Authority, provided that such obligations mature within 365 days from the date
of acquisition thereof;
7.15.5 Investments in certificates of deposit, banker's acceptances
or accounts issued or held by an Acceptable Bank, provided that such obligations
mature within 365 days from the date of acquisition thereof;
7.15.6 Investments in accounts held by a Non-Qualifying Bank,
provided that the amount held in accounts by all Non-Qualifying Banks for the
benefit of Borrower or any TKOGC Subsidiary will not exceed the amount of
working capital required by Borrower; or such TKOGC Subsidiary in the ordinary
course of business;
7.15.7 Investments in variable rate tax exempt bonds, notes or funds
given either of the two highest ratings by a credit rating agency of recognized
national standing, or if payment thereunder may be made by drawing on letters of
credit issued by Acceptable Banks, so long as the Investments in such bonds,
notes or funds mature within one year of the date of acquisition thereof;
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7.15.8 Investments in commercial paper given either of the two
highest ratings by a credit rating agency of recognized national standing and
maturing not more than 270 days from the date of creation thereof; and
7.15.9 Investments in money market mutual funds that invest solely
in so-called "money market" instruments maturing not more than one year after
the acquisition thereof, which funds have assets in excess of $500,000,000.
7.15.10 Investments in Transamerica Waste in the amount of
approximately $25,000.
As used in this Section:
"ACCEPTABLE BANK" means any bank or trust company (i) which is
organized under the laws of the United States of America or any state thereof,
(ii) which has capital, surplus and undivided profits aggregating at least
$500,000,000 and (iii) whose long-term unsecured debt obligations (or the
long-term unsecured debt obligations of the bank holding company owning all of
the Capital Stock of such bank or trust company) shall have been given a rating
of "A" or better by Standard and Poor's Ratings Group, "A2" or better by Moody's
Investors Service, Inc. or an equivalent rating by any other credit rating
agency of recognized national standing.
"INVESTMENT" means any investment, made in cash or by delivery of
property, by Borrower or any Subsidiary in any Person, whether by acquisition,
of capital stock, debt or other obligation or security, or by loan, guaranty,
advance, capital contribution or otherwise.
"NON-QUALIFYING BANK" means any bank or trust company, other than an
Acceptable Bank, which has capital, surplus and undivided profits aggregating at
least $100,000,000 (or the equivalent in a foreign currency).
"UNITED STATES GOVERNMENTAL SECURITY" means any direct obligation of,
or obligation guaranteed by, the United States of America, or any agency
controlled or supervised by or acting as an instrumentality of the United States
of America pursuant to authority granted by the Congress of the United States of
America, so long as such obligation or guarantee shall have the benefit of the
full faith and credit of the United States of America which shall have been
pledged pursuant to authority granted by the Congress of the United States of
America.
7.16 MERGER, ACQUISITION OR SALE OF ASSETS. Except for mergers and
acquisitions for which Borrower, or any one of them, is the surviving entity and
are otherwise in compliance with Section 7.2, above, and do not result in a
Default, merge or consolidate with or into any other entity or acquire all or
substantially all the assets of any person, firm, partnership, joint venture or
corporation, or sell, lease or otherwise dispose of any of its assets except for
dispositions in the ordinary course of business.
7.17 ADVANCES AND LOANS. Except foreign investments permitted by
SECTION 7.12 and investments permitted by Section 7.15, above, lend money, give
credit or make advances (other than advances not to exceed $10,000 for any one
employee and other reasonable and ordinary advances to cover reasonable expenses
of employees, such as travel expenses) to any person, firm, joint venture or
corporation, including, without limitation, Affiliates.
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7.18 SUBSIDIARIES. Except for acquisitions in compliance with Section
7.2 above or investments in compliance with Section 7.15, above, acquire any
Subsidiaries, create any Subsidiaries or enter into any partnership or joint
venture agreements.
7.19 TRANSACTIONS WITH AFFILIATES. Enter into any transaction,
including, without limitation, any purchase, sale, lease or exchange of property
or the rendering of any service, with any Affiliate unless such transaction is
otherwise permitted under this Agreement, is in the ordinary course of its
business, and is on fair and reasonable terms no less favorable to it than it
would obtain in a comparable arm's length transaction with a non-Affiliate.
7.20 POST-CLOSING MATTERS. Fail to deliver to Lender in form and
substance satisfactory to Lender the documents, if any, noted as post-closing
items on the Closing Memo on or before the date specified in the Closing Memo.
8. EVENTS OF DEFAULT. Upon the occurrence of any of the following events with
respect to Borrower or any guarantor:
8.1 NON-PAYMENT. The non-payment of any principal amount of any Note
when due, whether by acceleration or otherwise, or the nonpayment of any
interest upon any Note or any other amount due Lender pursuant to this Agreement
within 5 days of when the same is due;
8.2 COVENANTS. The default in the due observance of any affirmative
covenant or agreement to be kept or performed by it under the terms of this
Agreement or any of the Security Documents and the failure or inability of it to
cure such default within 30 days of the occurrence thereof; provided that such
30 day grace period will not apply to: (a) any default which in Lender's good
faith determination is incapable of cure, (b) any default that has previously
occurred, (c) any default in any negative covenants, or (d) any failure to
maintain insurance or to permit inspection of the Collateral or of its books and
records.
8.3 REPRESENTATIONS AND WARRANTIES. Any representation or warranty made
by it in this Agreement, in any of the Security Documents or in any report,
certificate, opinion, financial statement or other document furnished in
connection with the Obligations is false or erroneous in any material respect or
any material breach thereof has been committed;
8.4 OBLIGATIONS. Except as provided in Sections 8.1, 8.2 and 8.3 above,
the default by it in the due observance of any covenant, negative covenant or
agreement to be kept or performed by it under the terms of this Agreement, the
Security Documents or any document now or in the future executed in connection
with any of the Obligations and the lapse of any applicable cure period provided
therein with respect to such default, or, if so defined therein, the occurrence
of any Event of Default or Default (as such terms are defined therein);
8.5 BANKRUPTCY, ETC. It: (a) dissolves or is the subject of any
dissolution, a winding up or liquidation; (b) makes a general assignment for the
benefit of creditors; or (c) files or has filed against it a petition in
bankruptcy, for a reorganization or an arrangement, or for a receiver, trustee
or similar creditors' representative for its property or assets or any part
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thereof, or any other proceeding under any federal or state insolvency law, and
if filed against it, the same has not been dismissed or discharged within 60
days thereof;
8.6 EXECUTION, ATTACHMENT, ETC. The commencement of any foreclosure
proceedings, proceedings in aid of execution, attachment actions, levies
against, or the filing by any taxing authority of a lien against it or against
any of the Collateral, except those liens being diligently contested in good
faith which in the aggregate do not exceed $100,000;
8.7 LOSS, THEFT OR SUBSTANTIAL DAMAGE TO THE COLLATERAL. In addition to
the rights of Lender to deal with proceeds of insurance as provided in the
Security Documents, the loss, theft or substantial damage to the Collateral if
the result of such occurrence (singly or in the aggregate) is the failure or
inability to resume substantially normal operation of its business within 30
days of the date of such occurrence;
8.8 JUDGMENTS. Unless in the opinion of Lender adequately insured or
bonded, the entry of a final judgment for the payment of money involving more
than $100,000 against it and the failure by it to discharge the same, or cause
it to be discharged, within 10 days from the date of the order, decree or
process under which or pursuant to which such judgment was entered, or to secure
a stay of execution pending appeal of such judgment; the entry of one or more
final monetary or non-monetary judgments or order which, singly or in the
aggregate, does or could reasonably be expected to: (a) cause a material adverse
change in the value of the Collateral or its condition (financial or otherwise),
operations, properties or prospects, (b) have a material adverse effect on its
ability to perform its obligations under this Agreement or the Security
Documents, or (c) have a material adverse effect on the rights and remedies of
Lender under this Agreement, any Note or any Security Document;
8.9 REVOCATION OF GUARANTEE. The revocation or attempted revocation or
limitation in whole or in part of any Guarantee;
8.10 IMPAIRMENT OF SECURITY. (a) The validity or effectiveness of any
Security Document or its transfer, grant, pledge, mortgage or assignment by the
party executing it in favor of Lender is impaired; (b) any party to a Security
Document asserts that any Security Document is not a legal, valid and binding
obligation of it enforceable in accordance with its terms except affected by
applicable bankruptcy and insolvency laws and general principles of equity
(regardless of whether asserted in a proceeding in law or in equity); (c) the
security interest or lien purporting to be created by any of the Security
Documents ceases to be or is asserted by any party to any Security Document
(other than Lender) not to be a valid, perfected lien subject to no liens other
than liens not prohibited by this Agreement or any Security Document; or (d) any
Security Document is amended, subordinated, terminated or discharged, or any
person is released from any of its covenants or obligations except to the extent
that Lender expressly consents in writing thereto;
8.11 BOND DOCUMENTS. The occurrence of an Event of Default under and as
defined in the Bond Documents.
