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Filed Pursuant to Rule 424(b)(3)
File No. 333-74063
BACKGROUND AMERICA, INC.
TO OUR SHAREHOLDERS:
You are cordially invited to attend a Special Meeting of Shareholders of
Background America, Inc. to be held on June 16, 1999, at 10:00 a.m., local time,
at the principal executive offices of Background America at 1900 Church Street,
Suite 400, Nashville, Tennessee.
At the special meeting, you will be asked to consider and vote on a proposal to
approve an Agreement and Plan of Merger, as amended, which will result in
Background America becoming a wholly owned subsidiary of The Kroll-O'Gara
Company. Upon completion of the merger, each outstanding share of Background
America common and preferred stock will be exchanged for 0.2689628 of a share of
Kroll-O'Gara common stock, subject to withholding of 10% of the shares as
security for the payment of claims Kroll-O'Gara may have as a result of the
merger. Cash will be paid in lieu of issuing fractional shares. You have the
right to dissent from the merger.
Kroll-O'Gara will issue up to 989,431 shares of its common stock as a result of
the merger. Kroll-O'Gara's common stock trades on the Nasdaq National Market
under the symbol "KROG."
This document describes the merger agreement and the proposed merger in more
detail, including the conditions which must be met to complete the merger and
the effects of the merger on the rights of Background America shareholders.
PLEASE READ THIS DOCUMENT CAREFULLY AND CONSIDER THOUGHTFULLY THE INFORMATION
CONTAINED IN IT, INCLUDING THAT SET FORTH UNDER THE CAPTION "RISK FACTORS"
BEGINNING ON PAGE 14.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE MERGER
AGREEMENT.
Approval of the merger agreement will require the affirmative vote of at least a
majority of the votes entitled to be cast at the special meeting by the holders
of the outstanding shares of Background America common stock and preferred stock
voting together, as well as the affirmative vote of at least two-thirds of the
votes entitled to be cast at the meeting by the holders of the outstanding
shares of Background America preferred stock, voting separately as a class.
Whether or not you plan to attend the meeting, you are urged to complete, sign,
and return promptly the enclosed proxy card.
We look forward to seeing you at the special meeting.
Sincerely,
/s/ Michael D. Shmerling
Michael D. Shmerling
Chairman of the Board
and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS PROXY
STATEMENT/ PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated May 14, 1999 and was first mailed to
shareholders on or about May 18, 1999.
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BACKGROUND AMERICA, INC.
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
Background America, Inc. will hold a Special Meeting of Shareholders on June 16,
1999, at 10:00 a.m., local time, at 1900 Church Street, Suite 400, Nashville,
Tennessee, to vote on:
1. A proposal to approve the Agreement and Plan of Merger, dated as of January
21, 1999 and amended as of April 20, 1999, by and among The Kroll-O'Gara
Company, Kroll-O'Gara Tennessee, Inc., a wholly owned subsidiary of
Kroll-O'Gara, and Background America, Inc., providing for the merger of
Kroll-O'Gara Tennessee, Inc. into Background America with the result that
Background America will become a wholly owned subsidiary of Kroll-O'Gara,
and the waiver of any liquidation preference otherwise payable to holders of
Background America preferred stock.
2. Any other matters that properly come before the special meeting or any
adjournment or postponement of the special meeting.
Background America shareholders at the close of business on May 14, 1999 are
receiving notice of and may vote at the special meeting. Approval of the
Agreement and Plan of Merger requires the affirmative vote of at least a
majority of the outstanding shares of Background America's common and preferred
stock voting together, as well as the affirmative vote of the holders of at
least two-thirds (66 2/3%) of the outstanding shares of Background America's
preferred stock voting as a separate class.
The special meeting may be adjourned from time to time without notice other than
an announcement at the special meeting or at any other adjournment. Any business
for which notice is given above may be transacted when the special meeting
reconvenes.
Background America shareholders have dissenters' rights in connection with the
merger. These rights are described in the accompanying proxy
statement/prospectus.
PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED
ENVELOPE PROMPTLY, whether or not you plan to attend the special meeting. If you
attend the special meeting, you may vote in person if you wish, even if you
previously returned your proxy card.
By Order of the Board of Directors
/s/ Michael D. Shmerling
Michael D. Shmerling
Chairman of the Board
and Chief Executive Officer
May 14, 1999
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. IF WE COMPLETE THE
MERGER, WE WILL SEND YOU INSTRUCTIONS ON HOW TO EXCHANGE YOUR STOCK
CERTIFICATES.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................... 1
The Companies............................................. 1
The Merger................................................ 1
Differences in Rights of Shareholders..................... 4
Dissenters' Rights........................................ 4
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION........................... 5
Information Presented..................................... 5
Other Relevant Information................................ 6
Recent Developments....................................... 6
Kroll-O'Gara Selected Consolidated Financial
Information............................................ 8
Background America Selected Consolidated Financial
Information............................................ 9
Kroll-O'Gara and Background America Selected Unaudited Pro
Forma Combined Condensed Financial Information......... 10
Kroll-O'Gara and Background America Selected Unaudited Pro
Forma Combined Condensed Financial Information
Including Kizorek, Inc................................. 11
Unaudited Comparative Per Share Information............... 12
RISK FACTORS................................................ 14
THE SPECIAL MEETING......................................... 17
Time and Place; Purpose................................... 17
Proxies................................................... 17
Solicitation of Proxies................................... 17
Record Date and Voting Rights............................. 17
THE MERGER.................................................. 19
Background of the Merger.................................. 19
Reasons for and Advantages of the Merger.................. 19
Disadvantages of the Merger............................... 21
Interests of Certain Persons in the Merger................ 21
Accounting Treatment...................................... 23
United States Federal Income Tax Consequences............. 23
Federal Securities Law Consequences....................... 24
Dissenters' Rights........................................ 24
THE MERGER AGREEMENT........................................ 26
Terms of the Merger....................................... 26
The Escrow Fund........................................... 27
Exchange of Certificates.................................. 28
Representations and Warranties............................ 29
Conduct of Business by Background America Pending the
Merger................................................. 30
</TABLE>
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<TABLE>
<S> <C>
Conditions to the Merger.................................. 31
Termination............................................... 32
MARKET PRICES AND DIVIDENDS................................. 32
Market Prices............................................. 32
Dividends................................................. 33
THE KROLL-O'GARA COMPANY.................................... 34
BACKGROUND AMERICA, INC. ................................... 35
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 35
Business.................................................. 43
Principal Shareholders and Holdings of Management......... 47
DESCRIPTION OF KROLL-O'GARA CAPITAL STOCK................... 48
COMPARISON OF RIGHTS OF HOLDERS OF KROLL-O'GARA COMMON STOCK
AND BACKGROUND AMERICA COMMON STOCK....................... 50
RIGHTS OF HOLDERS OF BACKGROUND AMERICA PREFERRED STOCK..... 54
LEGAL MATTERS............................................... 55
EXPERTS..................................................... 56
OTHER BUSINESS.............................................. 56
WHERE YOU CAN FIND MORE INFORMATION......................... 57
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A: Agreement and Plan of Merger................... A-1
APPENDIX B: Business Corporations -- Dissenters' Rights.... B-1
</TABLE>
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SUMMARY
This summary highlights selected information from this document. It does not
contain all the information that is important to you. You should read this
entire document carefully. For additional information, see "Where You Can Find
More Information" on page 57.
We call this document a proxy statement/prospectus. It is a proxy statement sent
by Background America to you and the other shareholders of Background America.
It also is a prospectus of The Kroll-O'Gara Company covering the shares of
Kroll-O'Gara common stock which you and the other shareholders of Background
America will receive if the merger is completed. These Kroll-O'Gara shares have
been registered with the Securities and Exchange Commission. Background America
has supplied the information in this document which relates to it, and
Kroll-O'Gara has supplied the information which relates to it.
THE COMPANIES (PAGES 34 AND 35)
THE KROLL-O'GARA COMPANY
9113 LeSaint Drive
Fairfield, Ohio 45014
(513) 874-2112
Kroll-O'Gara is a leading global provider of a broad range of specialized
products and services designed to provide governments, businesses and
individuals with information, analysis, training, advice and products that
mitigate risks. Kroll-O'Gara has a network of 60 offices in 19 countries and had
1998 revenues of $247.2 million.
BACKGROUND AMERICA, INC.
1900 Church Street, Suite 400
Nashville, Tennessee 37203
(615) 320-9800
Background America provides background investigation services to government,
corporate, not-for-profit, professional and other clients. Headquartered in
Nashville, Tennessee, Background America maintains operations centers in
Hampstead, Maryland and Clearwater, Florida.
THE MERGER
GENERAL
We propose a merger as a result of which Background America will be acquired by,
and will become a wholly owned subsidiary of, Kroll-O'Gara. We expect to
complete the merger in June 1999. The merger agreement is the document that
governs the merger. We have attached this agreement as Appendix A to this proxy
statement/prospectus, and we encourage you to read it.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGES 26-28)
The merger agreement provides that each share of Background America common or
preferred stock which you own just before the merger will convert to 0.2689628
of a share of Kroll-O'Gara common stock. On May 13, 1999, the closing price of
Kroll-O'Gara common stock was $21.125 per share, which means that the value of
0.2689628 of a share of Kroll-O'Gara common stock was $5.68 on that date. This
value will vary from time to time as the price of Kroll-O'Gara common stock
fluctuates.
At least initially, you will receive only 90% of the shares of Kroll-O'Gara
common stock into which your Background America common or preferred stock
converts. The remaining 10% will be deposited in an escrow fund as security for
claims Kroll-O'Gara may have as a result of the merger.
After one year, any shares of Kroll-O'Gara common stock in the escrow fund which
are not subject to claims by, and return to, Kroll-O'Gara will be released and
apportioned to former Background America shareholders. If the amount required to
pay claims against the escrow equals or exceeds the value of the shares in the
escrow, you will not receive any shares from the escrow. Therefore, it is
possible that you will not receive
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any shares of Kroll-O'Gara common stock beyond the 90% issued at the time of the
merger.
The escrow fund will be Kroll-O'Gara's only source of indemnification for claims
relating to the merger. If you do not properly exercise dissenters' rights in
connection with the merger, you will be deemed to have agreed to the escrow as
described in this document.
In the merger you will receive only whole shares of Kroll-O'Gara stock and cash
in payment for any fractional share.
SPECIAL INFORMATION FOR OPTION AND WARRANT HOLDERS (PAGE 26)
In addition to its shareholders, Background America is furnishing this proxy
statement/ prospectus to holders of its stock options and warrants in connection
with the solicitation of the consents described below.
The merger agreement requires that the holders of all options and warrants to
purchase Background America common stock must consent to amending these options
and warrants so that, unless previously exercised, they survive the merger and
become exercisable for Kroll-O'Gara common stock. In addition, holders of stock
options and warrants will be asked to decide whether to exercise their options
and/or warrants at the time of the merger. Options and warrants which are not
exercised will remain outstanding as options and warrants to purchase
Kroll-O'Gara common stock. The price of each option and warrant outstanding
after the merger, and the number of shares issuable on exercise, will be
proportionately adjusted in accordance with the merger exchange ratio of
0.2689628 of a share of Kroll-O'Gara common stock for each share of Background
America stock.
If you hold options and/or warrants to purchase Background America common stock
and you elect to exercise them at the time of the merger, 10% of the shares of
Kroll-O'Gara common stock that you receive in the merger which are attributable
to those options and warrants will be subject to escrow. If you do not exercise
your options and warrants until after the merger, the shares of Kroll-O'Gara
common stock that you receive upon exercise will not be subject to escrow.
COMPARATIVE PER SHARE INFORMATION (PAGE 12)
Kroll-O'Gara's stock trades on the National Market tier of The Nasdaq Stock
Market. On January 21, 1999, the last trading day before we announced the
merger, Kroll-O'Gara common stock closed at $37.25 per share. On May 13, 1999,
Kroll-O'Gara common stock closed at $21.125 per share. There is no trading
market for Background America's stock.
You can obtain current stock price quotations for Kroll-O'Gara common stock
(symbol "KROG") from a newspaper, on the Internet or by calling your broker.
REASONS FOR THE MERGER (PAGE 19)
The Background America Board of Directors believes the merger will benefit both
you and Background America for a number of reasons, including providing you with
ownership in a larger, public company and with liquidity for your investment and
providing Background America with access to capital resources for the
development of its business.
VOTE REQUIRED AND VOTING AGREEMENT (PAGE 18)
To approve the merger, Background America shareholders holding a majority of the
outstanding shares of Background America common and preferred stock, voting
together, must vote in favor of the merger agreement. Additionally, the merger
must be approved by the holders of at least 66 2/3% of the outstanding shares of
Background America preferred stock, voting as a separate class.
Three of the holders of Background America common stock, who together own 83.2%
of the common stock, and six of the holders of Background America preferred
stock, who together own 85.9% of the preferred stock, have entered into an
agreement committing themselves to vote FOR the merger. These percentages
include shares held by Michael D. Shmerling,
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Background America's Chief Executive Officer, and shares held by Alan Wernick, a
director. In addition, based upon the unanimous recommendation of the Board, we
expect that Background America's other executive officers and directors, who own
approximately 4% of the common and 1% of the preferred stock, also will vote all
of their shares to approve the merger agreement. Accordingly, we expect that the
merger will be approved regardless of the vote by other shareholders.
EXCHANGE OF CERTIFICATES (PAGE 28)
If the merger is completed, your shares of Background America stock will be
converted into shares of Kroll-O'Gara common stock and you will need to exchange
your Background America stock certificates for Kroll-O'Gara stock certificates.
If we complete the merger, we will send you detailed instructions on how to
exchange your stock certificates. Please do not send us any stock certificates
until you receive these instructions.