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8.12 OTHER INDEBTEDNESS TO LENDER OR LENDER'S AFFILIATES. A default
with respect to any evidence of Indebtedness in excess of $10,000 by it (other
than to Lender pursuant to this Agreement) to Lender or to any of Lender's
Affiliates, if the effect of such default is to accelerate the maturity of such
Indebtedness or to permit the holder thereof to cause such Indebtedness to
become due prior to the stated maturity thereof, or if any Indebtedness in
excess of $10,000 of it for borrowed money (other than to Lender pursuant to
this Loan Agreement) is not paid when due and payable, whether at the due date
thereof or a date fixed for prepayment or otherwise (after the expiration of any
applicable grace period);
8.13 OTHER INDEBTEDNESS. A default with respect to any evidence of
Indebtedness in excess of $250,000 by it (other than to Lender or to any of
Lender's Affiliates), if the effect of such default is to accelerate the
maturity of such Indebtedness or to permit the holder thereof to cause such
Indebtedness to become due prior to the stated maturity thereof, or if any
Indebtedness of it in excess of $250,000 for borrowed money (other than to
Lender or Lender's Affiliate pursuant to this Loan Agreement) is not paid when
due and payable, whether at the due date thereof or a date fixed for prepayment
or otherwise (after the expiration of any applicable grace period);
then immediately upon the occurrence of any of the events described in SECTION
8.5 and at the option of the Lender upon the occurrence of any other Event of
Default, the Loans, all Notes and all other Obligations immediately will mature
and become due and payable without presentment, demand, protest or notice of any
kind which are hereby expressly waived. After the occurrence of any Event of
Default, Lender is authorized without notice to anyone to offset and apply to
all or any part of the Obligations all moneys, credits and other property of any
nature whatsoever of Borrower now or at any time hereafter in the possession of,
in transit to or from, under the control or custody of, or on deposit with
(whether held by Borrower individually or jointly with another party), Lender or
any of Lender's Affiliate. The rights and remedies of Lender upon the occurrence
of any Event of Default will include but not be limited to all rights and
remedies provided in the Security Documents and all rights and remedies provided
under applicable law. In furtherance but not in limitation of the foregoing,
upon the occurrence of an Event of Default, Lender may refuse to make any
further advances under any revolving credit note included in the Obligations.
Borrower waives any requirement of marshalling of the assets covered by the
Security Documents upon the occurrence of any Event of Default. Upon or at any
time after the occurrence of an Event of Default, Lender may request the
appointment of a receiver of the Collateral. Such appointment may be made
without notice, and without regard to (i) the solvency or insolvency, at the
time of application for such receiver, of the person or persons, if any, liable
for the payment of the Obligations; and (ii) the value of the Collateral at such
time. Such receiver will have the power to take possession, control and care of
the Collateral and to collect all accounts resulting therefrom. Notwithstanding
the appointment of any receiver, trustee, or other custodian, Lender will be
entitled to the possession and control of any cash, or other instruments at the
time held by, or payable or deliverable under the terms of this Loan Agreement
or any Security Documents to Lender.
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9. CONDITIONS PRECEDENT.
9.1 AT CLOSING. Lender's obligation to make any of the Loans is
conditioned upon: (i) the concurrent closing of the transaction represented by
this Agreement and the merger between a wholly owned subsidiary of The O'Gara
Company and Kroll Holdings, Inc. on or before December 15, 1997 and (ii) the
receipt by Lender of all documents in form and substance acceptable to Lender
listed on the Closing Memo, except for those specifically listed thereon as
post-closing items.
9.2 ADDITIONAL ADVANCES. Lender's obligations to make any Loan and/or
any advance under any Note on any date in the future (to the extent that there
are funds remaining to be disbursed hereunder or under any Note) are subject to
the conditions precedent that:
9.2.1 NO DEFAULTS. There does not exist any Event of Default, nor
any event which upon notice or lapse of time or both would constitute an Event
of Default.
9.2.2 ACCURACY. The representations and warranties contained in this
Agreement, the Security Documents, and in each document listed on the Closing
Memo and in any document delivered in connection therewith will be true and
accurate on and as of such date, in all material respects, except as such
warranties and representations may be affected by: (a) this Agreement or
transactions contemplated thereby, and (b) events occurring after the Closing
Date as to those representations and warranties relating to the Current
Financial Statements.
9.3 BORROWING REPRESENTATIONS. Each borrowing by Borrower hereunder
will constitute a representation and warranty by Borrower as of the date of such
borrowing that the conditions set forth in SECTION 9.2 have been satisfied.
10. CLOSING EXPENSES. Borrower will pay Lender immediately upon the execution of
this Agreement a reasonable sum for expenses and Attorneys Fees incurred by
Lender in connection with the preparation, execution and delivery of this
Agreement and the attendant documents and the consummation of the transactions
contemplated hereby together with all: (a) recording fees and taxes; (b) survey,
appraisal and environmental report charges; and (c) title search and title
insurance charges, including any stamp or documentary taxes, charges or similar
levies which arise from the payment made hereunder or from the execution,
delivery or registration or any Security Document or this Agreement. If Borrower
fails to pay such fees, Lender is entitled to disburse such sums as an advance
under any Note.
11. POST-CLOSING EXPENSES. To the extent that Lender incurs any costs or
expenses in protecting or enforcing its rights in the Collateral or observing or
performing any of the conditions or obligations of Borrower or any Guarantor
thereunder, including but not limited to reasonable Attorneys' Fees in
connection with litigation, preparation of amendments or waivers, present or
future stamp or documentary taxes, charges or similar levies which arise from
any payment made hereunder or from the execution, delivery or registration of
any Security Document or this Agreement, such costs and expenses will be due on
demand, will be
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included in the Obligations and will bear interest from the incurring or payment
thereof at the Default Rate.
12. REPRESENTATIONS AND WARRANTIES TO SURVIVE. All representations, warranties,
covenants, indemnities and agreements made by Borrower herein and in the
Security Documents will survive the execution and delivery of this Agreement,
the Security Documents and the issuance of any Notes.
13. ENVIRONMENTAL INDEMNIFICATION. Lender will not be deemed to assume any
liability or obligation for loss, damage, fines, penalties, claims or duties to
clean-up or dispose of wastes or materials on or relating to the Property merely
by conducting any inspections of the Property or by obtaining title to the
Property by foreclosure, deed in lieu of foreclosure or otherwise. Borrower,
including its successors and assigns, agrees to remain fully liable and will
indemnify, defend and hold harmless Lender, its directors, officers, employees,
agents, contractors, subcontractors, licensees, invitees, successors and
assigns, from and against any claims, demands, judgments, damages, actions,
causes of action, injuries, administrative orders, liabilities, costs, expenses,
clean-up costs, waste disposal costs, litigation costs, fines, penalties,
damages and other related liabilities arising from (i) the failure of Borrower
to perform any obligation herein required to be performed by Borrower, (ii) the
removal or other remediation of hazardous or toxic substances, hazardous wastes,
pollutants or contaminants, solid waste or petroleum at or from the Property,
(iii) any act or omission, event or circumstance existing or occurring resulting
from or in connection with the ownership, construction, occupancy, operation,
use and/or maintenance of the Property, (iv) any and all claims or proceedings
(whether brought by private party or governmental agency) for bodily injury,
property damage, abatement or remediation, environmental damage or impairment
and any other injury or damage resulting from or relating to any hazardous or
toxic substances, hazardous waste, pollutants, contaminants, solid waste, or
petroleum located upon or migrating into, from or through the Property (whether
or not any or all of the foregoing was caused by the Borrower or its tenant or
subtenant, or a prior owner of the Property or its tenant or subtenant, or any
third party and whether or not the alleged liability is attributable to the
handling, storage, generation, transportation or disposal of such material or
the mere presence of such material on the Property), and (v) Borrower's breach
of any representation or warranty contained in this Section. Without limitation,
the foregoing indemnities will apply to Lender with respect to claims, demands,
losses, damages (including consequential damages), liabilities, causes of
action, judgements, penalties, costs and expenses (including reasonable
attorneys' fees and court costs) which in whole or in part are caused by or
arise out of the negligence of Lender. Such indemnity, however, will not apply
to Lender to the extent the subject of the indemnification is caused by or
arises out of the gross negligence or willful misconduct of Lender. All
environmental representations, warranties, covenants, and indemnities will
continue indefinitely and may not be cancelled or terminated except by a writing
signed by Lender specifically referring to this Section. Notwithstanding
anything contained to the contrary in the Note, Loan Agreement, or other loan
documents evidencing or securing the Obligations, the provisions of this Section
will survive the termination or expiration of the Obligations, the full
repayment of the Obligations, or the acquiring of title by Borrower or its
successors and assigns by foreclosure, deed in lieu of foreclosure or otherwise,
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and will be fully enforceable against Borrower and its successors and assigns.
The provisions of this Section will constitute a separate undertaking by
Borrower and will be an inducement to Borrower in extending the Loan evidencing
the Obligations to Borrower. The provisions of this Section will not be subject
to any anti-deficiency or similar laws.
14. DEFINITIONS. For purposes hereof:
14.1 Each accounting term not defined or modified herein will have the
meaning given to it under generally accepted accounting principles in effect on
the Closing Date.
14.2 "Affiliate" will mean any person, partnership, joint venture,
company or business entity under common control or having similar equity holders
owning at least ten percent (10%) thereof, whether such common control is direct
or indirect. All of Person's direct or indirect parent corporations, partners,
Subsidiaries, and the officers, shareholders, members, directors and partners of
any of the foregoing and persons related by blood or marriage to any of the
foregoing will be deemed to be a Person's Affiliates for purposes of this
Agreement.
14.3 "Attorneys Fees" will mean the reasonable value of the services
(and all costs and expenses related thereto) of the attorneys (and all
paralegals and other staff employed by such attorneys) employed by Lender from
time to time to: (i) take any action in or with respect to any suit or
proceedings (bankruptcy or otherwise) relating to the Collateral or this
Agreement; (ii) protect, collect, lease or sell, any of the Collateral; (iii)
attempt to enforce any lien on any of the Collateral or to give any advice with
respect to such enforcement; (iv) enforce any of Lender's rights to collect any
of the Obligations; (v) give Lender advice with respect to this Agreement,
including but not limited to advice in connection with any default, workout or
bankruptcy; (vi) prepare any amendments, restatements, amendments or waivers to
this Agreement or any of the documents executed in connection with any of the
Obligations.
14.4 "Bond Documents" will mean the Trust Indenture dated as of
September 1, 1986 between the County of Butler, Ohio and PNC Bank, Ohio,
National Association, executed in connection with the Bonds, the Loan Agreement
dated as of September 1, 1986 between O'Gara Hess & Eisenhardt Armoring Company
Limited Partnership and the County of Butler, Ohio executed in connection with
the Bonds and all other documents executed in connection with the Bonds.
14.5 "Business Day" will mean any day excluding Saturday, Sunday and
any other day on which banks are required or authorized to close in Ohio.
14.6 "Capitalization" will mean Funded Debt plus Net Worth.
14.7 "Closing" will mean the execution and delivery of the documents
listed on the Closing Memo.
14.8 "Closing Date" will mean the date on which this Agreement is
executed.
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14.9 "Closing Memo" will mean the Closing Memorandum between Borrower
and Lender in connection with the transactions represented by this Agreement.
14.10 "Code" will mean the Internal Revenue Code of 1986, as amended
from time to time.
14.11 "Collateral" will mean any property, real or personal, tangible
or intangible, now or in the future securing the Obligations, including but not
limited to the property covered by the Security Documents listed in the Closing
Memo.
14.12 "Compliance Certificate" will mean the Compliance Certificate in
the form delivered to Borrower by Lender in connection with the Closing.
14.13 "Current Financial Statements" will mean the following financial
statements: (a) TKOGC's and OGHEAC's audited consolidated balance sheet dated
December 31, 1996 and statement of profit, loss and surplus for the fiscal year
ended December 31, 1996; (b) TKOGC's and OGHEAC's internally prepared
consolidated balance sheet dated September 30, 1997 and statement of profit,
loss and surplus for the period January 1, 1997 through September 30, 1997; (c)
KHI's and KAI's audited consolidated balance sheet dated December 31, 1996 and
statement of profit, loss and surplus for the fiscal year ended December 31,
1996; and (d) KHI's and KAI's internally prepared consolidated balance sheet
dated September 30, 1997 and statement of profit, loss and surplus for the
period January 1, 1997 through September 30, 1997.
14.14 "Default Rate" will mean 4% per annum plus the highest rate of
interest that would otherwise be in effect under any Note but not more than the
highest rate permitted by applicable law.
14.15 "Default" will mean any event or condition which with the passage
of time or giving of notice, or both, would constitute an Event of Default.
14.16 "Disclosure Schedule" will mean the Disclosure Schedule delivered
by the Borrower to the Lender in connection with the Closing.
14.17 "Environmental Report" will mean the environmental site
assessment of the Property previously delivered to Lender.
14.18 "ERISA Affiliate" will mean any trade or business (whether or not
incorporated) that is a member of a group of which Borrower is a member and
which is treated as a single employer under Section 414 of the Code.
14.19 "ERISA" will mean the Employee Retirement Income Security Act of
1974, or any successor statute, as amended from time to time.
14.20 "Event of Default" will mean any of the events listed in
SECTION 8.
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14.21 "Funded Debt" will mean all Indebtedness which matures more than
one year after the date of its creation including any amount which may be
considered the current portion of such Indebtedness.
14.22 "Guarantees" will mean the guarantees of all or any part of the
Obligations, now existing or hereafter arising, including but not limited to
those listed on the Closing Memo, whether on a full, limited or non-recourse
basis and such term will include any person or entity that hypothecates or
otherwise pledges any property to Lender in connection with any of the
Obligations and will include any amendments thereto and restatements thereof.
14.23 "Guarantor(s)" will mean any persons or entities that now or in
the future deliver one or more Guarantees to Lender. Initially, the Guarantors
will mean O'Gara Security International, Inc., O'Gara Satellite Networks, Inc.,
Kroll Environmental Enterprises, Inc., Kroll Information Services, Inc., Kroll
Associates International Holdings, Inc. and Kroll International, Inc.
14.24 "Hazardous wastes", "hazardous substances" and "pollutants or
contaminants" will mean any substances, waste, pollutant or contaminant now or
hereafter included with any respective terms under any now existing or
hereinafter enacted or amended federal, state or local statute, ordinance, code
or regulation, including but not limited to the Comprehensive Environmental
Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 ET SEQ.
("CERCLA").
14.25 "Indebtedness" will mean, without duplication: (i) all
obligations (including capitalized lease obligations) which in accordance with
generally accepted accounting principles would be shown on a balance sheet as a
liability; (ii) all obligations for borrowed money or for the deferred purchase
price of property or services; and (iii) all guarantees, reimbursement, payment
or similar obligations, absolute, contingent or otherwise, under acceptance,
letter of credit or similar facilities.
14.26 "Lender's Affiliate" will mean any person, partnership, joint
venture, company or business entity under common control or having similar
equity holders owning at least ten percent (10%) thereof with Lender, whether
such common control is direct or indirect. All of Lender's direct or indirect
parent corporations, sister corporations, and Subsidiaries will be deemed to be
a Lender's Affiliate for purposes of this Agreement.
14.27 "Letters of Credit" will mean the Alternate Letter of Credit and
all Transactional Letters of Credit.
14.28 "Letter of Credit Documents" will mean the respective
applications and agreements with respect to Letters of Credit on Lender's
standard forms thereof (or such other form as Lender and Borrower may agree)
signed at the time of issuance or renewal of such Letters of Credit.
14.29 "Loan(s)" will mean any and all advances of funds under this
Agreement or any of the Notes.
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14.30 "Mortgage" will mean the Open-End Mortgage, Assignment of Rents
and Leases and Security Agreement from OGHEAC to Lender securing the
reimbursement obligations relating to the Alternate Letter of Credit.
14.31 "Multiemployer Plan" will mean a multiemployer plan as defined in
Section 4001(a)(3) of ERISA to which Borrower or any ERISA Affiliate (other than
one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code
Section 414) is making or accruing an obligation to make contributions, or has
within any of the preceding five plan years made or accrued an obligation to
make contributions.
14.32 "Net Worth," at any particular time, will mean the sum of the
amounts appearing on the balance sheet of such entity under shareholder's equity
as: (a) the stated value of all outstanding stock, (b) capital, paid-in and
earned surplus and (c) cumulative foreign currency translation adjustments.
14.33 "Note(s)" will mean any note, now or in the future, between
Borrower and Lender, and will include any amendments made thereto and
restatements thereof, extensions and replacements.
14.34 "Obligations" will mean and include all loans, advances, debts,
liabilities, obligations, covenants and duties owing to Lender or any of
Lender's Affiliates from Borrower of any kind or nature, present or future,
whether or not evidenced by any note, guaranty or other instrument, whether
arising under this Agreement or under any other agreement, instrument or
document, whether or not for the payment of money, whether arising by reason of
an extension of credit, opening of a letter of credit, loan, guaranty,
indemnification or in any other manner, whether direct or indirect (including
those acquired by assignment, participation, purchase, negotiation, discount or
otherwise), absolute or contingent, joint or several, due or to become due, now
existing or hereafter arising and whether or not contemplated by Borrower or
Lender or Lender's Affiliates on the Closing Date.
14.35 "PBGC" will mean the Pension Benefit Guaranty Corporation
referred to and defined in ERISA.
14.36 "Permitted Liens" will mean:
(i) liens securing the payment of taxes, either not yet due or
the validity of which is being contested in good faith by
appropriate proceedings, and as to which it has set aside on its
books adequate reserves to the extent required by generally
accepted accounting principles;
(ii) deposits under workers' compensation, unemployment insurance
and social security laws, or to secure the performance of bids,
tenders, contracts (other than for the repayment of borrowed
money) or leases, or to secure statutory obligations or surety or
appeal bonds, or to secure indemnity, performance or other
similar bonds in the ordinary course of business;
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(iii) liens imposed by law, such as carriers' warehousemen's or
mechanics' liens, incurred by it in good faith in the ordinary
course of business, and liens arising out of a judgment or award
against it with respect to which it will currently be prosecuting
an appeal, a stay of execution pending such appeal having been
secured;
(iv) liens in favor of Lender;
(v) reservations, exceptions, encroachments and other similar
title exceptions or encumbrances affecting real properties,
provided such do not materially detract from the use or value
thereof as used by the owner thereof;
(vi) attachment, judgment and similar liens provided that
execution is effectively stayed pending a good faith contest;
(vii) liens in favor of the United States or any department or
agency thereof in connection with progress payments made to
Borrower; and
(viii) liens existing on the date of this Agreement and securing
Indebtedness of Borrower and/or its Subsidiaries referred to in
Schedule A attached hereto, subject to the payment in full of
such debt so noted on Schedule A with the proceeds of the Senior
Notes and/or the Loan.
14.37 "Person" will include an individual, a corporation, a limited
liability company, an association, a partnership, a trust or estate, a joint
stock company, an unincorporated organization, a joint venture, a government
(foreign or domestic), any agency or political subdivisions thereof, or any
other entity.
14.38 "Plan" will mean any pension plan subject to the provisions of
Title IV of ERISA or Section 412 of the Code and which is maintained for
employees of Borrower or any ERISA Affiliate.
14.39 "Prime Rate" will mean the rate per annum established by Lender
from time to time based on its consideration of various factors, including money
market, business and competitive factors, and it is not necessarily Lender's
most favored interest rate. Subject to any maximum or minimum interest rate
limitations specified herein or by applicable law, if and when such Prime Rate
changes, then in each such event, the rate of interest payable under this
Agreement, any Note, the Security Documents or any other document evidencing the
Obligations that is tied to the Prime Rate will change automatically without
notice effective the date of such changes.
14.40 "Proxy Statement/Prospectus" will mean the Proxy
Statement/Prospectus dated November 7, 1997 and delivered by Borrower to Lender.