WHAT WE NEED TO DO TO COMPLETE THE MERGER (PAGE 31)
The completion of the merger depends on a number of conditions being met. These
conditions are set forth in the merger agreement. Some of the conditions are:
1. Background America shareholders must approve the merger agreement;
2. there must be no governmental order blocking completion of the merger, and
no governmental proceeding trying to block the merger;
3. Kroll-O'Gara must receive a letter from its independent public accountants
stating that the merger will qualify for "pooling of interests" accounting
treatment and Background America must receive a letter from its accountants
as to its poolability;
4. Holders of no more than 7.5% of the outstanding stock of Background America
may exercise dissenters' rights; and
5. Holders of Background America's outstanding options and warrants must
consent to amending these options and warrants so that, unless previously
exercised, they survive the merger, are exercisable for Kroll-O'Gara common
stock and otherwise do not interfere with Kroll-O'Gara's ability to account
for the merger as a "pooling of interests."
Unless prohibited by law, either Kroll-O'Gara or Background America could waive
a condition to the merger that has not been satisfied and complete the merger
anyway.
We cannot be certain whether or when any of these conditions will be satisfied,
or waived if permissible. We cannot be certain that we will complete the merger.
TERMINATION OF THE MERGER AGREEMENT (PAGE 32)
The two companies can agree at any time to terminate the merger agreement
without completing the merger, even if the Background America shareholders
already have approved the merger.
Either company also can terminate the merger agreement if:
1. the merger is not completed by June 30, 1999; or
2. the other company materially violates any of its representations, warranties
or obligations under the merger agreement.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 23)
We expect that the shareholders of Background America will not recognize any
gain or loss for U.S. federal income tax purposes in the merger, except in
connection with any cash that they receive instead of fractional shares. This
tax treatment will not apply, however, to any Background America shareholder who
exercises dissenters' rights under Tennessee law. Additionally, the exercise of
options and warrants may result in taxable income.
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Determining the actual tax consequences of the merger to you as a taxpayer can
be complicated. Your tax treatment will depend on your specific situation. You
should consult your tax advisor for a full understanding of the tax consequences
to you of the merger.
ACCOUNTING TREATMENT (PAGE 23)
We expect the merger to qualify as a "pooling of interests," which means that,
for accounting and financial reporting purposes, Kroll-O'Gara will treat
Background America as if it had always been a part of Kroll-O'Gara.
MANAGEMENT OF KROLL-O'GARA AFTER THE MERGER
The current directors and executive officers of Kroll-O'Gara will remain
unchanged after the merger.
INTERESTS OF BACKGROUND AMERICA'S DIRECTORS AND OFFICERS IN THE MERGER (PAGE 21)
Some directors and officers of Background America have interests in the merger
that are, or may be, different from your interests. Background America has nine
directors and seven officers, one of whom also is a director. Four of the
directors and six of the officers hold options to purchase shares of Background
America common stock which, if not exercised at the time of the merger, will be
converted into options to purchase Kroll-O'Gara common stock. One of these
directors also holds warrants to purchase Background America common stock which
will be converted into options to purchase Kroll-O'Gara common stock.
Four of Background America's officers have entered into employment agreements
with Background America which will be effective at the time of the merger, and
three of these officers also will receive "stay" bonuses from Kroll-O'Gara if
the merger is completed and they stay in the employ of Kroll-O'Gara. In addition
some officers and directors own or have interests in companies that may have
business dealings with Background America after the merger.
The Board of Directors of Background America was aware of these interests and
took them into account in approving the merger agreement.
DIFFERENCES IN RIGHTS OF SHAREHOLDERS (PAGE 50)
Tennessee law and Background America's Charter and Bylaws currently govern your
rights as a shareholder of Background America. Kroll-O'Gara is an Ohio
corporation and, if the merger is completed, Ohio law and Kroll-O'Gara's
Articles of Incorporation and Code of Regulations will govern your shareholder
rights.
Additionally, if you own Background America preferred stock, you have certain
preferential rights as a preferred stock owner which you will lose as a holder
of Kroll-O'Gara common stock.
DISSENTERS' RIGHTS (PAGE 24)
Tennessee law permits holders of Background America common and preferred stock
to dissent from the merger and to have the fair value of their stock appraised
by a court and paid to them in cash. To do this, holders of dissenting shares
must follow required procedures, including filing notices with us and either
abstaining or voting against the merger. If you dissent from the merger and
follow the required procedures, your shares of Background America common and/or
preferred stock will not become shares of Kroll-O'Gara common stock. Instead,
your only right will be to receive the appraised value of your shares in cash.
We have attached the applicable provisions of Tennessee law related to
dissenters' rights to this proxy statement/prospectus as Appendix B.
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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
INFORMATION PRESENTED
The following pages contain tables which present, either singly or in
combination, two types of selected financial information for Kroll-O'Gara and
Background America.
(1) Historical financial information -- This is consolidated financial
information which has not been restated or adjusted to give effect to
transactions which occurred after it was prepared or to transactions which are
proposed.
Selected historical financial information for Kroll-O'Gara appears on page
8, and selected historical financial information for Background America appears
on page 9.
Except as discussed below, the selected historical financial information
for Kroll-O'Gara and Background America is derived from their full audited
historical financial statements and notes which are incorporated by reference or
set forth elsewhere in this document. You should read the selected historical
financial information of each company together with its full historical
financial statements and their notes.
The selected historical financial information for Kroll-O'Gara includes
data as of December 31, 1994, 1995 and 1996 and for the years ended December 31,
1994 and 1995 that is derived from unaudited consolidated financial statements
of Kroll-O'Gara. The selected historical financial information for Background
America includes data as of December 31, 1995 and for the period ended December
31, 1995 that is derived from unaudited consolidated financial statements of
Background America. The selected historical financial information for Background
America includes data as of December 31, 1996 and for the year ended December
31, 1996 that is derived from the audited consolidated financial statements of
Background America. These audited and unaudited financial statements are not
incorporated by reference or included in this document.
You also should read Kroll-O'Gara's and Background America's selected
historical financial information together with each company's "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
is incorporated by reference or included elsewhere in this document.
(2) Pro forma financial information -- This is unaudited data which assumes
something happened at an earlier time, although the event may not be reflected
in the company's historical financial statements. The following pro forma
information is presented:
<TABLE>
<S> <C> <C>
Page 10 -- Pro forma selected financial information for Kroll-O'Gara
which is based on Kroll-O'Gara's historical financial
statements and assumes Background America was merged with
Kroll-O'Gara throughout the time periods or at the times
presented. See also the related full pro forma financial
statements beginning on page F-29.
Page 11 -- Pro forma selected financial information for Kroll-O'Gara
which is based on Kroll-O'Gara's historical financial
statements and assumes that both Background America and
Kizorek, Inc. were merged with Kroll-O'Gara throughout the
time period presented. Kizorek was acquired by Kroll-O'Gara
on September 1, 1998, in a transaction accounted for as a
purchase, effective for accounting purposes on July 1, 1998.
Under purchase accounting, the results of operations of
Kizorek actually are included in Kroll-O'Gara's historical
financial statements only from July 1, 1998 forward. See
also the related full pro forma financial statement
beginning on page F-35.
</TABLE>
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You need to keep a number of things in mind when you read the pro forma
information in this document:
- Pro forma financial information does not include transaction fees and
costs incident to an acquisition, nor does it include post-merger costs
associated with integrating the operations of the acquired company or
companies with Kroll-O'Gara's operations. Kroll-O'Gara currently expects
to incur nonrecurring charges of approximately $2.0 million, net of tax
benefits, for these purposes in the acquisition of Background America.
- Pro forma information does not include discontinued operations,
extraordinary items or the cumulative effects of accounting changes. The
basic and diluted per share impact of these items, if and when
applicable, are disclosed in the related full pro forma financial
statements beginning on page F-28.
- Pro forma data does not reflect any reduced operating expenses or other
financial benefits which may be achieved after a merger.
- Pro forma data does not show how Kroll-O'Gara actually would have
performed had an acquisition taken place at the beginning of the time
periods presented.
- As a result, although -- under one set of assumptions -- the pro forma
data in this proxy statement/prospectus may illustrate some of the
financial characteristics of Kroll-O'Gara after the acquisition of
Background America, it does not predict or suggest future results.
OTHER RELEVANT INFORMATION
In reviewing the financial information which follows, you also should know,
and bear in mind, the following:
- Kroll-O'Gara completed acquisitions using the purchase method of
accounting with aggregate purchase prices totalling approximately $23.2
million in 1997 and approximately $36.5 million in 1998. As a result,
financial results from period-to-period are not comparable.
- Kroll-O'Gara's full year 1997 results were impacted significantly by
approximately $7.2 million of costs relating to the merger in December
1997 with Kroll Holdings, Inc., which was accounted for as a pooling of
interests.
- Kroll-O'Gara's full year 1998 results also were impacted significantly by
approximately $5.3 million of costs relating to mergers in December 1998
with Laboratory Specialists of America, Inc., Securify Inc. and Schiff &
Associates, Inc. which were accounted for as poolings of interest.
- Prior to October 28, 1996, a number of the entities that now are a part
of Kroll-O'Gara were not subject to federal and state income taxes.
- The pro forma basic and diluted earnings per share information presented
assumes that no shares escrowed in the Background America merger
ultimately are returned to Kroll-O'Gara and cancelled. The pro forma
information on pages F-28 to F-36 includes footnote disclosure of the
impact on the share information if all shares to be escrowed were
returned to Kroll-O'Gara.
RECENT DEVELOPMENTS
- On April 28, 1999, Kroll-O'Gara's Board of Directors approved a formal
plan to discontinue operations of Kroll-O'Gara's Voice and Data
Communications Group. Kroll-O'Gara intends to make the assets of the
segment available for sale immediately and expects to complete the
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disposal of this segment within the next twelve months. As a result of
the plan to discontinue operations, the historical financial statements
of Kroll-O'Gara have been restated for all periods presented to reflect
the discontinued operation's impact on those periods.
- In the first quarter of 1999, Kroll-O'Gara recorded revenues of $65.6
million, an increase of $13.2 million as compared to revenues of $52.4
million in the first quarter of 1998. Gross profit for the quarter was
$24.7 million, an increase of $6.4 million over gross profit of $18.3
million in the first quarter of 1998. Income from continuing operations
was $3.4 million for the quarter as compared to $3.1 million in 1998. Net
income was $2.4 million for the first quarter of 1999 as compared to $3.2
million in 1998. Diluted earnings per share for the first quarter of 1999
was $0.16 per share from continuing operations and $0.11 per share from
reported net income. In 1998, diluted earnings per share for the first
quarter was $0.20 per share from continuing operations and $0.20 per
share from reported net income. In 1999, net income includes the effect
of a loss from operations from a discontinued business, net of tax, of
$0.2 million as well as the cumulative effect of a change in accounting
principle, net of tax, of $0.8 million. The cumulative effect of a change
in accounting principle was a result of adoption of the American
Institute of Certified Public Accountant's Statement of Position 98-5,
"Reporting on the Cost of Start-Up Activities." Net income in 1998
includes the gain from operations of a discontinued business net of tax
of $0.1 million.
In the first quarter of 1999, Kroll-O'Gara began implementation of a plan
to reduce costs and improve operating efficiencies and recorded a
one-time, pre-tax restructuring charge of approximately $0.5 million.
Kroll-O'Gara expects to complete the restructuring in the second quarter
of 1999 with an additional one-time, pre-tax restructuring charge of
approximately $3.5 million to $4.5 million. The principal elements of the
restructuring plan are the closure of two Investigations and Intelligence
Group offices and the elimination of approximately 82 employees. The
primary components of the restructuring charge in the first quarter were
severance costs.