14.41 "Reportable Event" will mean any reportable event as defined in
Section 4043(b) of ERISA or the regulations issued thereunder with respect to a
Plan (other than a Plan
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maintained by an ERISA Affiliate which is considered an ERISA Affiliate only
pursuant to subsection (m) or (o) of Code Section 414).
14.42 "Security Documents" will mean the agreements, pledges,
mortgages, guarantees, or other documents delivered by Borrower, any Guarantor
or any other person or entity to Lender previously, now or in the future to
encumber the Collateral in favor of Lender, including but not limited to those
listed on the Closing Memo, and all amendments thereto and restatements thereof.
14.43 "Senior Notes" will mean those notes issued pursuant to
Borrower's $35,000,000 Note Purchase Agreement dated as of May 30, 1997 with the
Lenders listed in such Agreement.
14.44 "Subsidiaries" will mean a corporation of which shares of stock
having ordinary voting power (other than stock having such power only by reason
of the happening of a contingency) to elect a majority of the Board of Directors
or other managers of such corporation are at the time owned, or the management
of which is otherwise controlled, directly or indirectly through one or more
intermediaries, or both, by a Person or by subsidiaries of such subsidiaries.
14.45 "Substantial Equity Offering" will mean any equity offering which
will generate net cash proceeds to the Borrower of not less than $20,000,000,
excluding the equity offering described in the Proxy Statement/Prospectus.
14.46 "Withdrawal Liability" will mean liability to a Multiemployer
Plan as a result of a complete or partial withdrawal from such Multiemployer
Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.
All other terms contained in this Agreement and not otherwise defined herein
will, unless the context indicates otherwise, have the meanings provided for by
the Uniform Commercial Code of the State of Ohio to the extent the same are
defined therein.
15. GENERAL.
15.1 INDEMNITY. Borrower will indemnify, defend and hold harmless
Lender, its directors, officers, counsel and employees, from and against all
claims, demands, liabilities, judgments, losses, damages, costs and expenses,
joint or several (including all accounting fees and Attorneys' Fees reasonably
incurred), that Lender or any such indemnified party may incur arising under or
by reason of this Agreement or any act hereunder or with respect hereto or
thereto including but not limited to any of the foregoing relating to any act,
mistake or failure to act in perfecting, maintaining, protecting or realizing on
any collateral or lien thereon except the willful misconduct or gross negligence
of such indemnified party. Without limiting the generality of the foregoing and
subject to terms and conditions of the foregoing, Borrower agrees that if, after
receipt by Lender of any payment of all or any part of the Obligations, demand
is made at any time upon Lender for the repayment or recovery of any amount or
amounts received by it in payment or on account of the Obligations and Lender
repays all or
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any part of such amount or amounts by reason of any judgment, decree or order of
any court or administrative body, or by reason of any settlement or compromise
of any such demand, this Agreement will continue in full force and effect and
Borrower will be liable, and will indemnify, defend and hold harmless Lender for
the amount or amounts so repaid. The provisions of this Section will be and
remain effective notwithstanding any contrary action which may have been taken
by Borrower in reliance upon such payment, and any such contrary action so taken
will be without prejudice to Lender's rights under this Agreement and will be
deemed to have been conditioned upon such payment having become final and
irrevocable. The provisions of this Section will survive the expiration or
termination of this Agreement.
15.2 CONTINUING AGREEMENT. This Agreement is and is intended to be a
continuing Agreement and will remain in full force and effect until the Loan is
finally and irrevocably paid in full and this Agreement is terminated by a
writing signed by Lender specifically terminating this Agreement.
15.3 NO THIRD PARTY BENEFICIARIES. Nothing express or implied herein is
intended or will be construed to confer upon or give any person, firm or
corporation, other than the parties hereto, any right or remedy hereunder or by
reasons hereof.
15.4 NO PARTNERSHIP OR JOINT VENTURE. Nothing contained herein or in
any of the agreements or transactions contemplated hereby is intended or will be
construed to create any relationship other than as expressly stated herein or
therein and will not create any joint venture, partnership or other
relationship.
15.5 WAIVER. No delay or omission on the part of Lender to exercise any
right or power arising from any Event of Default will impair any such right or
power or be considered a waiver of any such right or power or a waiver of any
such Event of Default or any acquiescence therein nor will the action or
nonaction of Lender in case of such Event of Default impair any right or power
arising as a result thereof or affect any subsequent default or any other
default of the same or a different nature. No disbursement of the Loans
hereunder will constitute a waiver of any of the conditions to Lender's
obligation to make further disbursements; nor, in the event that Borrower is
unable to satisfy any such condition, will any such disbursement have the effect
of precluding Lender from thereafter declaring such inability to be an Event of
Default.
15.6 NOTICES. All notices, demands, requests, consents, approvals and
other communications required or permitted hereunder will be in writing and will
be conclusively deemed to have been received by a party hereto and to be
effective if delivered personally to such party, or sent by telex, telecopy
(followed by written confirmation) or other telegraphic means, or by overnight
courier service, or by certified or registered mail, return receipt requested,
postage prepaid, addressed to such party at the address set forth below or to
such other address as any party may give to the other in writing for such
purpose:
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To Lender: KeyBank National Association
525 Vine Street
Cincinnati, Ohio 45202
Attention: Steven J. Bloemer
Telecopier: 513-762-8222
To Borrower: The Kroll-O'Gara Company
9133 LeSaint Drive
Fairfield, Ohio 45014
Attention: Chief Financial Officer
Telecopier: 513-874-1262
All such communications, if personally delivered, will be conclusively deemed to
have been received by a party hereto and to be effective when so delivered, or
if sent by telex, telecopy or telegraphic means, on the day on which
transmitted, or if sent by overnight courier service, on the day after deposit
thereof with such service, or if sent by certified or registered mail, on the
third business day after the day on which deposited in the mail.
15.7 SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and
inure to the benefit of Borrower and Lender and their respective successors and
assigns, provided, however, that Borrower may not assign this Agreement in whole
or in part without the prior written consent of Lender and Lender at any time
may assign this Agreement in whole or in part, provided, however, that no such
assignment by Lender will relieve Lender of its obligations hereunder unless
Borrower so consents in writing.
15.8 MODIFICATIONS. This Agreement, any Notes and the Security
Documents, and the documents listed on the Closing Memo, constitute the entire
agreement of the parties and supersede all prior agreements and understandings
regarding the subject matter of this Agreement, including but not limited to any
proposal or commitment letters. No modification or waiver of any provision of
this Agreement, any Note, any of the Security Documents or any of the documents
listed on the Closing Memo, nor consent to any departure by Borrower therefrom,
will be established by conduct, custom or course of dealing; and no
modification, waiver or consent will in any event be effective unless the same
is in writing and specifically refers to this Agreement, and then such waiver or
consent will be effective only in the specific instance and for the purpose for
which given. No notice to or demand on Borrower in any case will entitle
Borrower to any other or further notice or demand in the same, similar or other
circumstance.
15.9 REMEDIES CUMULATIVE. No single or partial exercise of any right or
remedy by Lender will preclude any other or further exercise thereof or the
exercise of any other right or remedy. All remedies hereunder and in any
instrument or document evidencing, securing,
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guaranteeing or relating to any Loan or now or hereafter existing at law or in
equity or by statute are cumulative and none of them will be exclusive of the
others or any other remedy. All such rights and remedies may be exercised
separately, successively, concurrently, independently or cumulatively from time
to time and as often and in such order as Lender may deem appropriate.
15.10 ILLEGALITY. If fulfillment of any provision hereof or any
transaction related hereto or of any provision of the Notes or the Security
Documents, at the time performance of such provision is due, involves
transcending the limit of validity prescribed by law, then IPSO FACTO, the
obligation to be fulfilled will be reduced to the limit of such validity; and if
any clause or provisions herein contained other than the provisions hereof
pertaining to repayment of the Obligations operates or would prospectively
operate to invalidate this Agreement in whole or in part, then such clause or
provision only will be void, as though not herein contained, and the remainder
of this Agreement will remain operative and in full force and effect; and if
such provision pertains to repayment of the Obligations, then, at the option of
Lender, all of the Obligations of Borrower to Lender will become immediately due
and payable.
15.11 GENDER, ETC. Whenever used herein, the singular number will
include the plural, the plural the singular and the use of the masculine,
feminine or neuter gender will include all genders.
15.12 HEADINGS. The headings in this Agreement are for convenience only
and will not limit or otherwise affect any of the terms hereof.
15.13 TIME. Time is of the essence in the performance of this Loan
Agreement.
15.14 GOVERNING LAW AND JURISDICTION; NO JURY TRIAL. THIS AGREEMENT
WILL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO
DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OHIO, WITHOUT REGARD TO
CONFLICTS OF LAW PRINCIPLES, AND BORROWER HEREBY AGREES TO THE JURISDICTION OF
ANY STATE OR FEDERAL COURT LOCATED WITHIN HAMILTON COUNTY, OHIO AND CONSENTS
THAT ALL SERVICE OF PROCESS BE MADE BY CERTIFIED MAIL DIRECTED TO BORROWER AT
BORROWER'S ADDRESS SET FORTH HEREIN FOR NOTICES AND SERVICE SO MADE WILL BE
DEEMED TO BE COMPLETED FIVE (5) BUSINESS DAYS AFTER THE SAME HAS BEEN DEPOSITED
IN U.S. MAILS, POSTAGE PREPAID; PROVIDED THAT NOTHING CONTAINED HEREIN WILL
PREVENT LENDER FROM BRINGING ANY ACTION OR EXERCISING ANY RIGHTS AGAINST ANY
SECURITY OR AGAINST BORROWER INDIVIDUALLY, OR AGAINST ANY PROPERTY OF BORROWER,
WITHIN ANY OTHER STATE OR NATION. BORROWER WAIVES ANY OBJECTION BASED ON FORUM
NON CONVENIENS AND ANY OBJECTION TO VENUE OR ANY ACTION INSTITUTED HEREUNDER.
BORROWER AND LENDER EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT, ANY DOCUMENTS EVIDENCING ANY OF THE
32
<PAGE> 33
OBLIGATIONS, OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH AGREEMENTS.
Executed as of December 1, 1997
BORROWER
THE KROLL-O'GARA COMPANY
By: /s/ Abram S. Gordon
------------------------
Print Name: Abram S. Gordon
Title: Vice President
O'GARA-HESS & EISENHARDT
ARMORING COMPANY
By: /s/ Abram S. Gordon
------------------------
Print Name: Abram S. Gordon
Title: Vice President
<PAGE> 34
KROLL HOLDINGS, INC.
By: /s/ Nazzareno E. Paciotti
--------------------------
Print Name: Nazzareno E. Paciotti
Title: Chief Financial Officer
KROLL ASSOCIATES, INC.
By: /s/ Nazzareno E. Paciotti
--------------------------
Print Name: Nazzareno E. Paciotti
Title: Chief Financial Officer
LENDER
KEYBANK NATIONAL ASSOCIATION
By: /s/ Steven J. Bloemer
--------------------------
Print Name: Steven J. Bloemer
Title: Vice President
34
<PAGE> 1
Exhibit 10.25
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of the
6th day of November, 1997, is made and entered into by and between The O'Gara
Company, an Ohio corporation (the "Company"), and American International Group,
Inc., a Delaware corporation ("Shareholder").
W I T N E S S E T H:
WHEREAS, in accordance with that certain Plan and Agreement to Merge
dated August 8, 1997 ("Merger Agreement") among the Company, VDE, INC., Kroll
Holdings, Inc. ("KHI") and Jules Kroll ("Kroll"), shares of Common Stock, $.01
par value per share, of the Company (the "Common Stock") will be issued to the
Shareholder; and
WHEREAS, pursuant to the Merger Agreement and to induce the Shareholder
to vote its shares of the capital stock of KHI in favor of the transaction
contemplated by the Merger Agreement, the Company has agreed to provide the
registration rights hereinafter set forth;
NOW, THEREFORE, the parties hereby agree as follows:
1. CERTAIN DEFINITIONS.
As used in this Agreement the following terms shall have the meanings
ascribed to them below:
1.1 "COMMISSION": the United States Securities and Exchange
Commission, or any successor agency or commission.
1.2 "EXCHANGE ACT": the Securities and Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
1.3 "HOLDER" or "HOLDERS": (a) the Shareholder or any
Permitted Transferee, individually, or (b) the Shareholder and all Permitted
Transferees, collectively.
1.4 "PERMITTED TRANSFEREE": a Person that controls, is
controlled by or is under common control with the Shareholder.
1.5 "PERSON": an individual, corporation, limited liability
company, joint venture, partnership, trust, unincorporated organization or other
entity, or a government or any agency or political subdivision thereof.
1.6 "REGISTRABLE SECURITIES": any outstanding shares of Common
Stock held of record by the Holders. As to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when (i) a
registration statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have
<PAGE> 2
been disposed of in accordance with such registration statement, (ii) such
securities shall have been distributed (other than in a privately negotiated
sale) pursuant to a Rule 144 Open Market Transaction, (iii) such securities
shall cease to be outstanding, or (iv) such securities shall be held
beneficially by any person other than a Shareholder or a Permitted Transferee
(with satisfactory evidence of such beneficial ownership having been provided to
the Company).
1.7 "RULE 144 OPEN MARKET TRANSACTION": the sale of securities
pursuant to Rule 144 (as it exists now or may hereafter be amended, or any
successor provision) under the Securities Act.
1.8 "SECURITIES ACT": the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
2. REGISTRATION RIGHTS.
2.1 DEMAND REGISTRATION.
(a) Subject to Section 2.1(b) below, the Shareholder shall
have the right, on not more than one (1) occasion within three (3) years of the
Effective Time of the Merger to require the Company to file a registration
statement under the Securities Act covering all or part of any Holder's or
Holders' Registrable Securities by delivering a written request therefor to the
Company specifying the number of Registrable Securities to be included in such
registration, and the intended method of distribution thereof (the "Demand
Registration Request"). Subject to Sections 2.3, 2.4, 2.5 and 2.7, the Company
shall use its best efforts to effect the registration under the Securities Act
of the Registrable Securities which the Company has been so requested to
register in the Demand Registration Request, for disposition in accordance with
the intended method of disposition stated in the Demand Registration Request (a
"Demand Registration"). The Company shall not be obligated to effect more than
one (1) Demand Registration. A registration request pursuant to this Agreement
will not be deemed to have been effected unless the registration statement with
respect thereto shall have been declared effective and remained effective for
the period required by Section 2.4(a) of this Agreement.
(b) The demand registration rights granted the Shareholder in
Section 2.1(a) are subject to the following additional limitations: (i) the
Company shall not be obligated to file a registration statement relating to any
Demand Registration Request made more than three (3) years after the Effective
Time of the Merger; (ii) the Company shall not be required to file a
registration statement pursuant to a Demand Registration Request on Form S-1 at
any time when registration on Form S-3 is available for use by the Holders in
connection with such registration; and (iii) if the Board of Directors of the
Company, in its good faith judgment, reasonably determines that any registration
of Registrable Securities should not be made or
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<PAGE> 3
continued due to a valid need not to disclose confidential information or
because it would interfere with any corporate reorganization or material
financing, acquisition, merger or other transaction involving the Company
(collectively, a "Valid Business Reason"), the Company may postpone filing a
registration statement relating to a Demand Registration Request and, in case
any such registration statement has been filed, if the Valid Business Reason has
not resulted from actions taken by the Company, the Company may cause such
registration statement to be withdrawn and its effectiveness terminated or may
postpone amending or supplementing such registration statement, in each case
until such Valid Business Reason no longer exists. The Company shall give
written notice to the Shareholder of its determination to postpone or withdraw a
registration statement for a Valid Business Reason, together with such
disclosure to the Shareholder of the nature of the Valid Business Reason as
business necessity and the requirements of applicable law will allow, and of the
fact that the Valid Business Reason for such postponement or withdrawal no
longer exists, in each case promptly after the occurrence thereof. If the
Company shall give any notice of postponement or withdrawal of any registration
statement, the Company shall not, during the period of postponement or
withdrawal, register any capital stock other than pursuant to a registration
statement on Form S-4 or Form S-8. Each Holder of Registrable Securities agrees
that, upon receipt of any notice from the Company that the Company has
determined to withdraw any registration statement pursuant to clause (iii)
above, each Holder will discontinue its disposition of Registrable Securities
pursuant to such registration statement and, if so directed by the Company, will
deliver to the Company all copies, other than permanent file copies, then in
such Holder's possession of the prospectus covering such Registrable Securities
that was in effect at the time of receipt of such notice. If the Company shall
give any notice of withdrawal of a registration statement, the Company shall, at
such time as the Valid Business Reason that caused such withdrawal no longer
exists, file a new registration statement covering the Registrable Securities
that were covered by the withdrawn registration statement. If the Company shall
have withdrawn or prematurely terminated a registration statement filed under
Section 2.1(a) (whether pursuant to clause (iii) above or as a result of any
stop order, injunction or other order or requirement of the Commission or any
other governmental agency or court), the Company shall not be considered to have
effected a registration for the purposes of this Section 2.1 and such withdraws
or terminated registration shall not constitute a Demand Registration unless and
until the Company shall have filed a new registration statement covering the
Registrable Securities covered by the withdrawn registration statement and such
registration statement shall have been declared effective and remained effective
for the period required by Section 2.4(a) of this Agreement. If the Company
shall give any notice of postponement of a registration statement, the Company
shall, at such time as the Valid Business Reason that caused such postponement
no longer exists, use its best efforts to effect the
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<PAGE> 4
registration under the Securities Act of Registrable Securities in accordance
with this Section 2.1.
(c) Subject to Section 2.3, the Company may elect to include
in any registration statement and offering made pursuant to this Section 2.1,
authorized but unissued shares of Common Stock or shares of Common Stock held by
the Company as treasury shares.
(d) If any Demand Registration involves an underwritten
offering, the Shareholder shall have the right to select the investment bankers
and underwriters or managing underwriters to administer the offering of such
Registrable Securities, provided such investment bankers and underwriters shall
be reasonably acceptable to the Company.
2.2 "PIGGY-BACK" REGISTRATIONS. (a) If, at any time within three (3)
years after the Effective Time of the Merger, the Company proposes or is
required to register any shares of its Common Stock under the Securities Act
(other than pursuant to Section 2.1) on a registration statement on Form S-1,
Form S-2 or Form S-3, whether or not for its own account, the Company, on each
such occasion, shall give prompt written notice of its intention to do so to the
Shareholder. Upon the written request of the Shareholder made within fifteen
(15) days following the receipt of any such written notice (which request shall
specify the Registrable Securities intended to be disposed of by each Holder),
the Company shall, subject to Sections 2.2(b), 2.3, 2.4, 2.5 and 2.7 hereof, use
its best efforts to cause all Registrable Securities requested by the
Shareholder to be included in such registration under the Securities Act (with
the securities which the Company at the time proposes to register) to permit the
sale or other disposition by the Holders of such Registrable Securities.
(b)(i) If, at any time after giving written notice of its
intention to register any shares of Common Stock and prior to the effective date
of the registration statement filed in connection therewith the Company shall
determine for any reason not to register such shares of Common Stock, the
Company shall give written notice to the Shareholder and, thereupon, shall be
relieved of its obligation to register any Registrable Securities in connection
with such abandoned registration.