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KROLL-O'GARA SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................... $91,338 $92,955 $157,148 $188,665 $247,192
Cost of sales........................................... 57,990 65,106 111,640 125,453 159,187
------- ------- -------- -------- --------
Gross profit.......................................... 33,348 27,849 45,508 63,212 88,005
Selling, general and administrative expenses, including
amortization.......................................... 32,227 30,836 36,138 44,589 57,901
Merger related costs.................................... -- -- -- 7,205 5,339
Asset impairment........................................ -- -- 125 -- --
------- ------- -------- -------- --------
Operating income (loss)............................... 1,121 (2,987) 9,245 11,418 24,765
Interest expense........................................ (2,599) (2,827) (3,002) (4,726) (4,194)
Other income (expense), net............................. 533 36 332 (326) 1,310
------- ------- -------- -------- --------
Income (loss) from continuing operations before
minority interest, provision (benefit) for income
taxes, extraordinary item and cumulative effect of
change in accounting principle...................... (945) (5,778) 6,575 6,367 21,881
Minority interest....................................... -- -- -- (156) --
------- ------- -------- -------- --------
Income (loss) from continuing operations before
provision (benefit) for income taxes, extraordinary
item and cumulative effect of change in accounting
principle........................................... (945) (5,778) 6,575 6,211 21,881
Provision (benefit) for income taxes.................... (1,540) (824) 365 3,305 7,466
------- ------- -------- -------- --------
Income (loss) from continuing operations before
extraordinary item and cumulative effect of change
in accounting principle............................. 595 (4,954) 6,210 2,906 14,415
Loss from operations and disposal of discontinued
clinical business, net of tax......................... -- -- (1,274) -- --
Income (loss) from operations of discontinued Voice and
Data Communications Group, net........................ (44) (676) 332 (305) (1,326)
------- ------- -------- -------- --------
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle............ 551 (5,630) 5,268 2,601 13,089
Extraordinary item, net of tax benefit.................. -- -- -- (194) --
------- ------- -------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle................................ 551 (5,630) 5,268 2,407 13,089
Cumulative effect of change in accounting principle, net
of tax benefit........................................ -- -- -- (360) --
------- ------- -------- -------- --------
Net income (loss)..................................... 551 (5,630) 5,268 2,047 13,089
Dividends on preferred stock............................ -- 13 -- -- --
------- ------- -------- -------- --------
Net income (loss) available to common shareholders.... $ 551 $(5,643) $ 5,268 $ 2,047 $ 13,089
======= ======= ======== ======== ========
Basic earnings (loss) per share from continuing
operations............................................ $ 0.07 $ (0.46) $ 0.54 $ 0.21 $ 0.78
======= ======= ======== ======== ========
Basic weighted average shares outstanding............... 8,926 10,884 11,607 14,007 18,439
======= ======= ======== ======== ========
Diluted earnings (loss) per share from continuing
operations............................................ $ 0.02 $ (0.46) $ 0.50 $ 0.20 $ 0.76
======= ======= ======== ======== ========
Diluted weighted average shares outstanding............. 9,384 10,884 12,161 14,799 18,965
======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $17,261 $ 5,130 $11,991 $ 35,278 $ 83,370
Net property, plant and equipment........................ 7,752 8,305 10,763 17,435 23,825
Total assets............................................. 70,772 71,871 89,998 143,869 243,722
Long-term debt, including current portion................ 28,010 29,072 27,939 54,239 41,223
Shareholders' equity..................................... 16,926 11,471 23,117 38,468 141,095
</TABLE>
8
<PAGE> 13
BACKGROUND AMERICA SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997 1998
---- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ -- $ 1,776 $ 4,221 $ 7,351
Cost of sales........................................... -- 1,624 3,448 5,104
---- ------- ------- -------
Gross profit.......................................... -- 152 773 2,247
Selling, general and administrative expenses, including
amortization.......................................... 76 1,237 2,178 3,393
Merger related costs.................................... -- -- -- 388
---- ------- ------- -------
Operating loss........................................ (76) (1,085) (1,405) (1,534)
Interest expense........................................ -- (42) (84) (12)
Other income (expense), net............................. -- (2) 152 130
---- ------- ------- -------
Net loss.............................................. $(76) $(1,129) $(1,337) $(1,416)
==== ======= ======= =======
AS OF DECEMBER 31,
-------------------------------------
1995 1996 1997 1998
---- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital......................................... $(86) $(1,365) $ 3,051 $ 1,406
Property, plant and equipment, net...................... 20 343 629 747
Total assets............................................ 61 1,675 5,202 4,646
Long-term debt, including current portion............... 70 1,310 152 124
Shareholders' deficit................................... (66) (243) (1,575) (2,681)
</TABLE>
9
<PAGE> 14
KROLL-O'GARA AND BACKGROUND AMERICA
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $158,924 $192,886 $254,543
Cost of sales............................................... 113,264 128,901 164,291
-------- -------- --------
Gross profit.............................................. 45,660 63,985 90,252
Selling, general and administrative expenses, including
amortization.............................................. 37,375 46,767 61,294
Merger related costs........................................ -- 7,205 5,727
Asset impairment............................................ 125 -- --
-------- -------- --------
Operating income.......................................... 8,160 10,013 23,231
Interest expense............................................ (3,044) (4,810) (4,206)
Other income (expense), net................................. 330 (477) 1,440
-------- -------- --------
Income from continuing operations before minority
interest, provision for income taxes, extraordinary
item and cumulative effect of change in accounting
principle.............................................. 5,446 5,030 20,465
Minority interest........................................... -- (156) --
-------- -------- --------
Income from continuing operations before provision for
income taxes, extraordinary item and cumulative effect
of change in accounting principle...................... 5,446 4,874 20,465
Provision for income taxes.................................. 365 3,305 7,466
-------- -------- --------
Income from continuing operations......................... $ 5,081 $ 1,569 $ 12,999
======== ======== ========
Basic earnings per share from continuing operations......... $ 0.42 $ 0.11 $ 0.67
======== ======== ========
Basic weighted average shares outstanding................... 12,112 14,751 19,345
======== ======== ========
Diluted earnings per share from continuing operations....... $ 0.39 $ 0.10 $ 0.65
======== ======== ========
Diluted weighted average shares outstanding................. 12,671 15,560 19,917
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 38,329 $ 84,777
Net property, plant and equipment........................... 18,064 24,572
Total assets................................................ 149,071 248,368
Long-term debt, including current portion................... 54,391 41,347
Shareholders' equity........................................ 42,861 144,383
</TABLE>
10
<PAGE> 15
KROLL-O'GARA AND BACKGROUND AMERICA
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION INCLUDING
KIZOREK, INC.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $260,928
Cost of sales............................................... 168,202
--------
Gross profit.............................................. 92,726
Selling, general and administrative expenses, including
amortization.............................................. 63,874
Merger related costs........................................ 5,727
--------
Operating income.......................................... 23,215
Interest expense............................................ (4,241)
Other income, net........................................... 1,440
--------
Income before provision for income taxes.................. 20,324
--------
Provision for income taxes.................................. 7,409
--------
Income from continuing operations......................... $ 12,915
========
Basic earnings per share from continuing operations......... $ 0.67
========
Basic weighted average shares outstanding................... 19,345
========
Diluted earnings per share from continuing operations....... $ 0.65
========
Diluted weighted average shares outstanding................. 19,917
========
</TABLE>
11
<PAGE> 16
UNAUDITED COMPARATIVE PER SHARE INFORMATION
The table below shows comparative earnings per share and shareholders'
equity (book value) per share for Kroll-O'Gara and Background America on
historical and pro forma bases. The historical data is derived from the
historical financial statements of Kroll-O'Gara and Background America. Because
the merger will be accounted for as a pooling of interests, the pro forma data
assumes that Background America has been merged with Kroll-O'Gara throughout the
periods shown. We computed the pro forma equivalent for the merger data by
multiplying the pro forma combined for the merger amounts by an exchange ratio
of 0.2689628 of a share of Kroll-O'Gara common stock for each share of
Background America common and preferred stock. Unaudited comparative per share
information does not include discontinued operations, extraordinary items or the
cumulative effects of accounting changes. The basic and diluted per share impact
of these items, if and when applicable, are disclosed in the related full pro
forma financial statements beginning on page F-28.
Unaudited comparative per share information does not include transaction
fees and costs incident to an acquisition, nor does it include post-merger costs
associated with integrating the operations of the acquired company or companies
with Kroll-O'Gara's operations. Kroll-O'Gara currently expects to incur
nonrecurring charges of approximately $2.0 million, net of tax benefits, for
these purposes in the acquisition of Background America.
The calculation of shareholders' equity per common share assuming full
dilution includes the (1) proceeds from the assumed exercise of stock options
and warrants outstanding at the end of each period as a component of
shareholders' equity, and (2) stock options and warrants outstanding at the end
of each period as a component of common shares outstanding.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Earnings (loss) per common share from continuing operations
(basic)
Kroll-O'Gara:
Historical................................................ $ 0.54 $ 0.21 $ 0.78
Pro forma combined for the merger......................... 0.42 0.11 0.67
Pro forma combined for the merger and for Kizorek......... n/a n/a 0.67
Pro forma combined for the merger assuming return of all
escrowed shares........................................ 0.42 0.11 0.68
Pro forma combined for the merger and for Kizorek assuming
return of all escrowed shares.......................... n/a n/a 0.67
Background America:
Historical, assuming conversion of preferred shares....... (0.60) (0.48) (0.42)
Pro forma equivalent for the merger....................... 0.11 0.03 0.18
Pro forma equivalent for the merger assuming return of all
escrowed shares........................................ 0.11 0.03 0.18
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Earnings (loss) per common share from continuing operations
(diluted)
Kroll-O'Gara:
Historical................................................ $ 0.50 $ 0.20 $ 0.76
Pro forma combined for the merger......................... 0.39 0.10 0.65
Pro forma combined for the merger and for Kizorek......... n/a n/a 0.65
Pro forma combined for the merger assuming return of all
escrowed shares........................................ 0.39 0.10 0.66
Pro forma combined for the merger and Kizorek assuming
return of all escrowed shares.......................... n/a n/a 0.65
</TABLE>
12
<PAGE> 17
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Background America:
Historical, assuming conversion of preferred shares....... (0.60) (0.47) (0.40)
Pro forma equivalent for the merger....................... 0.10 0.03 0.18
Pro forma equivalent for the merger assuming return of all
escrowed shares........................................ 0.10 0.03 0.18
</TABLE>
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Shareholders' equity (deficit) per common share (end of
period)
Kroll-O'Gara:
Historical................................................ $2.75 $7.65
Pro forma combined for the merger......................... 2.91 7.46
Pro forma combined for the merger and for Kizorek......... 3.38 7.46
Pro forma combined for the merger assuming return of all
escrowed shares........................................ 2.92 7.50
Pro forma combined for the merger and for Kizorek assuming
return of all escrowed shares.......................... 3.40 7.50
Background America:
Historical................................................ (0.73) (1.21)
Pro forma equivalent for the merger....................... 0.78 2.01
Pro forma equivalent for the merger assuming return of all
escrowed shares........................................ 0.79 2.02
Shareholders' equity (deficit) per common share assuming
full dilution
Kroll-O'Gara:
Historical................................................ $2.73 $7.59
Pro forma combined for the merger......................... 2.87 7.39
Pro forma combined for the merger and for Kizorek......... 3.33 7.39
Pro forma combined for the merger assuming return of all
escrowed shares........................................ 2.89 7.42
Pro forma combined for the merger and for Kizorek assuming
return of all escrowed shares.......................... 3.34 7.42
Background America:
Historical................................................ (0.73) (1.12)
Pro forma equivalent for the merger....................... 0.77 1.99
Pro forma equivalent for the merger assuming return of all
escrowed shares........................................ 0.78 2.00
</TABLE>
Neither Kroll-O'Gara nor Background America has paid any dividends on its common
stock, and no dividends accrue or are payable on Background America's preferred
stock until June 2000. Kroll-O'Gara does not anticipate paying any dividends on
the Kroll-O'Gara common stock in the foreseeable future. Additionally, the terms
of Kroll-O'Gara's Senior Notes due 2004 and of its credit agreement with its
bank require maintenance of certain financial ratios which may limit the funds
available for cash dividends. See "Market Prices and Dividends."
13
<PAGE> 18
RISK FACTORS
You should carefully consider the risk factors discussed below in
evaluating the merger of Background America with Kroll-O'Gara. Further
information about Kroll-O'Gara is given in its annual report on Form 10-K, as
amended, for the year ended December 31, 1998, particularly in the "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections of that document. See "Where You Can Find More
Information."
Some of the information in this proxy statement/prospectus is
forward-looking. Forward-looking statements can be identified by the use of
language such as "may," "will," "expect," "anticipate," "estimate," "continue"
or other similar words. These statements discuss future expectations which 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 and in the Kroll-O'Gara documents incorporated by
reference in this document.
KROLL-O'GARA MAY NOT BE ABLE TO MANAGE THE GROWTH THAT RESULTS FROM ITS
AGGRESSIVE GROWTH STRATEGY.
Kroll-O'Gara has made multiple acquisitions since January 1, 1997 and
currently intends to continue an aggressive acquisition and internal growth
strategy. When companies are acquired, Kroll-O'Gara may not be able to integrate
or manage these businesses so as to produce returns that justify the investment.
Additionally, issues relating to new acquisitions may divert the attention of
Kroll-O'Gara's management from existing operations. Kroll-O'Gara also will need
to enhance the capabilities of its operational and financial systems and will
require additional employees, management and operational and financial resources
to support its growth strategy. If Kroll-O'Gara cannot manage its growth for any
of these reasons, its operations and earnings could be adversely affected.
THE LOSS OF, OR A SIGNIFICANT REDUCTION IN, KROLL-O'GARA'S U.S. MILITARY
BUSINESS WOULD HAVE A MATERIAL ADVERSE EFFECT ON KROLL-O'GARA'S RESULTS OF
OPERATIONS.
U.S. Military contracts account for a significant portion of Kroll-O'Gara's
business, representing 33%, 23% and 25% of net sales for 1996, 1997 and 1998,
respectively. The U.S. Military funds these contracts in annual increments, and
the contracts require subsequent authorization and appropriation which may not
occur or which may provide less than the total amount of the contract.
Fluctuations in spending by the U.S. Government for national defense could
adversely affect Kroll-O'Gara's ability to receive future contracts. Also, the
U.S. Government generally may cancel its contracts unilaterally, at its
convenience.
KROLL-O'GARA IS DEPENDENT ON SINGLE SOURCE SUPPLIERS OF COMPONENTS FOR ITS
UP-ARMORED HMMWVS, WHICH ACCOUNT FOR ALMOST 25% OF ITS NET SALES.
Kroll-O'Gara is the prime contractor to the U.S. Military for the supply of
armoring and blast protection for High Mobility Multi-Purpose Wheeled Vehicles,
commonly known as HMMWVs. HMMWVs armored by Kroll-O'Gara are manufactured by AM
General Corporation under separate U.S. Military contracts. Should deliveries of
HMMWVs to Kroll-O'Gara be significantly interrupted, or should other single
source suppliers significantly interrupt deliveries of components for the
Up-Armored HMMWV, Kroll-O'Gara probably would not be able to deliver Up-Armored
HMMWVs to the U.S. Military on schedule, which could have a material adverse
effect on Kroll-O'Gara.
14
<PAGE> 19
KROLL-O'GARA'S SIGNIFICANT BUSINESS OUTSIDE THE UNITED STATES EXPOSES IT TO
NUMEROUS RISKS WHICH, SINGLY OR TOGETHER, COULD MATERIALLY AND ADVERSELY AFFECT
ITS BUSINESS.
In addition to its U.S. facilities, Kroll-O'Gara has operations and assets
in Argentina, Australia, Brazil, Canada, China, Colombia, France, Germany,
India, Italy, Japan, Mexico, the Philippines, Russia, Saudi Arabia, Singapore,
Switzerland and the United Kingdom. Kroll-O'Gara also sells its products and
services in other foreign countries and is seeking to increase its level of
international business activity. Kroll-O'Gara's international business exposes
it to various risks. Currently, the most significant risks relate to regional
economic downturns in Central and South America and in Asia. Although the impact
of these downturns has been offset to date with growth in other areas of
Kroll-O'Gara's business, these results may not continue. Other risks of foreign
business include exchange rate fluctuations, foreign currency restrictions,
expropriation of assets, war, civil uprisings and riots, government instability,
the vagaries of foreign legal systems, and unanticipated taxes, duties or other
governmental assessments. Any of these 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 Kroll-O'Gara.