(ii) In case of a determination by the Company to delay the
registration of shares of its Common Stock pursuant to this Section 2.2, the
Company shall be permitted to delay the registration of Registrable Securities
for the same period as the delay in registering all other equity securities to
be included in such registration.
(iii) The Company shall not be obligated to register any
Holder's Registrable Securities pursuant to this Section 2.2 unless the sale or
other disposition of such Registrable Securities is made pursuant to the same
terms, conditions and
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<PAGE> 5
method of distribution applicable to the securities which the Company proposes
to register.
(iv) If any registration pursuant to Section 2.2 involves an
underwritten offering, the Company shall have the right to select the investment
bankers and underwriters or managing underwriters to administer the offering,
and any Registrable Securities requested by the Shareholder to be included in
any such registration shall be offered pursuant to an underwriting agreement
with the managing underwriter so selected by the Company.
(c) The Shareholder shall have the right to withdraw its
request for inclusion of all or any portion of the Registrable Securities in any
registration statement pursuant to this Section 2.2 by giving written notice to
the Company of its request to withdraw (a "Withdrawal Election"); PROVIDED,
HOWEVER, that a Withdrawal Election shall be irrevocable and the Shareholder
shall no longer have any right to include the withdrawn Registrable Securities
in such registration statement.
2.3 ALLOCATION OF SECURITIES INCLUDED IN REGISTRATION STATEMENT. (a) If
any requested registration pursuant to Section 2.1 involves an underwritten
offering and the managing underwriter shall advise the Company that, in its
view, the number of Registrable Securities requested to be included in such
registration (including those securities requested by the Company to be included
in such registration) exceeds the largest number (the "Section 2.1 Sale Number")
that can be sold in an orderly manner in such offering within a price range
acceptable to the Shareholder, the Company shall include in such registration:
(i) all Registrable Securities requested to be included in
such registration by the Shareholder, to the extent not in excess of the Section
2.1 Sale Number; and
(ii) To the extent that the number of Registrable Securities
requested to be included by the Shareholder is less than the Section 2.1 Sale
Number, such number of securities the Company proposes to register, if any, as
may be included without causing the Section 2.1 Sale Number to be exceeded.
If, as a result of the provisions of this Section 2.3(a), the Shareholder shall
not be entitled to include all Registrable Securities in a registration that the
Shareholder has requested to be included, the Shareholder may make a Withdrawal
Election; PROVIDED, HOWEVER, that the Withdrawal Election shall be irrevocable
and, after making a Withdrawal Election, the Shareholder shall no longer have
any right to include the withdrawn Registrable Securities in the registration
statement; and PROVIDED FURTHER that if as a result of such Withdrawal Election
no Registrable Securities are to be included in such registration, such
registration shall not constitute a Demand Registration for purposes of
determining whether the limitation on the number of Demand Registrations set
forth in Section 2.1(a)
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<PAGE> 6
has been met and the Company shall not thereafter be required to complete such
registration.
(b) If any registration pursuant to Section 2.2 involves an
underwritten offering and the managing underwriter shall advise the Company
that, in its view, the number of securities requested to be included in such
registration exceeds the number (the "Section 2.2 Sale Number") that can be sold
in an orderly manner in such offering within a price range acceptable to the
Company, the Company shall include in such offering (i) all the securities the
Company proposes to register, and (ii) to the extent that the shares of Common
Stock to be included by the Company are less than the Section 2.2 Sale Number,
such number of Registrable Securities requested to be included by the
Shareholder as will bring the total number of securities to be so registered to
the Section 2.2 Sale Number.
2.4 REGISTRATION PROCEDURES. If and whenever the Company is required by
the provisions of this Agreement to use its best efforts to effect or cause the
registration of any Registrable Securities, the Company shall, as expeditiously
as possible:
(a) prepare and file with the Commission a registration
statement with respect to all Registrable Securities required by this Agreement
to be covered thereby, and use its best efforts to cause such registration
statement to become and remain effective until the earliest to occur of (i) the
date on which all Registrable Securities covered by such registration statement
are sold, or (ii) the earlier of the date that is one hundred twenty (120) days
after such registration statement becomes effective; PROVIDED, HOWEVER, that
before filing a registration statement or prospectus, or any amendments or
supplements thereto, the Company will furnish to counsel selected by the
Shareholder copies of all documents proposed to be filed, which documents will
be subject to the reasonable review and comments of such counsel;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus as may be
necessary to keep such registration statement effective for the period required
by Section 2.4(a) above and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all Registrable Securities
covered by such registration statement; PROVIDED, HOWEVER, that before filing a
registration statement or prospectus, or any amendments or supplements thereto,
the Company will furnish to counsel selected by the Shareholder copies of all
documents proposed to be filed, which documents will be subject to the
reasonable review and comments of such counsel;
(c) furnish, without charge, to each seller of such
Registrable Securities and each underwriter, if any, of the securities covered
by such registration statement such number of copies of such registration
statement, each amendment and supplement thereto (in each case including all
exhibits), and the
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<PAGE> 7
prospectus included in such registration statement (including each preliminary
prospectus) in conformity with the requirements of the Securities Act, and other
documents as such seller and underwriter may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Securities
owned by such seller;
(d) use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under such other
securities or blue sky law of such jurisdictions as any sellers of Registrable
Securities or any managing underwriter, if any, shall reasonably request, and do
any and all other acts and things which may be reasonably necessary or advisable
to enable such sellers or underwriters to consummate the disposition of the
Registrable Securities in such jurisdictions, except that in no event shall the
Company be required to (i) qualify to do business as a foreign corporation in
any jurisdiction where it would not, but for the requirements of this paragraph
(d), be required to be so qualified, or (ii) subject itself to taxation in any
such jurisdiction;
(e) promptly notify each Holder selling Registrable Securities
covered by such registration statement and each underwriter, if any: (i) when
the registration statement, any pre-effective amendment, the prospectus or any
prospectus supplement related thereto or post-effective amendment to the
registration statement has been filed, and, with respect to the registration
statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the Commission for amendments or supplements to the
registration statement or the prospectus related thereto or for additional
information; (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the registration statement or the initiation of
any proceedings for that purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification of any
Registrable Securities for sale under the securities or blue sky laws of any
jurisdictions or the initiation of any proceeding for such purpose; and (v) of
the existence or occurrence of any fact or event which results or would
reasonably be expected to result in the registration statement, the prospectus
related thereto or any document incorporated therein by reference containing an
untrue statement of a material fact or omitting to state a material fact
required to be stated therein or necessary to make any statement therein in
light of the circumstances under which it was made, not misleading, and in case
the notification relates to an event described in clause (v), the Company shall
promptly prepare and furnish to each such seller and each underwriter, if any, a
reasonable number of copies of a prospectus supplemented or amended so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
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<PAGE> 8
(f) comply with all applicable rules and regulations of the
Commission, and make generally available to its securities holders, as soon as
reasonably practicable after the effective date of the registration statement,
an earnings statement (which need not be audited) covering the period of at
least twelve consecutive months beginning with the first day of the Company's
first calendar quarter after the effective date of the registration statement,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act and the rules and regulations thereunder;
(g) use its best efforts to cause all such Registrable
Securities covered by such registration statement to be listed on the principal
securities exchange on which Common Stock of the Company is then listed or, if
not so listed, on the National Association of Securities Dealers automated
quotation system; and
(h) enter into such customary agreements (including, if
applicable, an underwriting agreement in customary form containing, among other
provisions, standard provisions with respect to the indemnification of the
underwriters) and take such other actions as the Shareholder shall reasonably
request in order to expedite or facilitate the disposition of such Registrable
Securities.
2.5 OBLIGATION TO DISCONTINUE. Each Holder of Registrable Securities
agrees that upon receipt of any notice from the Company of the happening of any
event described in clause (iii) of Section 2.4(e), such Holder will discontinue
such Holder's disposition of Registrable Securities pursuant to the registration
statement until the effectiveness of such registration statement is no longer
suspended or proceedings for that purpose are no longer pending. Each Holder of
Registrable Securities also agrees that upon receipt of any notice from the
Company of the happening of any event described in clause (iv) of Section
2.4(e), such Holder will discontinue such Holder's disposition of Registrable
Securities pursuant to the registration statement in the jurisdiction specified
in such notice until the qualification of the Registrable Securities in the
jurisdiction specified in such notice is no longer suspended or proceedings for
that purpose are no longer pending. Each Holder of Registrable Securities
further agrees that upon receipt of any notice from the Company of the happening
of an event of the kind described in clause (v) of Section 2.4(e), such Holder
will discontinue such Holder's disposition of Registrable Securities pursuant to
the registration statement until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 2.4(e) and, if so
directed by the Company, will use its best efforts to deliver to the Company, or
will agree to destroy and provide a certificate to the Company regarding such
destruction, all copies, other than permanent file copies, then in such Holder's
possession of the prospectus covering such Registrable Securities that was in
effect at the time of receipt of such notice.
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<PAGE> 9
2.6 REGISTRATION EXPENSES. The Company shall, whether or not any
registration pursuant to this Agreement becomes effective, pay all expenses
incident to the Company's performance of or compliance with this Article 2,
including, without limitation, (i) Commission or stock exchange registration and
filing fees, (ii) fees and expenses of compliance with state securities or blue
sky laws and in connection with the preparation of a blue sky survey, including
without limitation, fees and expenses of blue sky counsel, (iii) printing
expenses, (iv) messenger and delivery expenses, (v) internal expenses
(including, without limitation, all salaries and expenses of the Company's
officers and employees performing legal and accounting duties), (vi) fees and
disbursements of counsel for the Company, (vii) fees and disbursements of all
independent public accountants (including the expenses of any audit and/or "cold
comfort" letter) and fees and expenses of other Persons, including special
experts, retained by the Company, and (viii) any fees and disbursements of
underwriters, if any, customarily paid by issuers or sellers of securities.