KROLL-O'GARA'S INABILITY OR FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS AND
LICENSING REQUIREMENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS BUSINESS.
The services provided by Kroll-O'Gara's Investigations and Intelligence
Group are subject to various federal, state, local and foreign laws, including
privacy laws. Subsidiaries of Kroll-O'Gara hold private investigative licenses
from, and their investigative activities are regulated by, government agencies
in various jurisdictions. Kroll-O'Gara 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 manner in which Kroll-O'Gara
obtains information and conducts its operations, including Kroll-O'Gara's access
to data used in its business. However, changes in these laws and regulations,
particularly those relating to privacy, could interfere with Kroll-O'Gara's
method of operations and access to data and, as a result, have a material
adverse effect on Kroll-O'Gara.
Additionally, the laboratory of Kroll-O'Gara's drug testing subsidiary is
certified on the federal level and licensed in a number of states. If the
subsidiary fails to continue to meet all applicable requirements, its
certification could be suspended or lost, which would result in Kroll-O'Gara not
being eligible to perform testing for various clients and would have a material
adverse effect on this aspect of Kroll-O'Gara's business.
Moreover, as a government contractor, Kroll-O'Gara's operations are subject
to routine audit to assure compliance with a variety of regulations. 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.
KROLL-O'GARA DEPENDS ON THE SERVICES OF MANY OF ITS PROFESSIONAL AND TECHNICAL
EMPLOYEES. COMPETITION FOR THESE EMPLOYEES IS INTENSE.
Kroll-O'Gara is highly dependent on the quality and efforts of the senior
managers and professional and technical staff in its Investigations and
Intelligence Group and its Information Security Group. Kroll-O'Gara relies
heavily on these employees for continued business development. Also, personnel
in Kroll-O'Gara's new Information Security Group must be fully up-to-date,
and -- indeed -- "ahead of the curve," in the rapidly evolving areas of
e-commerce and computer security. Competition for these employees is intense.
Kroll-O'Gara's business could be materially and adversely affected if a number
of
15
<PAGE> 20
its senior managers and professional and technical employees were to leave and
if Kroll-O'Gara were unable to attract and retain qualified replacements.
DUE TO THE NATURE OF ITS BUSINESS, KROLL-O'GARA IS SUSCEPTIBLE TO POTENTIALLY
SIGNIFICANT LIABILITY CLAIMS.
The very nature of Kroll-O'Gara's business exposes it to potential
liability claims in instances in which its clients suffer losses in spite of
Kroll-O'Gara's efforts to mitigate their risks. Kroll-O'Gara maintains product
liability insurance with a maximum per occurrence and annual aggregate limit of
$25 million and professional liability insurance with a maximum per occurrence
and annual aggregate limit of $15 million. If one or more successful claims
substantially exceeded coverage limits, it would have a material adverse effect
on Kroll-O'Gara. Also, in the ordinary course of its business, Kroll-O'Gara is
subject to claims of third parties other than clients alleging trespass,
invasion of privacy and other tortious conduct by its investigators and other
personnel, which are not covered by insurance. Although Kroll-O'Gara endeavors
to minimize the risk of these claims, a substantial, successful claim could have
a material adverse effect on Kroll-O'Gara.
THE FAILURE OF THIRD PARTIES TO RESOLVE THEIR YEAR 2000 ISSUES COULD HAVE A
MATERIAL ADVERSE EFFECT ON KROLL-O'GARA.
Although Kroll-O'Gara currently expects to complete its own Year 2000
conversions on a timely basis and without costs that are material to its
financial condition or results of operations, many of Kroll-O'Gara's operations,
especially in the Investigations and Intelligence Group, rely on third party
computer systems and data bases. The failure of third parties to address
adequately their Year 2000 issues could deprive Kroll-O'Gara of access to
information necessary to its business and thereby have a material adverse effect
on Kroll-O'Gara's operations and results.
16
<PAGE> 21
THE SPECIAL MEETING
Background America, Inc., a Tennessee corporation, is mailing this proxy
statement/prospectus to holders of shares of its common stock and its Series A
Preferred Stock, on or about May 18, 1999, together with a Notice of Special
Meeting of Shareholders and a form of proxy solicited by the Board of Directors
of Background America for use at the special meeting.
TIME AND PLACE; PURPOSE
The special meeting will be at 1900 Church Street, Suite 400, Nashville,
Tennessee, on June 16, 1999, starting at 10:00 a.m., local time. At the special
meeting, you will be asked to approve an Agreement and Plan of Merger dated as
of January 21, 1999 and amended as of April 20, 1999, among The Kroll-O'Gara
Company, an Ohio corporation, Kroll-O'Gara Tennessee, Inc., a wholly owned
subsidiary of Kroll-O'Gara, and Background America. If the proposed merger is
approved and completed, Background America will become a wholly owned subsidiary
of Kroll-O'Gara.
PROXIES
You may use the accompanying proxy card if you are unable to attend the
special meeting in person or wish to have your shares voted by proxy even if you
do attend the special meeting. You may revoke any proxy that you give at any
time before it is exercised, either by submitting a written notice of revocation
or a properly executed proxy of a later date, or by attending the special
meeting and voting in person. You should address written notice of revocation
and other communications with respect to the revocation of Background America
proxies to Background America, Inc., 1900 Church Street, Suite 400, Nashville,
Tennessee 37203, Attention: Corporate Secretary.
All shares of Background America common stock and Background America
preferred stock represented by properly executed proxies received prior to or at
the special meeting and not revoked before they are exercised will be voted in
accordance with the instructions indicated in such proxies. If you do not
specify how your proxy is to be voted, it will be voted "FOR" the merger
agreement.
SOLICITATION OF PROXIES
Background America will pay the expenses of solicitation of proxies for the
special meeting. In addition to solicitation by mail, proxies may be solicited
in person by directors, officers and employees of Background America without
additional compensation and by telephone, teletype, facsimile or similar method.
RECORD DATE AND VOTING RIGHTS
RECORD DATE. Background America's Board of Directors has fixed the close
of business on May 14, 1999 as the record date for determining the Background
America shareholders entitled to notice of and to vote at the special meeting.
You will be entitled to vote at the special meeting if you were a shareholder of
record on the close of business on the record date. As of the record date, there
were 2,199,728 shares of Background America common stock outstanding and
entitled to vote and 1,143,700 shares of Background America preferred stock
outstanding and entitled to vote.
QUORUM. A majority of the shares of Background America common stock
entitled to vote, represented in person or by proxy, will constitute a quorum at
the special meeting.
VOTING RIGHTS. Each share of Background America common stock entitles its
holder to one vote. Each share of Background America preferred stock entitles
its holder to one vote.
17
<PAGE> 22
VOTE REQUIRED AND VOTING AGREEMENT. The merger agreement must be approved
by:
(1) the affirmative vote of the holders of a majority of the shares of
Background America common stock and Background America preferred stock
outstanding on the record date and voting together, and
(2) the affirmative vote of at least 66 2/3% of the outstanding shares
of Background America preferred stock voting as a separate class.
Three of the holders of Background America common stock, who together own
83.21% of those shares, and six of the holders of Background America preferred
stock, owning 85.94% of those shares, have entered in a voting agreement
committing themselves to vote FOR the merger. These percentages include shares
held by Michael D. Shmerling, Background America's Chief Executive Officer, who
owns 51.38% of the Background America common stock and 16.66% of the Background
America preferred stock, and shares held by Alan Wernick, a director, who owns
4.55% of the Background America common stock and 1.22% of the Background America
preferred stock. Each person also has granted officers of Kroll-O'Gara an
irrevocable power of attorney to vote his shares of Background America common
stock and Background America preferred stock. In addition, based upon the
unanimous recommendation of the Background America Board, it currently is
expected that Background America's other directors and executive officers, who
own approximately 4% of the Background America common stock and 1% of the
Background America preferred stock, also will vote their shares for approval of
the merger agreement. Accordingly, Background America expects the merger to be
approved regardless of the vote by other shareholders.
Approval of the merger agreement by the holders of Background America
preferred stock constitutes a waiver of the preferred stock's liquidation
rights. See "Rights of Holders of Background America Preferred Stock."
If you do not properly exercise and perfect dissenters' rights in
connection with the merger, you will be deemed to have agreed to the escrow of a
total of 10% of the shares of Kroll-O'Gara common stock into which your shares
of Background American common stock and/or Background America preferred stock
will convert in the merger. In this regard, you should read and consider the
information provided under the captions "The Merger Agreement -- Terms of the
Merger -- The Escrow Fund" and "The Merger -- Dissenters' Rights."
ABSTENTIONS. Shares represented by a properly executed proxy marked
"abstain" will be counted as present for purposes of determining a quorum but
will not be voted on the merger agreement proposal. An abstention will,
therefore, have the same effect as a vote against the merger.
18
<PAGE> 23
THE MERGER
BACKGROUND OF THE MERGER
In September 1998, officers of Background America were approached by
representatives of Kroll-O'Gara regarding a possible acquisition of Background
America. Kroll-O'Gara was seeking a suitable acquisition in the pre-employment
background checking area to complement its other risk mitigation services and
the services to be provided by its soon-to-be-acquired drug testing subsidiary.
Background America's officers responded that they would be willing to discuss a
combination between the companies, and discussions between the parties continued
from that date until January 1999.
During that time, Kroll-O'Gara and Background America conducted various due
diligence activities and negotiated the terms and conditions to be included in a
definitive agreement. Background America's management chose not to seek
alternative bidders because the results of negotiations and due diligence
activities by Background America revealed an opportunity determined by
management to be unique based upon its familiarity with the background
investigation services marketplace. The Board of Directors did not consider any
alternative strategic business combinations in addition to the merger with
Kroll-O'Gara.
At a meeting held on December 30, 1998, the Board of Directors of
Background America reviewed and considered the merger agreement. All of the
directors of Background America present at the meeting then voted to approve the
merger and the merger agreement, with such changes as the proper officers of
Background America determined would be appropriate. The merger agreement was
executed on January 21, 1999, and Kroll-O'Gara announced the merger after the
close of business on that same day. Holders of 83.2% of Background America's
common stock and 85.9% of its preferred stock have entered into an agreement
committing themselves to vote for the merger. In addition, all of the directors
and officers of Background America who are not parties to the voting agreement
have informally advised Background America that, as of the date of this proxy
statement/prospectus, they intend to vote for the approval of the merger
agreement.
The 0.2689628 of a share of Kroll-O'Gara common stock to be exchanged for
each share of Background America common stock and Background America preferred
stock reflect prices that were negotiated on an arms-length basis between
representatives of Background America and representatives of Kroll-O'Gara. There
was no affiliation, relationship, understanding or transaction between
Background America and its affiliates, on one hand, and Kroll-O'Gara and its
affiliates, on the other hand, prior to the execution of the merger agreement.
REASONS FOR AND ADVANTAGES OF THE MERGER
The Board of Directors of Background America evaluated the opportunity of a
strategic business combination represented by the merger in light of the ability
of Background America to continue to build its business and the ability of
Background America eventually to engage in a public offering of its common
stock. Although the Board of Directors identified no cause for inability to
continue to build Background America's business or eventually to seek to engage
in a public offering based upon the results of its operations to date, the terms
of the merger proposal caused the Board of Directors to approve and recommend
the merger. The Board of Directors of Background America considered a variety of
factors in evaluating whether the merger was in the best interests of the
shareholders of
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Background America and in approving the merger and the merger agreement. The
factors deemed material by the Board of Directors were as follows:
- Shareholders of Background America will receive equity securities of
Kroll-O'Gara in the merger, which will allow them to maintain an indirect
interest in the business of Background America through their ownership of
Kroll-O'Gara common stock.
- The closing sale price of the Kroll-O'Gara common stock on December
29, 1998, the day prior to the approval of the merger by the Board of
Directors, was $38.50 compared to the book value of the Background America
common stock of a negative $1.27 per share and the redemption price of the
Background America preferred stock of $5.93 per share on September 30,
1998. Additionally, the equivalent assumed value of the Background America
common and preferred stock, giving effect to their conversion into
Kroll-O'Gara common stock, was $10.36 per share, representing a premium of
$11.36 for Background America common stock and a premium of $4.43 for
Background America preferred stock.
- The anticipated tax-free status of the merger.
- The active trading market for Kroll-O'Gara common stock on the
Nasdaq National Market, as opposed to the lack of a public market for
Background America common and preferred stock, which will provide
Background America shareholders with liquidity which did not exist
previously.
- The capital resources available to Kroll-O'Gara as a public company
for use in the development and growth of Background America's business.
- Cost savings to Background America in an amount estimated to be in
excess of $500,000 achieved through avoidance of a public offering of
Background America's common stock. The Background America Board did not
analyze other possible synergies and cost savings which might benefit
Background America after the merger.
- The opportunity made available by Kroll-O'Gara for current
management of Background America to continue to develop its business.
- The diversification of the business enterprises and operations of
Kroll-O'Gara compared to Background America's focus on employment
screening.
- The fact that 10% of the merger payment would be placed into escrow
and perhaps never be paid to shareholders of Background America.
The Board of Directors of Background America did not assign any relative
weights to the above factors, but it considered all of them to be material. Each
of the factors other than the last two supported the determination by the Board
of Directors of Background America that the merger was in the best interests of
the shareholders of Background America. The second-to-last factor supported the
Board of Directors' determination because fluctuations in Background America's
business are likely to be reduced in the context of the larger company, but it
was adverse to their determination in that, following the merger, Background
America's shareholders would be at risk with regard to the other aspects of
Kroll-O'Gara's business. The last factor was adverse to the Board of Directors'
determination. However, the Board of Directors was aware that the escrow was
specifically bargained for and insisted upon by Kroll-O'Gara as a condition to
the merger agreement and believed it was outweighed by the remaining positive
factors. The Board of Directors believes that it appropriately addressed all of
the relevant concerns in the proposed transaction with Kroll-O'Gara in
concluding that the terms of the transaction with Kroll-O'Gara are fair to the
shareholders of Background America from a financial point of view. The Board of
Directors of Background America did not retain the services of a financial
advisor in
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determining whether the merger consideration is fair to its shareholders because
it believed it had the business experience necessary to evaluate the terms of
the merger and was satisfied with them.
DISADVANTAGES OF THE MERGER
Upon consummation of the merger, you and the other shareholders of
Background America will own a maximum of approximately 4% of the issued and
outstanding shares of Kroll-O'Gara. By comparison, Kroll-O'Gara's officers and
directors will control approximately 33% of Kroll-O'Gara common stock and are
likely to be able to control most matters requiring approval by shareholders,
including the election of directors. Additionally, if you own Background America
preferred stock, you have certain preferential rights as a preferred stock owner
which you will lose as a holder of Kroll-O'Gara common stock. See "Rights of
Holders of Background America Preferred Stock."
In considering the merger, you should consider, in addition to the
advantages described above, the risks associated with the merger and with
Kroll-O'Gara's business which are discussed in "Risk Factors." Of course, after
the merger, Background America will be owned by Kroll-O'Gara. Therefore the
various risks involved in Background America's business will be assumed by
Kroll-O'Gara and its shareholders. There is no certainty regarding the effect of
consummation of the merger upon the market price of the Kroll-O'Gara common
stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Some of the officers and members of the Board of Directors of Background
America have interests in the merger that are in addition to their interests as
shareholders of Background America generally.
Most of the officers and directors of Background America own options to
purchase shares of Background America common stock, the terms of which provide
for the acceleration of vesting in connection with the consummation of a
fundamental corporate event to which Background America is a party, including
the merger. One director also owns warrants with similar terms. The following
table describes the associated realizable value to each such officer and
director with respect to the options owned by him:
<TABLE>
<CAPTION>
NUMBER AVERAGE
NAME OF SHARES EXERCISE PRICE REALIZABLE VALUE(1)
- ---- ---------------- -------------- -------------------
<S> <C> <C> <C>
Directors:
Alan L. Wernick............................. 14,000 $ 1.25 $131,001
Tom Martin.................................. 4,500 $ 0.75 $ 44,357
William Denny............................... 2,500 $ 1.91 $ 21,743
Nick Manis
(options)................................ 400 $ 2.00 $ 3,443
(warrants)............................... 2,000 $ 3.25 $ 14,714
Officers:
Marc C. Curvin.............................. 120,202 $2.456 $979,791
A. Michael Rosen............................ 19,000 $2.063 $162,340
Benny Ball.................................. 18,000 $2.389 $147,928
Tim Davison................................. 5,350 $1.761 $ 47,327
Tom Ellis................................... 12,900(2) $2.016 $110,833
Robert Schlossnagle......................... 12,000 $2.292 $ 99,782
</TABLE>
- ---------------
(1) Calculated based on the closing price for Kroll-O'Gara common stock of
$39 7/16, as reported on the Nasdaq National Market at the close of trading
on December 31, 1998, less the applicable average exercise price.
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(2) Includes options to purchase an aggregate of 1,700 shares of Background
America common stock which will be issued after the merger in the form of
options to purchase Kroll-O'Gara common stock.
It is currently anticipated that the officers of Background America after
the merger will be substantially the same as those who are serving immediately
before the merger. Additional officers also may be designated by Kroll-O'Gara.
Michael D. Shmerling, Marc C. Curvin, A. Michael Rosen and Benny Ball have
entered into employment agreements with Background America which will become
effective at the time of the merger and will expire on December 31, 2001. Each
employment agreement contains terms and provisions customary in an executive
employment agreement, including a covenant by the employee not to compete with
Background America or Kroll-O'Gara for two years following termination of
employment and a provision for the payment of severance benefits to each
employee upon the occurrence of certain events, including the employee's
termination of employment by Background America without cause. The annual
salaries payable to Messrs. Shmerling, Curvin, Rosen and Ball under the
employment agreements are $150,000, $125,000, $100,000 and $100,000,
respectively. Additionally, each of Messrs. Rosen, Ball and Robert Schlossnagle
will be paid a one-time "stay bonus" of $50,000, Mr. Tim Davison will be paid a
one-time "stay bonus" of $20,000 and Mr. Tom Ellis will be paid a one-time "stay
bonus" of $10,000, in each case if he continues to be employed by Background
America on June 30, 1999. Finally, each person is eligible to participate in the
incentive compensation plans of Kroll-O"Gara during the term of his employment
by Background America.
Mr. Shmerling is the indirect owner, through two limited liability
companies controlled by him, of approximately 17,500 square feet of office space
occupied by Background America in Nashville, Tennessee. The current annual rent
paid by Background America to the companies is $236,895. On April 20, 1999,
Background America entered into two leases for the Nashville office space with
the two companies controlled by Mr. Shmerling. Background America will lease
5,625 square feet of space for $15.50 per square foot and 6,225 square feet of
space for $18.50 per square foot. Each lease expires in 2004. Background America
and Kroll-O'Gara believe that the terms of these leases are no less favorable
than those which Background America could otherwise have obtained from unrelated
third parties and that the terms were negotiated on an arms-length basis.
Each of Michael D. Shmerling, Alan L. Wernick, Marc C. Curvin, A. Michael
Rosen and Tim Davison is an officer or director of Background America and is
also a former shareholder of AMICUS Staffing, Inc., a corporation engaged in the
business of providing professional and support personnel on a temporary or
permanent basis in the legal industry. Each of those persons sold his stock in
AMICUS in May 1997 in exchange for a cash payment and the contingent right to
receive additional cash payments based on the future financial performance of
AMICUS. Currently, AMICUS is subleasing office space from Background America at
an annual rental rate of $49,816. Background America and AMICUS also are sharing
expenses associated with telephone systems and a receptionist. Background
America's portion of the total annual shared expenses is approximately $10,000.
It is currently anticipated that these arrangements will continue following the
merger.
Each of Michael D. Shmerling and Marc C. Curvin is an owner of System-X,
LLC, a company engaged in the business of providing technology related services.
Currently, System-X provides system maintenance for Background America's
computer systems in exchange for forgiveness of rental costs associated with
office space. Background America estimates the value of rental space forgiven in
calendar year 1998 to be approximately $24,868. It is not currently anticipated
that Kroll-O'Gara will require the services of System-X following the merger. If
any System-X services are purchased by Kroll-O'Gara, it is anticipated that they
will be on terms negotiated on an arms-length basis. System-X
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and Background America have entered into an agreement in which System-X
acknowledges that any intellectual property developed for Background America by
System-X in connection with services provided by System-X to Background America
is the property of Background America.
The Board of Directors of Background America was aware of the interests of
the directors and officers in the merger and took them into account in approving
the merger agreement.
ACCOUNTING TREATMENT
Kroll-O'Gara will account for the merger as a pooling of interests. Under
this method of accounting, the assets and liabilities of Background America will
be carried forward to the Kroll-O'Gara financial statements at their recorded
amounts; the income of Kroll-O'Gara will include income of Background America
for the entire fiscal year in which the merger occurs; and the reported income
of Background America for prior periods will be combined with and restated as
income of Kroll-O'Gara on a consolidated basis. It is a condition to the merger
that Kroll-O'Gara receive an opinion from Arthur Andersen LLP, its independent
public accountants, confirming the appropriateness of this accounting treatment
under generally accepted accounting principles. Another condition of the merger,
which is included in order to preserve pooling of interests accounting, is that
holders of no more than 7.5% of Background America's outstanding stock exercise
dissenters' rights. See "The Merger Agreement -- Conditions to the Merger."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
Sherrard & Roe, PLC's opinion with respect to the material U.S. federal
income tax consequences of the merger to holders of Background America common
stock, preferred stock, stock options and warrants is set forth below. This
opinion is based on the Internal Revenue Code, Treasury regulations,
administrative rulings and pronouncements and judicial decisions as of the date
of this proxy statement/ prospectus, all of which are subject to change,
possibly with retroactive effect. The opinion is based on various
representations made by Background America and Kroll-O'Gara to Sherrard & Roe,
PLC.
The opinion does not address the state, local or foreign tax consequences
of the merger. In addition, the opinion relates to persons who hold Background
America common stock or Background America preferred stock as capital assets.
Your tax treatment may vary depending upon your particular situation.
Shareholders such as insurance companies, foreign persons, tax-exempt
organizations, financial institutions and broker-dealers, as well as individuals
who received Background America common stock pursuant to the exercise of
employee stock options or otherwise as compensation, may be subject to special
rules not discussed. You are urged to consult your own tax advisor concerning
the United States federal, state and local and any foreign tax consequences of
the merger to you.
Sherrard & Roe, PLC expects that the material U.S. federal income tax
consequences that will result from the merger are as follows:
a. You will not recognize any income, gain or loss as a result of the
exchange of your Background America stock for Kroll-O'Gara common stock in
the merger, except in connection with any cash received instead of a
fractional share of Kroll-O'Gara common stock. If, however, you hold
options or warrants which you exercise at the time of or after the merger,
you may have tax liability related to the exercise of those options or
warrants.
b. Your tax basis in the Kroll-O'Gara common stock received in the
merger will equal your tax basis in the Background America common stock
and/or Background America preferred stock exchanged, reduced by your basis
in any Background America common and/or preferred stock for which you
receive cash instead of a fractional share of Kroll-O'Gara common stock.
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c. The holding period for the Kroll-O'Gara common stock which you
receive in the merger will include your holding period of the Background
America common stock or Background America preferred stock surrendered.
d. If you receive cash instead of a fractional share of Kroll-O'Gara
common stock in the merger, you will recognize gain or loss in an amount
equal to the difference between the cash received and your basis in the
Background America common stock or Background America preferred stock
allocable to the fractional share.
e. If you hold warrants to acquire Background America common stock,
you will not recognize gain or loss upon the conversion of the warrants
into warrants to purchase Kroll-O'Gara common stock.
f. If you hold unexercised options to acquire Background America
common stock, you will not recognize income upon the conversion of those
options into options to purchase Kroll-O'Gara common stock.
The opinion of Sherrard & Roe, PLC does not extend to any tax effects or
consequences other than those expressly stated in the opinion.
FEDERAL SECURITIES LAW CONSEQUENCES
Generally, all shares of Kroll-O'Gara common stock received by Background
America shareholders in the merger will be freely transferable. If, however, you
are an "affiliate" of Background America prior to the merger or of Kroll-O'Gara
after the merger, you may resell the Kroll-O'Gara common stock which you receive
in the merger only in compliance with the volume, manner-of-sale and notice
requirements of Rules 144 and 145 under the Securities Act of 1933. You may be
deemed to be an affiliate of Kroll-O'Gara or Background America if you control,
are controlled by, or are under common control with, either company. Officers,
directors and principal shareholders are often deemed affiliates of a company.
Under Rules 144 and 145, an affiliate may sell Kroll-O'Gara common stock in
ordinary brokers' transactions. The maximum number of shares which may be sold
within a three-month period is the greater of 1% of the Kroll-O'Gara common
stock then outstanding or the average weekly reported volume of trading in the
common stock during the four calendar weeks preceding the sale. In addition, it
is a condition of the merger that each Background America affiliate agree not to
sell, transfer or dispose of any Kroll-O'Gara common stock until Kroll-O'Gara
has announced results of operation that include at least 30 days of combined
operations with Background America. If the merger is completed during June 1999,
this means that affiliates will not be able to resell Kroll-O'Gara common stock
until Kroll-O'Gara has announced results of operation for the nine months ending
September 30, 1999, which probably will happen in late October or early November
1999.
DISSENTERS' RIGHTS
The following is a summary of the principal steps which you must take to
perfect dissenters' rights under Chapter 23 of the Tennessee Business
Corporation Act. Because this is a summary, it does not contain all the
information that may be important to you if you want to exercise dissenters'
rights. You should review this discussion and Chapter 23 carefully if you wish
to exercise dissenters' rights, or wish to preserve the right to do so, since
failure to comply with the required procedures will result in the loss of those
rights. The full text of Chapter 23 is attached as Appendix B to this proxy
statement/ prospectus.
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If you dissent from the merger and demand and perfect dissenters' rights
under Chapter 23 and if the merger is approved and becomes effective, your
shares of Background America common stock and/or Background America preferred
stock will not be converted into Kroll-O'Gara common stock. Instead, you will
have the right to receive the "fair value" of your Background America shares.
The "fair value" of your Background America Stock may be more or less than the
value of the Kroll-O'Gara common stock which you would have received in the
merger if you did not dissent. If you are considering dissenting, you should
consult with your legal advisor. If your Background America shares are held of
record in the name of another person and you desire to perfect dissenters'
rights, you must obtain the record shareholder's written consent to the dissent
and must file it with Background America along with your own notice, as
described in the next paragraph.
To exercise dissenters' rights, you
(1) must file with Background America, before the class votes on the
merger agreement at the special meeting, a written notice of your intent to
demand payment for your shares if the merger agreement is approved, and
(2) must not vote in favor of the merger agreement.
A vote in favor of the merger agreement will waive your dissenters' rights.
Holders of Background America preferred stock must not vote in favor of the
merger agreement in either the combined vote with the common stock or the
separate preferred stock class vote. Your failure to vote on the merger
agreement will not in itself waive your dissenters' rights. However, a vote
against the merger agreement or a failure to vote does not, alone, constitute a
demand. If you dissent and demand payment, you must do so as to all the shares
of Background America common stock and Background America preferred stock
beneficially owned by you.