Notwithstanding the foregoing, the Shareholder shall pay or cause to be paid (a)
all underwriting discounts and commissions and transfer taxes, if any,
attributable to any Holder's Registrable Securities and (b) all fees and
disbursements, if any, of counsel to or other representatives of the
Shareholder.
2.7 CERTAIN LIMITATIONS ON REGISTRATION RIGHTS. In the case of any
registration under Section 2.1 pursuant to an underwritten offer, or in the case
of a registration pursuant to Section 2.2 if the Company has determined to enter
into an underwriting agreement in connection therewith, all Registrable
Securities to be included in such registration shall be subject to an
underwriting agreement and no Person may participate in such registration unless
such Person agrees to sell such Person's securities on the basis provided
therein and completes and/or executes all questionnaires and other documents
which must be executed in connection therewith.
2.8 LIMITATIONS ON SALE OR DISTRIBUTION OF OTHER SECURITIES. If
requested in writing by the Company or the managing underwriters, if any, of any
registration effected pursuant to Section 2.1 or 2.2, each Holder of Registrable
Securities agrees not to effect any public sale or distribution, including any
Rule 144 Open Market Transaction, of any Registrable Securities, or of any other
equity security of the Company or of any security convertible into or
exchangeable or exercisable for any equity security of the Company (other than
as part of such underwritten public offering) within 15 days before or 90 days
after the effective date of each underwritten offering made pursuant to such
registration statement; PROVIDED, HOWEVER, that such Holder may request a waiver
of such time period from the managing underwriter, for a period of time to be
not less than 60 days, which waiver shall not be unreasonably withheld.
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<PAGE> 10
2.9 INDEMNIFICATION. (a) In the event of any registration of any
securities of the Company under the Securities Act pursuant to Article 2, the
Company shall, and hereby does, indemnify and hold harmless, to the fullest
extent permitted by law, the Shareholder and each other seller of any
Registrable Securities covered by such registration statement, and their
respective directors, officers, fiduciaries, employees, stockholders, members
and general and limited partners (and the directors, officers, employees,
stockholders, members and partners thereof), each other Person who participates
as an underwriter or qualified independent underwriter ("independent
underwriter"), if any, in the offering or sale of such securities, each officer,
director, employee, stockholder or partner of such underwriter or independent
underwriter, and each other Person, if any, who controls such seller or any such
underwriter within the meaning of the Securities Act, against any and all
losses, claims, damages, liabilities, actions or proceedings in respect thereof
and expenses of whatsoever nature (including, without limitation, costs and
expenses of investigation and defense, reasonable fees of counsel and any
amounts paid in any settlement effected with the Company's consent)
(collectively, "Claims and Damages") suffered or incurred by an indemnified
party or to which any such indemnified party may become subject under the
Securities Act or otherwise, insofar as such Claims and Damages arise out of or
are based upon (i) any untrue statement or alleged untrue statement under which
such securities were registered under the Securities Act or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in any prospectus, or any
preliminary, final or summary prospectus or any amendment or supplement thereto,
together with the documents incorporated by reference therein, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading or (iii) any
violation by the Company of the Securities Act or any other federal, state or
common law rule or regulation applicable to the Company and related to any
action or inaction required of the Company in connection with any such
registration; PROVIDED, that the Company shall not be liable to any such
indemnified party in any such case to the extent such Claims or Damages arise
out of or are based upon an untrue statement or alleged untrue statement of a
material fact or omission or alleged omission of a material fact made in such
registration statement or amendment thereof or supplement thereto or in any such
prospectus or any preliminary, final or summary prospectus in reliance upon and
in conformity with written information furnished to the Company by or on behalf
of such indemnified party specifically for use therein.
(b) If Registrable Securities are included in the securities
as to which any registration under Sections 2.1 or 2.2 is being effected, the
Shareholder and each seller of Registrable
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<PAGE> 11
Securities (and, if the Company requires as a condition to including any
Registrable Securities in any registration statement filed in accordance with
Section 2.1 or 2.2, any underwriter and independent underwriter, if any) shall,
severally and not jointly, indemnify and hold harmless, to the extent permitted
by law, the Company, its directors, officers, fiduciaries, employees and
stockholders, members and general and limited partners with respect to Claims
and Damages arising out of or based upon any untrue statement or alleged untrue
statement of any material fact in, or omission or alleged omission of any
material fact from, such registration statement, any preliminary, final or
summary prospectus contained therein, or any amendment or supplement thereto, if
such statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company or its representatives by or on behalf of the Shareholder specifically
for use in such registration statement, preliminary, final or summary prospectus
or amendment or supplement or document incorporated by reference into any of the
foregoing.
(c) Indemnification similar to that specified in Section
2.10(a) and (b) (with appropriate modifications) shall be given by the Company
and each seller of Registrable Securities with respect to any required
registration or other qualification of securities in accordance with this
Agreement under any state securities and blue sky laws.
(d) Any person entitled to indemnification under this
Agreement shall notify promptly the indemnifying party in writing of the
commencement of any action or proceeding with respect to which a claim for
indemnification may be made pursuant to this Section 2.10, but the failure of
any indemnified party to provide such notice shall not relieve the indemnifying
party of its obligations under this Section 2.10, except to the extent the
indemnifying party is damaged or prejudiced thereby. In case any action or
proceeding is brought against an indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to assume the defense thereof, to the extent that it chooses, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party that it so chooses, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof; PROVIDED, HOWEVER, that if representation of both
parties by the same counsel is inappropriate under applicable standards of
professional conduct, then, in any such case, the indemnified party shall have
the right to assume or continue its own defense and the indemnifying party shall
be liable for all Claims and Damages arising thereunder and all reasonable
expenses therefor. If an indemnifying party has elected to assume the defense of
any action or proceeding or has otherwise acknowledged its obligation to
indemnify the indemnified party, such indemnifying party shall in no event be
liable for any settlement effected without its consent. No indemnifying party
shall
- 11 -
<PAGE> 12
consent to any settlement or the entry of any judgment without the prior written
consent of the indemnified party unless such settlement or judgment (i) provides
only for monetary damages, which shall be paid in full by the indemnifying
party, and (ii) includes as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect of the underlying claim or litigation.
(e) The indemnity agreements contained herein shall be in
addition to any other rights to indemnification or contribution which any
indemnified party may have pursuant to law or contract and shall remain
operative and in full force and effect regardless of any investigation made or
omitted by or on behalf of any indemnified party and shall survive the transfer
of the Registrable Securities by any such party.
3. GENERAL.
3.1 RULE 144. The Company covenants that it will timely file
the reports required to be filed by it under the Securities Act or the Exchange
Act (including but not limited to the reports under Section 13 and 15 (d) of the
Exchange Act referred to in Rule 144(c)(1) under the Securities Act), and will
take such further action as any Holder of Registrable Securities may reasonably
request, all to the extent required from time to time to enable such Holder to
sell Registrable Securities without registration under the Securities Act within
the limitation of the exemptions provided by Rule 144 under the Securities Act,
as such Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission. Upon the request of any Holder of
Registrable Securities, the Company will promptly deliver to such Holder a
written statement as to whether it has complied with such requirements.
3.2 AMENDMENTS AND WAIVERS. No amendment or waiver of any term or
provision of this Agreement shall be effective unless in writing signed by the
party to be charged. The waiver by any party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any subsequent
breach.
3.3 NOTICES. Except as otherwise provided in this Agreement, notices
and other communications under this Agreement shall be in writing and shall be
deemed to have been duly given on the date received by hand delivery, facsimile
transmission or registered mail, postage prepaid, addressed as follows:
to the Company:
The O'Gara Company
9113 LeSaint Drive
Fairfield, Ohio 45014
Attn: Abram Gordon, Esq.
Telephone No. (513) 874-2112
Facsimile No. (513) 874-1262
- 12 -
<PAGE> 13
with a copy to:
Taft, Stettinius & Hollister
1800 Star Bank Center
425 Walnut Street
Cincinnati, Ohio 45202
Attn: Thomas D. Heekin, Esq.
Telephone No. (513) 381-2838
Facsimile No. (513) 381-0205
and to the Shareholder:
American International Group, Inc.
70 Pine Street
New York, New York 10270
Attn: Howard I. Smith, Executive Vice President
Telephone No. (212) 720-6800
Facsimile No. (212) 509-4543
with a copy to:
American International Group, Inc.
70 Pine Street
New York, New York 10270
Attn: Corporate Secretary
Telephone No. (212) 770-5123
Facsimile No. (212) 785-1584
The Company and the Shareholder, by written notice given in accordance with this
Section 3.3, may change the address to which such notice or other communications
are to be sent.
3.4 LEGENDS. (a) Substantially the following legend shall be placed on
the certificates representing any shares of Common Stock issued to the
Shareholder by the Company pursuant to the Merger Agreement:
"The shares represented by this certificate are subject to the rights
and restrictions contained in a Registration Rights Agreement, dated as
of October __, 1997, copies of which are on file at the office of the
Secretary of the Company."