If you comply with (1) and (2) above, within 10 days after the earlier of
the date the merger becomes effective or the date of the special meeting,
Background America must send you a dissenters' notice which
(a) tells you by when and to where you must send your payment demand,
(b) tells you when and where to deposit your certificates for
Background America common stock and Background America preferred stock,
(c) requires you to certify as to your ownership of Background America
shares prior to announcement of the proposed merger, and
(d) includes a form for demanding payment.
Once you have filed a demand for payment, it cannot be withdrawn unless
Background America and Kroll-O'Gara consent to the withdrawal.
If you timely file a payment demand with Background America, Background
America must notify you of what it considers to be the "fair value" of your
Background America shares. Background America must then pay you that amount,
plus accrued interest. If you are dissatisfied with Background America's
determination of "fair value," within one month you must either notify
Background America of your own estimate of "fair value" or reject Background
America's offer in accordance with Chapter 23. If you and Background America
cannot agree on the "fair value" of your Background America shares, you will
have the right to receive the "fair value" as determined by a Tennessee court.
If you exercise dissenters' rights under Chapter 23, you will not have any
rights as a shareholder of Background America or Kroll-O'Gara after the merger.
However, if you subsequently withdraw your payment demand or otherwise lose your
dissenters' rights, your shares of Background America common
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stock and Background America preferred stock will be converted into shares of
Kroll-O'Gara common stock in accordance with the merger agreement. You will lose
your dissenters' rights:
- if you fail to file a written objection before the vote on the merger
agreement,
- if you vote in favor of approval of the merger agreement in either class
vote,
- if you do not send in your demand for payment within the specified time
period, or
- if you fail to deposit the certificates for your shares.
THE MERGER AGREEMENT
The description of the merger agreement set forth below summarizes the
material terms of the agreement. You also should read the complete merger
agreement, a copy of which is included as Appendix A to, and is incorporated by
reference in, this proxy statement/prospectus.
TERMS OF THE MERGER
THE MERGER. In the merger, a wholly owned subsidiary of Kroll-O'Gara,
which was established for purposes of the merger and essentially has no assets
or liabilities, will merge into Background America. As a result, Background
America will continue as the surviving corporation and will be a wholly owned
subsidiary of Kroll-O'Gara.
EFFECTIVE TIME. As promptly as practicable after the satisfaction or
waiver of the conditions set forth in the merger agreement, Kroll-O'Gara and
Background America will complete the merger by filing a Certificate of Merger
with the Secretary of State of the State of Tennessee. The merger will become
effective when the Certificate of Merger is filed.
CONVERSION OF BACKGROUND AMERICA STOCK IN THE MERGER. When the merger
becomes effective, each then outstanding share of Background America common and
preferred stock, excluding shares as to which dissenters' rights have been
exercised, will be converted into the right to receive 0.2689628 of a share of
Kroll-O'Gara common stock. Initially, however, a total of 10% of the shares of
Kroll-O'Gara common stock into which each holder's shares of Background American
common stock and Background America preferred stock are converted will be
escrowed. These shares will be subject to return to Kroll-O'Gara. SEE "THE
ESCROW FUND" BELOW. YOU MAY NOT RECEIVE ANY SHARES OF KROLL-O'GARA COMMON STOCK
BEYOND THOSE ISSUED TO YOU AT THE TIME OF THE MERGER.
OUTSTANDING STOCK OPTIONS AND WARRANTS. The merger agreement requires that
the holders of all options and warrants to purchase Background America common
stock must consent to amending these options and warrants so that, unless
previously exercised, they survive the merger and become exercisable for
Kroll-O'Gara common stock. In addition, holders of stock options and warrants
will be asked to decide whether their options and/or warrants should be
exercised at the time of the merger or remain outstanding as options and
warrants to purchase Kroll-O'Gara common stock. If you hold options and/or
warrants to purchase Background America common stock and you elect to exercise
them at the time of the merger, 10% of the shares of Kroll-O'Gara common stock
that you receive in the merger which are attributable to those options and
warrants will be escrowed. If you do not exercise your options and warrants
until after the merger, the shares of Kroll-O'Gara common stock that you receive
upon exercise will not be escrowed.
Each outstanding stock option and warrant to purchase Background America
common stock that is not exercised before or at the time of the merger will
become exercisable after the merger for the
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number of shares of Kroll-O'Gara common stock that the holder would have been
entitled to receive in the merger had he or she exercised the option or warrant
before the merger, at a price per share equal to
(x) the aggregate exercise price for Background America common stock
purchasable pursuant to the stock option or warrant divided by
(y) the number of shares of Kroll-O'Gara common stock deemed
purchasable pursuant to the stock option or warrant.
The number of shares of Kroll-O'Gara common stock that may be purchased
upon exercise of a stock option or warrant will not include any fractional
share, and any fractional share will be rounded up to the nearest whole number.
The shares of Kroll-O'Gara common stock issuable upon exercise of the stock
options and warrants are included in the shares of Kroll-O'Gara common stock
registered under the Securities Act through this proxy statement/prospectus.
Kroll-O'Gara will use its best efforts to maintain the effectiveness of that
registration for so long as the stock options and warrants remain outstanding.
FRACTIONAL SHARES. No fractional shares of Kroll-O'Gara common stock will
be issued in the merger. Instead, Kroll-O'Gara will pay each Background America
shareholder who would otherwise have been entitled to a fractional share of
Kroll-O'Gara common stock an amount equal to the fraction multiplied by the
"Market Value" on the closing date of the merger. "MARKET VALUE" means, on any
day, the average of the last sale prices per share of Kroll-O'Gara common stock
on the Nasdaq National Market for the five consecutive trading days ending four
days prior to that date.
THE ESCROW FUND
A total of 10% of the shares of Kroll-O'Gara common stock otherwise
issuable to each Background America shareholder in the merger will be placed
into escrow. The escrow fund will provide security and indemnification for any
claims which Kroll-O'Gara and its affiliates have for damages arising from
(1) breaches by Background America of its representations, warranties,
covenants and obligations in the merger agreement and
(2) any claim for brokerage or finder's fees in connection with the
merger.
The escrow is the only source of indemnification for Kroll-O'Gara and its
affiliates for these damages.
Kroll-O'Gara may not recover from the escrow fund for any breach or series
of related breaches as to which the damages are less than $25,000. Also, amounts
otherwise payable from the escrow must be offset by any insurance proceeds
received by Kroll-O'Gara, and some claims first must be satisfied from an escrow
fund established by Background America in connection with an earlier
acquisition.
If Kroll-O'Gara makes any non-cash distributions on the Kroll-O'Gara common
stock during the life of the escrow, the distributions will be paid into the
escrow and will be subject to claims against the escrow fund. Any cash dividends
relating to shares in the escrow will be redistributed as promptly as
practicable to former Background America shareholders in proportion to their
interests in the escrow fund.
The representations, warranties, covenants and obligations of the parties
to the merger agreement will survive for one year after the merger, and
Kroll-O'Gara must assert any claims against the escrow fund during that time
period. The escrow will terminate on the first anniversary of the merger unless
there is ongoing litigation relating to claims by Kroll-O'Gara against the fund.
When the escrow terminates, any shares of Kroll-O'Gara common stock remaining in
it will be distributed to former
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Background America shareholders in proportion to the shares originally withheld
from each to fund the escrow.
Shares of Kroll-O'Gara common stock which are returned to Kroll-O'Gara in
satisfaction of claims against the escrow will be valued at the Market Value at
the time of the merger.
Any Background America shareholder who does not properly exercise and
perfect dissenters' rights in connection with the merger (see "The
Merger -- Dissenters' Rights") agrees to accept the terms and conditions of the
escrow fund, consents to the appointment of Russell R. French as shareholder
representative in connection with the escrow and agrees to indemnify the
shareholder representative for any costs and expenses which he incurs in that
capacity.
The shareholder representative will have the right to vote all shares of
Kroll-O'Gara common stock held in the escrow.
The Escrow Agreement for the escrow fund is included as Exhibit A to the
merger agreement and you are encouraged to read it.
EXCHANGE OF CERTIFICATES
EXCHANGE AGENT. The Fifth Third Bank, Cincinnati, Ohio will act as
exchange agent for the merger.
EXCHANGE PROCEDURES. As soon as reasonably practicable after the merger,
the exchange agent will mail each record holder of Background America shares at
the time of the merger a letter of transmittal and instructions for exchanging
certificates representing Background America common stock and Background America
preferred stock for certificates evidencing Kroll-O'Gara common stock. You will
have to follow the instructions and surrender your certificates for Background
America common stock and Background America preferred stock, together with the
properly executed letter of transmittal, and any other required documents, to
the exchange agent. You then will be entitled to receive
(a) certificates for that number of whole shares of Kroll-O'Gara
common stock which you have the right to receive in the merger, less shares
which are escrowed,
(b) any dividends or other distributions on the Kroll-O'Gara common
stock declared or made after the merger to which you may be entitled, and
(c) cash in lieu of any fractional share of Kroll-O'Gara common stock.
Until so surrendered, each outstanding certificate that, prior to the
merger, represented shares of Background America common stock or Background
America preferred stock, other than Background America shares as to which
dissenters' rights have been exercised, will be deemed to evidence the ownership
of the number of whole shares of Kroll-O'Gara common stock into which your
Background America shares have been converted, less shares which are escrowed.
DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. If any dividends or
other distributions are declared or made after the merger on shares of
Kroll-O'Gara common stock, you will not receive them until you surrender your
Background America share certificates. When you do surrender your certificates,
Kroll-O'Gara will pay you, without interest, any dividends or other
distributions with a record date after the merger previously paid to holders of
Kroll-O'Gara common stock. Any dividends or distributions on escrowed shares
will be paid into the escrow fund and will be held or distributed as described
above in "The Escrow Fund."
TRANSFERS OF OWNERSHIP. If you want a certificate for shares of
Kroll-O'Gara common stock to be issued in a name other than that in which the
Background America certificate surrendered in exchange is
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<PAGE> 33
registered, your Background America certificate must be properly endorsed and
otherwise in proper form for transfer. You also must pay to Kroll-O'Gara or its
agent any resulting transfer or other tax, or establish to the satisfaction of
Kroll-O'Gara that the tax has been paid or is not payable.
Any shares of Kroll-O'Gara common stock released to you from the escrow
fund will be registered in your name and may not be issued in a different name.
ESCHEAT AND WITHHOLDING. Neither Kroll-O'Gara nor Background America will
be liable to you for any shares of Kroll-O'Gara common stock and cash in lieu of
any fractional share delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. Kroll-O'Gara or the exchange agent
will deduct from the shares of Kroll-O'Gara common stock and cash in lieu of any
fractional share paid to you any amounts that Kroll-O'Gara or the exchange agent
is required to withhold under federal, state, local or foreign tax law.
LOST, STOLEN OR DESTROYED CERTIFICATES. If you are the owner of a lost,
stolen or destroyed Background America stock certificate, the exchange agent
will issue a certificate for Kroll-O'Gara common stock in exchange for your
lost, stolen or destroyed Background America stock certificate upon receipt from
you of an affidavit of that fact. However, in its discretion, Kroll-O'Gara may
require you to deliver a reasonable indemnity bond against any claim that may be
made against Kroll-O'Gara or the exchange agent with respect to a certificate
alleged to have been lost, stolen or destroyed.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
BACKGROUND AMERICA SHAREHOLDERS PROMPTLY FOLLOWING THE MERGER EXPLAINING HOW TO
EXCHANGE BACKGROUND AMERICA CERTIFICATES FOR KROLL-O'GARA CERTIFICATES. YOU
SHOULD NOT SEND IN YOUR BACKGROUND AMERICA SHARE CERTIFICATES UNTIL YOU RECEIVE
YOUR TRANSMITTAL LETTER.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties of
Background America and of Kroll-O'Gara. Those relate, among other things, to the
following matters, some of which are subject to specified exceptions:
CORPORATE STATUS. The organization, good standing, qualification and
capitalization of each party are as described in the merger agreement and
there are no commitments by Background America to issue capital stock;
APPROVALS AND FILINGS. There are no governmental or regulatory
approvals or filings required to complete the merger;
ABSENCE OF CONFLICT. The merger will not conflict with charter
documents, laws or agreements to which the party is subject, or contravene
any governmental permit or license relating to the business of the party;
ACCURACY OF REPORTS AND FINANCIAL STATEMENTS. Kroll-O'Gara has filed
its required reports and documents with the Securities and Exchange
Commission and there are no material misstatements or omissions contained
in these filings. Background America's financial statements have been
prepared fairly and in accordance with generally accepted accounting
principles and there are no undisclosed liabilities that would have a
material adverse effect on the business, assets, prospects, results of
operations or condition (a "MATERIAL ADVERSE EFFECT") of Background
America;
CONDUCT OF BUSINESS. There has been no material adverse change in the
business, assets, prospects, results of operations or condition, financial
or otherwise, of either party;
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<PAGE> 34
ABSENCE OF MATERIAL UNTRUE STATEMENTS. There are no material untrue
statements or omissions in this proxy statement/prospectus or the
registration statement filed with the SEC of which it is a part; and
OTHER MATTERS. The merger agreement also includes representations and
warranties of Background America dealing with the conduct of its business
in the ordinary course, employee relations, benefit plans, title to
properties, compliance with laws, the absence of litigation that could
reasonably be expected to have a Material Adverse Effect, intellectual
property rights, contracts, the validity and standing of any required
permits and authorizations, compliance with environmental laws, maintenance
of books and records, Year 2000 compliance, customers, taxes, private
investigation licenses and relationships and transactions with affiliates.
CONDUCT OF BUSINESS BY BACKGROUND AMERICA PENDING THE MERGER
Prior to the merger, Background America will conduct its business only in
the ordinary course of business and in a manner consistent with past practice.
Background America also will use reasonable commercial efforts to preserve
substantially intact its business organization, to keep the services of its
principal employees and to preserve its present relationships with material
customers and suppliers. For all of these purposes, and those described below,
Background America's agreements cover actions by its subsidiaries. Without the
prior consent of Kroll-O'Gara, except as permitted by the merger agreement:
AMENDMENTS. Background America will not amend its governing
documents;
CHANGES IN CAPITAL STRUCTURE OR ASSETS. Background America will not
change its capital structure, including issuing or repurchasing stock, or
mortgage, sell, pledge or otherwise dispose of its assets, declare or pay
any dividend or distribution or amend the terms of any of its securities;
INDEBTEDNESS, CAPITAL EXPENDITURES AND ACQUISITIONS. Background
America will not incur or guarantee any additional indebtedness, make any
loans, make any capital expenditures or acquire any other business;
EMPLOYMENT MATTERS. Background America will not increase the
compensation of any of its employees or increase any employee benefits;
ACCOUNTING CHANGES. Background America will not change its accounting
policies or procedures except as required by generally accepted accounting
principles;
SATISFACTION OF CLAIMS OR LIABILITIES. Background America will not
pay any material obligation, discharge or satisfy any encumbrance,
institute or settle any legal proceedings, or cancel or waive any material
debt, claim or right;
CONTRACTS. Background America will not enter into any contracts or
terminate or modify any material contract or commit to provide services for
a period of more than twelve months; and
COMMITMENTS. Background America will not commit to do any of the
foregoing.
The merger agreement contains a number of exceptions to the prohibitions listed
above which are designed to permit Background America to operate its business in
the ordinary course.
ADDITIONAL AGREEMENTS
CONSENTS; APPROVALS. Background America and Kroll-O'Gara have agreed to
use their best efforts to obtain all consents, waivers, approvals,
authorizations or orders, and to make all required filings, necessary to
complete the merger.
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<PAGE> 35
TAX TREATMENT. Each of Kroll-O'Gara and Background America has agreed not
to take any action that would reasonably be expected to adversely affect the
qualification of the merger as a tax-free reorganization under the provisions of
Section 368 of the Internal Revenue Code.
TREATMENT OF OPTIONS AND WARRANTS. Background America will use its
reasonable best efforts to obtain the consents of holders of its stock options
and warrants to amendments to those options and warrants to negate actions which
would interfere with Kroll-O'Gara's ability to account for the merger as a
pooling of interests.
POOLING ACCOUNTING TREATMENT. Each of Kroll-O'Gara and Background America
has agreed not to take any action that would reasonably be expected to affect
adversely the ability of Kroll-O'Gara to treat the merger as a pooling of
interests. Additionally, Background America has agreed to use its best efforts
to negate any past actions which would reasonably be expected to impact
adversely Kroll-O'Gara's ability to account for the merger as a pooling of
interests.
CONDITIONS TO THE MERGER
CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The
obligations of Kroll-O'Gara and Background America to complete the merger are
subject to various conditions, including:
(1) the merger agreement must have been approved by the requisite
votes of the shareholders of Background America;
(2) there must not be any pending or threatened action, proceeding or
inquiry by any court or governmental authority, or any other legal
restraint, preventing or seeking to prevent or invalidate the merger or
Kroll-O'Gara's ownership or operation of the business of Background
America;
(3) in each case, the representations and warranties of the other
party contained in the merger agreement must be complete and correct in all
material respects;
(4) in each case the other party must have performed or complied in
all material respects with all of its agreements and covenants required by
the merger agreement; and
(5) for Kroll-O'Gara there must have been no event or series of events
which has had, or is reasonably likely to have, a Material Adverse Effect
on Background America since October 31, 1998 and, for Background America,
there must have been no event or series of events which has had, or is
reasonably likely to have, a Material Adverse Effect on Kroll-O'Gara since
September 30, 1998.
ADDITIONAL CONDITIONS TO OBLIGATIONS OF KROLL-O'GARA. The obligations of
Kroll-O'Gara to complete the merger are subject to additional conditions,
including:
(1) Background America must have obtained all material required
consents, waivers, approvals, authorizations or orders, and made all
required filings, except where the failure to do so would not reasonably be
expected to have a Material Adverse Effect;
(2) Kroll-O'Gara must have received an opinion of Arthur Andersen LLP,
in form and substance reasonably satisfactory to Kroll-O'Gara, regarding
the qualification of the merger for pooling of interests accounting
treatment and Background America must have received an opinion of its
accountants, in form and substance reasonably satisfactory to Kroll-O'Gara,
regarding the poolability of Background America;
(3) with the consents of their holders, Background America's stock
options and warrants must have been amended or otherwise dealt with on
terms and conditions reasonably satisfactory to Kroll-O'Gara;
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<PAGE> 36
(4) Kroll-O'Gara must have received from each "affiliate" of
Background America an agreement to comply with the restrictions on
affiliates under Rule 145 under the Securities Act and under pooling of
interests accounting treatment;
(5) the holders of no more than 7.5% of Background America's
outstanding shares may have exercised dissenters' rights in connection with
the merger; and
(6) the escrow agreement must have been executed by Background
America.
TERMINATION
The merger agreement may be terminated at any time prior to its
effectiveness, notwithstanding its approval by the shareholders of Background
America:
(1) by mutual written consent authorized by the Boards of Directors of
Kroll-O'Gara and Background America; or
(2) by either Kroll-O'Gara or Background America if the merger is not
completed by June 30, 1999, except that a party whose failure to fulfill a
material obligation under the merger agreement has prevented consummation
of the merger by that date cannot terminate the merger agreement for this
reason; or
(3) by Kroll-O'Gara if there has been a material misrepresentation,
breach or failure to comply with its obligations by Background America; or
(4) by Background America if there has been a material
misrepresentation, breach or failure to comply with its obligations by
Kroll-O'Gara.
MARKET PRICES AND DIVIDENDS
MARKET PRICES
Kroll-O'Gara common stock trades on the Nasdaq National Market under the
symbol "KROG." On March 31, 1999, there were approximately 197 record owners of
Kroll-O'Gara common stock.
There is no public trading market for Background America's common or
preferred stock. There are 19 holders of Background America common stock and 17
holders of Background America preferred stock.
The table below sets forth the high and low sale prices for Kroll-O'Gara
common stock as reported by The Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1997
First Quarter............................................. 13.25 9.00
Second Quarter............................................ 13.00 9.00
Third Quarter............................................. 15.00 10.25
Fourth Quarter............................................ 20.00 16.00
1998
First Quarter............................................. 19.25 16.50
Second Quarter............................................ 22.00 17.00
Third Quarter............................................. 26.00 18.50
Fourth Quarter............................................ 40.50 20.00
</TABLE>
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<PAGE> 37
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1999
First Quarter............................................. 40.88 26.31
Second Quarter (through May 13, 1999)..................... 29.00 20.88
</TABLE>
DIVIDENDS
Kroll-O'Gara expects that any future earnings will be retained to finance
its operations and for the growth and development of its business. Accordingly,
Kroll-O'Gara currently does not expect to pay cash dividends on its shares of
common stock in the foreseeable future. Additionally, the terms of
Kroll-O'Gara's Senior Notes and the credit agreement with its bank require
maintenance of certain financial ratios which may limit the funds available for
cash dividends. The payment of any future dividends will be subject to the
discretion of the Board of Directors of Kroll-O'Gara and will depend on
Kroll-O'Gara's results of operations, financial position and capital
requirements, general business conditions, restrictions imposed by financing
arrangements, if any, legal restrictions on the payment of dividends and other
factors its Board of Directors deems relevant.
Background America has never paid a cash dividend on its common stock.
Background America's dividend policy has been to retain any earnings to support
the expansion of operations. If the merger is not completed, Background
America's Board of Directors currently does not intend to pay cash dividends on
the Background America common stock in the foreseeable future. Any future cash
dividends would depend on earnings, capital requirements, Background America's
financial condition and other factors then deemed relevant by the Background
America Board. No dividends accrue or are payable on the Background America
preferred stock until June 2000.
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<PAGE> 38
THE KROLL-O'GARA COMPANY
Kroll-O'Gara is a leading global provider of a broad range of specialized
products and services designed to supply solutions to a variety of security
needs. Kroll-O'Gara provides governments, businesses, and individuals with
information, analysis, training, advice and products to mitigate the growing
risks associated with fraud, electronic threats, physical threats, and
uninformed decisions based upon incomplete or inaccurate information.
Kroll-O'Gara is organized into three primary business groups: Investigations and
Intelligence, Security Products and Services and Information Security.
The Investigations and Intelligence Group provides:
- financial services, including forensic accounting, asset tracing
services and pre-acquisition due diligence;
- business investigations and intelligence services, including
litigation support, monitoring, and intellectual property infringement
investigations;
- corporate services, including pre-employment background checking, drug
testing, surveillance and vendor integrity programs;
- corporate security services, including security architecture and
planning; and
- computer forensics services, including data recovery and litigation
support.
The Security Products and Services Group provides:
- armored products, including ballistic and blast protected armoring
systems for commercial and military vehicles; and
- security services, including advanced driver training, force
protection training and risk and crisis management.
The Information Security Group provides objective information security
services, including:
- network and system security assessment;
- product evaluation and assessment;
- security policy creation and implementation;
- security architecture and design; and
- security training.
Kroll-O'Gara serves a diverse customer base, including large multinational
corporations, medium and small businesses, individuals, law firms, investment
and commercial banks and U.S. and foreign government agencies.
On April 28, 1999, Kroll-O'Gara's Board of Directors approved a formal plan
to discontinue operations of Kroll-O'Gara's Voice and Data Communications Group.
Kroll-O'Gara's Voice and Data Communications business was engaged in reselling
satellite communication and navigation equipment, selling airtime for satellite
telephones and designing and installing integrated satellite communication
systems in vehicles.
See "Where You Can Find More Information" for additional information on
Kroll-O'Gara which is incorporated by reference into this proxy
statement/prospectus.
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<PAGE> 39
BACKGROUND AMERICA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto of Background America appearing elsewhere in this
proxy statement/prospectus.
GENERAL
Background America and its wholly owned subsidiaries, Concord Security
Services, Inc., a Maryland corporation, Quality Facts, Inc., an Alabama
corporation, and Background America of Florida, Inc., a Tennessee corporation,
deliver background investigation services to government, corporate, not-
for-profit, professional and other clients. Background America was incorporated
in Tennessee on September 8, 1995.
Background America offers five primary types of services: Conventional
Contract Services, Automated Contract Services, Telephony Services, Database
Services and Due Diligence Services. In providing Conventional Contract
Services, Background America delivers, in response to a specific background
inquiry, a report based upon manual research of public and non-public sources
utilizing mail, facsimile or courier for communication to and from the customer.
Background America provides services similar to Conventional Contract Services
by means of its Automated Contract Services, which integrates the report
request, data gathering and report delivery functions with the information
transfer capabilities of the internet. Background America's Telephony Services
provide customers with automated human resources functions, such as
pre-screening and recruitment of potential employees. Another proposed feature
of Background America's Telephony Services is an information delivery system
providing access, by means of computer telephony services, to educational and
employment records that have been downloaded to a Background America file
server. Background America also provides Database Services, which permit
customers to perform their own searches of public information maintained by
Background America on its central file server, and Due Diligence services which
consist of more involved background searches.
QUALITY FACTS STOCK PURCHASE. On January 31, 1996, Background America
acquired all of the issued and outstanding stock of Quality Facts, Inc. Prior to
the acquisition, Quality Facts was engaged in the business of providing
background checks and pre-employment screening. In the acquisition, Background
America paid $300,000 cash; issued 12,000 shares of Background America common
stock; and agreed to pay 50% of the federal income taxes payable by each Quality
Facts shareholder, and $500 to each Quality Facts shareholder for state income
taxes, relating to the sale of the shareholder's Quality Facts stock. In
addition, Background America issued to the Quality Facts shareholders options to
purchase a total of 10,200 shares of Background America common stock at per
share exercise prices ranging from $0.75 to $2.00, with a weighted average
exercise price of $1.55 per share. In conjunction with the acquisition of
Quality Facts, Background America entered into employment agreements with each
of the three shareholders of Quality Facts, guaranteeing each employment for a
period of two years ending in February 1998 at an annual salary of $36,000.
Background America continues to employ two of these shareholders and has entered
into new employment agreements with them.
BACKGROUND SOURCE ASSET PURCHASE. Effective June 27, 1996, Background
America acquired substantially all of the assets and assumed certain liabilities
of Background Source, Inc., a Tennessee corporation. The assets purchased
included all of the tangible and intangible assets of Background Source used in
its business of performing background searches. In connection with the purchase
of these assets, Background America paid $110,000 and assumed some current
liabilities of Background Source
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<PAGE> 40
incurred in the ordinary course of business. Background America also issued to
the majority shareholder of Background Source a stock purchase warrant to
purchase 500 shares of Background America common stock at an exercise price of
$3.50 per share.
CONCORD STOCK PURCHASE. Background America acquired all of the issued and
outstanding stock of Concord Security Services, Inc. effective June 1, 1996.
Concord was engaged in the business of performing background searches and
pre-employment screening. Background America issued 128,572 shares of Background
America common stock in the acquisition and granted to each Concord shareholder
the right to put to Background America all, but not less than all, of the shares
of Background America common stock issued to that shareholder at a price of
$3.85 per share. The put right expired in May 1997, without being exercised by
any former shareholder of Concord. So long as the former Concord shareholders
own at least 128,572 shares of Background America common stock, they are
entitled to recommend one person for election to the Background America Board of
Directors, and Background America is required to use its reasonable efforts to
cause the nominee to be elected to the Board of Directors. It is anticipated
that this right will be waived in connection with the merger with Kroll-O'Gara.
In connection with the Concord acquisition, Background America also entered into
a three-year employment agreement with one of the principals of Concord to serve
as Director of Maryland Operations. The employment agreement provides for an
annual compensation package comprised of salary, benefits, car allowance, taxes
and all other costs attributed to employment in an aggregate amount not to
exceed $80,000.