3.5 COMPANY REPRESENTATIONS. The Company represents and warrants to the
Shareholder that:
(a) The Company has all requisite power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby;
(b) The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Company;
- 13 -
<PAGE> 14
(c) This Agreement has been duly executed and delivered by the
Company and (assuming the due authorization, execution and delivery hereof by
the Shareholder) constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms;
(d) The execution and delivery of this Agreement do not, and
the consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, result in any violation of, or default (with or
without notice or lapse of time, or both) under, (i) any provision of the
charter or organizational documents of the Company, (ii) any judgment, order,
decree, statute, law, ordinance, rule or regulation by which the Company is
bound or to which any of its properties or assets is subject, other than, in the
case of clause (ii), any such violation or default that would not reasonably be
expected to have a material adverse effect on the financial condition or
operations of the Company and its consolidated subsidiaries, taken as a whole,
and would not impair the ability of the Company to perform its obligations under
this Agreement; and
(e) No filing or registration with, or authorization, consent
or approval of, any governmental authority is required by or with respect to the
Company in connection with the execution and delivery by the Company of this
Agreement or the consummation by the Company of the transactions contemplated
hereby, except as otherwise expressly provided herein or in the Merger
Agreement.
3.6 SHAREHOLDER REPRESENTATION. The Shareholder represents and warrants
to the Company that:
(a) The Shareholder has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby;
(b) The execution and delivery of this Agreement by the
Shareholder and the consummation by the Shareholder of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
on the part of the Shareholder;
(c) This Agreement has been duly executed and delivered by the
Shareholder and (assuming the due authorization, execution and delivery hereof
by the Company) constitutes a valid and binding obligation of the Shareholder,
enforceable against the Shareholder in accordance with its terms;
(d) The execution and delivery of this Agreement do not, and
the consummation of the transactions contemplated hereby and compliance with the
provisions hereof will not, result in any violation of, or default (with or
without notice or lapse of time, or both) under (i) any provision of the charter
or organizational documents of the Shareholder or (ii) any judgment, order,
decree, statute, law, ordinance, rule or regulation by which the Shareholder is
bound or to which any of its properties
- 14 -
<PAGE> 15
or assets is subject other than, in the case of clause (ii), any such
violations, defaults, rights, liens, security interests, charges or encumbrances
that would not reasonably be expected to have a material adverse effect on the
financial condition or operations of the Shareholder and its consolidated
subsidiaries, taken as a whole, and would not impair the ability of the
Shareholder to perform its obligations under this Agreement.
(e) No filing or registration with, or authorization, consent
or approval of, any governmental authority is required by or with respect to the
Shareholder in connection with the execution and delivery by the Shareholder of
this Agreement or the consummation by the Shareholder of the transactions
contemplated hereby, except as otherwise expressly provided herein.
3.7 MISCELLANEOUS.
(a) This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and the respective
successors and assigns of the parties hereto, whether so expressed or not. If
any Permitted Transferee shall acquire shares of Common Stock from the
Shareholder, whether by operation of law or otherwise (other than pursuant to
any offering registered under the Securities Act or any Rule 144 Open Market
Transaction), the Shareholder shall promptly notify the Company and such
Registrable Securities acquired from the Shareholder shall be held subject to
all of the terms of this Agreement, and by taking and holding such Registrable
Securities such Permitted Transferee shall be entitled to receive the benefits
of and be conclusively deemed to have agreed to be bound by and to perform all
of the terms and provisions of this Agreement. If the Company shall so request,
any such successor or assign shall agree in writing to acquire and hold the
Registrable Securities acquired from the Shareholder subject to all of the terms
hereof.
(b) This Agreement constitutes the entire understanding
between the parties with respect to the subject matter hereof and supersedes any
and all previous agreements among them relating to the subject matter hereof,
whether written, oral or implied.
(c) This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of New York, without giving effect to the
conflicts of law principles thereof.
(d) The Section and other headings contained in this Agreement
are for reference purposes only and shall not affect the meaning or
interpretation hereof.
(e) This Agreement may be executed in two or more
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which together shall be deemed to be one and the same
agreement.
- 15 -
<PAGE> 16
(f) Should any term or condition of this Agreement be
determined by a court of competent jurisdiction to be unenforceable for any
reason, including, without limitation, violation of statute or public policy,
such provision shall, if possible, be reformed by the parties hereto or, if the
parties cannot agree, by the appropriate court of competent jurisdiction to
comply with applicable legal requirements in a matter that is as close in its
intent and effect to the original provision as possible or, if such reformation
cannot be accomplished shall be stricken without affecting the validity of any
other term or condition of this Agreement.
(g) Each party hereto shall do and perform or cause to be done
and performed all such further acts and things and shall execute and deliver all
such other agreements, certificates, instruments, and documents as any other
party hereto reasonably may request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
AMERICAN INTERNATIONAL GROUP, INC.
By: /S/ HOWARD I. SMITH
----------------------------
Name:
--------------------------
Title:
-------------------------
By: /S/ KATHLEEN E. SHANNON
----------------------------
Name:
--------------------------
Title:
-------------------------
THE O'GARA COMPANY
By: /S/ ABRAM S. GORDON
----------------------------
Name: ABRAM S. GORDON
--------------------------
Title: VICE PRESIDENT
-------------------------
- 16 -
<PAGE> 1
Exhibit 21.1
The Kroll-O'Gara Company
Subsidiaries
O'Gara-Hess & Eisenhardt Armoring Company (Delaware) (100%)
O'Gara-Hess & Eisenhardt Armoring Company de Mexico, S.A. de
C.V. (Mexico) (100%)
O'Gara-Hess & Eisenhardt de Brasil LTDA (Brazil)(100%)
O'Gara Security International, Inc. (Delaware)(100%)
O'Gara Laura Automotive Group (Russia) (51%)
ZAO IMYA (Russia)(100%)
O'Gara France S.A. (France) (100%)
Labbe S.A. (France) (100% by O'Gara France S.A.)
Hellio Polds Lourds-Carrosserie, Tolerie, Peinture
S.A. (France) (100%)
SARL Normandie Carrosserie (France) (83.7%)
Societte De Blindage and de Secirite
(France) (100%)
O'Gara Philippines, Inc. (Philippines) (100%)
O'Gara Satellite Networks Limited (Ireland) (100%)
Next Destination Limited (U.K.) (100%)
International Training, Incorporated (Virginia) (100%)
Kroll Holdings, Inc. ("KHI") (Delaware) (100%)
Kroll Associates, Inc. (Delaware) (100%)
Kroll Associates (Asia) Limited (Hong Kong) (50%; 50% by KHI)
Kroll Information Services, Inc. (Delaware)(100%)
Kroll Associates U.K. Limited (England)(100%)
All other subsidiaries together do not meet the definition of a
Significant Subsidiary.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
March 13, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
The Kroll-O'Gara Company
Cincinnati, Ohio
We consent to the use in this Registration Statement of The Kroll-O'Gara Company
on Form S-1 of our report dated March 13, 1997 (August 8, 1997 as to Notes 7 and
17 to the financial statements) appearing in the Prospectus, which is a part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
New York, New York
March 12, 1998
<PAGE> 1
EXHIBIT 23.4
The Board of Directors
Kroll Holdings, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
New York, New York
March 12, 1998
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
We, the undersigned directors of The Kroll-O'Gara Company (the "Company")
hereby appoint Wilfred T. O'Gara and Abram S. Gordon or either of them, with
full power of substitution, our true and lawful attorneys and agents, to do any
and all acts and things in our names and on our behalf as directors of the
Company which said attorneys and agents, or either of them, may deem necessary
or advisable to enable the Company to comply with the Securities Act of 1933, as
amended, and the rules, regulations and requirements of the Securities and
Exchange Commission, in connection with the filing of a Registration Statement
on Form S-1 relating to the sale of shares of the Company's Common Stock,
including, without limitation, signing for us, or any of us, in our names as
directors of the Company, such Registration Statement and any and all amendments
thereto, and we hereby ratify and confirm all that said attorneys and agents, or
either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the rules and regulations thereunder, this Power of Attorney has been signed
below by the following persons in the capacities indicated as of the 12th day of
March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ JULES B. KROLL Chairman of the Board
- ------------------------------------------------
Jules B. Kroll
/s/ THOMAS M. O'GARA Vice Chairman of the Board
- ------------------------------------------------
Thomas M. O'Gara
/s/ WILFRED T. O'GARA Director
- ------------------------------------------------
Wilfred T. O'Gara
/s/ MICHAEL G. CHERKASKY Director
- ------------------------------------------------
Michael G. Cherkasky
/s/ MARSHALL S. COGAN Director
- ------------------------------------------------
Marshall S. Cogan
/s/ MICHAEL J. LENNON Director
- ------------------------------------------------
Michael J. Lennon
/s/ RAYMOND E. MABUS Director
- ------------------------------------------------
Raymond E. Mabus
/s/ HUGH E. PRICE Director
- ------------------------------------------------
Hugh E. Price
/s/ JERRY E. RITTER Director
- ------------------------------------------------
Jerry E. Ritter
/s/ WILLIAM S. SESSIONS Director
- ------------------------------------------------
William S. Sessions
/s/ HOWARD I. SMITH Director
- ------------------------------------------------
Howard I. Smith
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from consolidated
balance sheets, consolidated statements of operations, consolidated statements
of shareholders' equity, consolidated statements of cash flows.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,899
<SECURITIES> 23
<RECEIVABLES> 53,749
<ALLOWANCES> (2,516)
<INVENTORY> 19,453
<CURRENT-ASSETS> 86,991
<PP&E> 30,060
<DEPRECIATION> 15,448
<TOTAL-ASSETS> 133,971
<CURRENT-LIABILITIES> 55,465
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 27,818
<TOTAL-LIABILITY-AND-EQUITY> 133,971
<SALES> 190,413
<TOTAL-REVENUES> 190,413
<CGS> 131,644
<TOTAL-COSTS> 131,644
<OTHER-EXPENSES> 49,798
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,806
<INCOME-PRETAX> 3,615
<INCOME-TAX> 2,352
<INCOME-CONTINUING> 1,264
<DISCONTINUED> 0
<EXTRAORDINARY> (194)
<CHANGES> (360)
<NET-INCOME> 710
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