TCIC ASSET PURCHASE. As of December 9, 1996, Background America acquired
substantially all of the assets of Tennessee Criminal Information Center, a
Tennessee general partnership. The assets purchased included all of the tangible
and intangible assets of TCIC used in its business of performing background
searches and maintaining a computerized database of criminal arrest records. In
connection with the asset purchase, Background America paid $183,678 and assumed
liabilities of TCIC with respect to prepaid customer credits.
1997 ISSUANCE OF PREFERRED STOCK. In June 1997, Background America issued
1,143,700 shares of Series A Preferred Stock to various purchasers at a price of
$5.25 per share. In connection with the issuance of the Preferred Stock,
Background America, the Preferred Stock purchasers and selected employees of
Background America (the "MANAGERS") entered into a Shareholders' Agreement
providing some of the Preferred Stock purchasers rights regarding representation
on Background America's Board of Directors, and rights of first refusal and
co-sale with respect to Background America common stock owned by some of the
Managers. As a condition to the purchase of the Preferred Stock, each of the
Managers also executed a covenant-not-to-compete with Background America.
PROFILES PLUS MERGER. On March 26, 1998, Profiles Plus, Inc., a Florida
corporation engaged in the business of performing background searches and
pre-employment screening, merged into Background America of Florida, Inc., a
wholly owned subsidiary of Background America. In connection with the Profiles
Plus merger, 83,334 shares of Background America common stock were issued,
approximately $140,000 of indebtedness of Profiles Plus was repaid, and
Background America granted each of the shareholders of Profiles Plus the right
to put to Background America all, but not less than all, of the shareholder's
Background America common stock at a price of $6.00 per share. A put option
relating to 27,778 shares issued in the acquisition was exercised; the remaining
put options expired unexercised. Background America paid $133,996 to the
Profiles Plus shareholders in consideration of agreements not to compete and
entered into an independent contractor agreement with one Profiles Plus
shareholder providing for, over a period of 48 months, guaranteed payments
$175,000 and allowing him to earn commissions. In addition, Background America
entered into two-year employment agreements with two non-shareholder employees
providing for annual salaries of $48,000 and $38,000, respectively, and
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<PAGE> 41
providing bonuses based upon the net operating income derived from the
activities of the Clearwater, Florida office. Background America granted the
non-shareholder employees stock options to purchase 5,000 shares of Background
America common stock at an exercise price of $3.00 per share and options to
purchase 500 shares of Background America common stock at an exercise price of
$6.00 per share.
ACCOUNTING TREATMENT. The acquisitions and the merger described above were
accounted for using the purchase method. Accordingly, the purchase prices paid
by Background America have been allocated to the assets purchased and
liabilities assumed based upon their estimated fair values at the date of
acquisition. The excess of the purchase price over the estimated fair value of
all net assets acquired is being amortized on a straight-line basis over 12
years.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1997 AND 1998
The following table sets forth selected results of operations for the
fiscal years ending December 31, 1997 and 1998, which are derived from the
audited consolidated financial statements of Background America appearing
elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
REVENUES.................................................... $ 4,221,059 $ 7,350,666
COSTS OF SALES.............................................. 3,447,569 5,103,967
----------- -----------
Gross profit........................................... 773,490 2,246,699
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 1,899,086 2,897,725
Depreciation and amortization............................. 279,214 513,394
Merger related costs...................................... -- 388,000
----------- -----------
Total operating expenses.................................. 2,178,300 3,781,119
----------- -----------
Operating loss............................................ (1,404,810) (1,534,420)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (84,463) (12,258)
Interest income........................................... 93,106 91,639
Other, net................................................ 59,523 38,665
----------- -----------
Total other income........................................ 68,166 118,046
----------- -----------
NET LOSS.................................................... $(1,366,644) $(1,416,374)
=========== ===========
</TABLE>
REVENUES. Background America recognizes revenues at the time services are
completed using the accrual method. Revenues increased $3,129,607, or 74%, from
$4,221,059 in 1997 to $7,350,666 in 1998. Of this amount $1,333,327, or 43%,
related to sales contributed during 1998 due to the acquisition of Profiles Plus
on March 26, 1998. The remainder of the increase was due to an overall increase
in the volume of services provided by Background America's existing businesses.
COST OF SALES AND GROSS PROFIT. Costs of sales for 1998 increased
$1,656,398, or 48%, from $3,447,569 in 1997 to $5,103,967 in 1998. Gross
operating profit as a percentage of revenues increased from 18% in 1997 to 31%
in 1998. The increase in cost of sales was due to increases in Background
America's business activities as discussed above in "Revenues." The increase in
gross profit percentage was primarily due to a reduction in labor costs
resulting from the further implementation of Background America's automated
background report development system. Background America expects continued
reduction in labor costs throughout 1999 as a result of broader implementation
of the report development system inclusive of additional system refinements.
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<PAGE> 42
OPERATING EXPENSES. Operating expenses for 1998 increased $1,602,819, or
74%, from $2,178,300 in 1997 to $3,781,119 in 1998. Operating expenses as a
percentage of revenues decreased from 52% in 1997 to 51% in 1998. The increase
in operating expenses consisted of approximately $495,000 of operating expenses
generated by Profiles Plus, $388,000 of merger related professional fees, and
approximately $475,000 in additional sales commissions due to increased sales
volumes. The remaining increase was attributable to additional depreciation and
information systems labor reflecting Background America's commitment to the
advancement of its automated background report development system.
OTHER INCOME AND EXPENSE. Interest expense decreased $72,205, or 85%, from
$84,463 in 1997 to $12,258 in 1998. Interest expense, primarily related to notes
payable to shareholders, was significantly reduced beginning in July 1997 as a
result of $1,053,735 of the notes payable and related accrued interest being
cancelled in exchange for the sale of the Series A Preferred Stock, with a
further reduction in the notes payable from cash provided from the sale of the
Series A Preferred Stock. Interest income was virtually the same in 1998 and
1997, with a decrease of $1,467 in 1998. Interest income was generated as a
result of availability of liquid assets derived from the sales of Series A
Preferred Stock in June 1997. Other income decreased $20,858, or 35%, from
$59,523 for 1997 to $38,665 for 1998 resulting primarily from the discontinuance
by Background America, in July 1998, of providing payroll and accounting
services to companies with common ownership with Background America.
NET LOSS. Net loss increased $79,730, or 6%, from $1,336,644 in 1997 to
$1,416,374 in 1998. The increase was due primarily to the $1,602,819 increase in
operating expenses offset somewhat by the improvement in gross margin during
1998.
COMPARISON OF FISCAL 1996 AND 1997
The following table sets forth selected results of operations for the
fiscal years ended December 31, 1996 and 1997, which are derived from the
audited consolidated financial statements of Background America appearing
elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
REVENUES.................................................... $ 1,775,815 $ 4,221,059
COSTS OF SALES.............................................. 1,624,319 3,447,569
----------- -----------
Gross profit........................................... 151,496 773,490
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 1,118,116 1,899,086
Depreciation and amortization............................. 118,624 279,214
----------- -----------
Total operating expenses.................................. 1,236,740 2,178,300
----------- -----------
Operating loss............................................ (1,085,244) (1,404,810)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (41,801) (84,463)
Interest income........................................... -- 93,106
Other, net................................................ (1,874) 59,523
----------- -----------
Total other income (expense).............................. (43,675) 68,166
----------- -----------
NET LOSS.................................................... $(1,128,919) $(1,336,644)
=========== ===========
</TABLE>
REVENUES. Revenues increased $2,445,244, or 138%, from $1,775,815 in 1996
to $4,221,059 in 1997. The primary reasons for this increase were a full year's
contribution to revenues provided by Concord, as well as increases in the number
of customers attributable to increased sales efforts. In 1997,
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<PAGE> 43
Background America revenues included nearly $2,000,000 of revenues from Concord,
an increase of more than $1,350,000 over the revenues contributed by Concord in
1996.
COST OF SALES AND GROSS PROFIT. Costs of sales for 1997 increased
$1,823,250, or 112%, from $1,624,319 in 1996 to $3,447,569 in 1997. Gross
operating profit as a percent of revenues increased from 8% in 1996 to 18% in
1997. The increase in cost of sales was due to increases in Background America's
business activities as discussed above in "Revenues." In particular, Background
America's cost of sales attributable to Concord increased by approximately
$900,000 in 1997 over 1996. The increase in gross profit percentage was
primarily due to reduction of labor costs resulting from Background America's
automated background report development system.
OPERATING EXPENSES. Operating expenses for 1997 increased $941,560, or
76%, from $1,236,740 in 1996 to $2,178,300 in 1997. Operating expenses as a
percentage of revenues decreased from 70% to 52% from 1996 to 1997. The primary
reasons for the increase in operating expenses were an increase of approximately
$300,000 in operating costs due to a full year's expenses associated with the
Concord acquisition and approximately $300,000 of additional sales and marketing
costs. Other significant items contributing to increased operating expenses
included increased depreciation and amortization associated with the expansion
of Background America's computer system, and the impact of a full year's
amortization of the goodwill associated with the 1996 acquisitions.
OTHER INCOME AND EXPENSE. In 1996, Background America incurred a net other
expense of $43,675, consisting primarily of interest expense in the amount of
$41,801. Interest expense of $39,600 was incurred on notes payable to Michael D.
Shmerling and Alan Wernick, who were shareholders, officers and directors of
Background America at the time the loans were made. In 1997, Background America
received net other income of $68,166, comprised of interest expense of $84,463,
interest income of $93,106 and other income of $59,523. The increased interest
expense was due to increased borrowings to support an increased level of
operations and expenses associated with Background America's automated
background report development system, including the expansion of Background
America's computer system. The interest income in 1997 was due to interest
earned on the proceeds derived from the sale of Series A Preferred Stock. The
other income of $59,523 in 1997 was comprised of payroll and accounting services
provided to companies with common ownership with Background America and of
rental income from subleasing a portion of the building in which Background
America's corporate headquarters is located. The payroll and accounting services
were discontinued in July 1998.
NET LOSS. Net loss for 1997 increased $207,725, or 18%, from $1,128,919 in
1996 to $1,336,644 in 1997. The increased net loss was due to an increase in
cost of sales and operating expenses as described above resulting from the
growth of Background America's business from 1996, its first year of operations,
to 1997.
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
Background America has historically used stock options to retain and
compensate officers, directors, employees and others. During 1996, 1997 and
1998, Background America granted options for the purchase of 59,952, 189,125 and
112,200 shares, respectively, of Background America common stock to officers,
directors, employees and others. SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to adopt the fair
value method of accounting for stock-based compensation. Background America has
chosen to continue to account for stock-based employee compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees and Related Interpretations. If compensation cost for
stock-based compensation had been determined based on the fair value of the
options at the grant dates consistent with the methodology prescribed under SFAS
No. 123, Background America's pro forma loss for 1996
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<PAGE> 44
would have increased to $1,134,412, an increase of $5,493 over the reported
loss, Background America's pro forma loss for 1997 would have increased to
$1,383,360, an increase of $46,716 over the reported loss, and Background
America's pro forma loss for 1998 would have increased to $1,475,749, an
increase of $59,375 over the reported loss.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards which require that derivative instruments be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement is effective for financial statements of Background America
for the year ended December 31, 2000. Management of Background America believes
that adoption of SFAS 133 will not have a material effect on Background
America's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL SOURCES. To supplement cash generated from operations, Background
America has borrowed money pursuant to various credit arrangements and, in June
1997, issued shares of Series A Preferred Stock. During 1996, 1997 and 1998,
certain shareholders of Background America made loans to Background America
payable on demand, bearing interest at annual rates ranging from 8.50% to 8.75%.
The shareholder loans have been repaid in full. From the preferred stock sale,
Background America received cash proceeds of $4,914,317, net of issuance costs
totaling $36,373, and cancelled $1,053,735 of principal and accrued interest
under the shareholder loans. On April 4, 1997, Background America entered into a
credit agreement with NationsBank of Tennessee, N.A., which provides for a line
of credit of up to $1,000,000. The outstanding principal balance of the
NationsBank line of credit bears interest at a floating rate equal to
NationsBank index rate. The NationsBank line of credit matures in April 1999 and
is guaranteed by certain shareholders of Background America. As of March 1,
1999, no amounts were outstanding under the NationsBank line of credit. As of
September 30, 1998, Background America had approximately $1,058,328 remaining
from the preferred stock sale, all in the form of highly liquid investments with
original maturities of three months or less.
CASH FLOW. Net cash used in operating activities in 1998 totaled $764,117,
a decrease of $719,202 from the $1,482,319 used in operating activities in 1997.
Net cash used in operating activities in 1998 was significantly lower than in
1997 because Background America began to break even on operations in August 1998
primarily due to a reduction in labor costs associated with implementation of
automated background reporting.
Net cash used in investing activities in 1998 increased $146,445 from
$495,488 in 1997 to $641,933 in 1998. The primary reason for the increase was
that Background America did not consummate any acquisitions in 1997, but paid
approximately $260,000 in 1998 in connection with the Profiles Plus merger. This
increase was partially offset by a decrease of approximately $113,000 in capital
expenditures in 1998.
Background America used $342,725 in financing activities in 1998, compared
to $4,810,942 generated from financing activities in 1997. The 1997 financing
activities primarily consisted of the sale of Series A Preferred Stock. 1998
financing activities included the payment of $166,668 to a shareholder of
Background America who exercised the right to put all of his Background America
common stock to the company. The common stock was issued and the put right was
granted as partial payment in the
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<PAGE> 45
Profiles Plus merger. The other 1998 financing activity was the payment of
$176,057 of notes payable to certain officers of Background America.
FUTURE OPERATIONS AND LIQUIDITY. Background America leases certain office
space under noncancelable operating lease agreements. Total estimated rents for
1999 are $222,814. Certain of these office leases are between Background America
and Michael D. Shmerling, an executive officer of Background America and member
of its board of directors. Background America believes that the terms of these
leases are comparable to terms that would be obtained in arms' length
transactions with unaffiliated third parties. Background America is also
obligated to make payments on various agreements executed in connection with
acquisitions previously consummated in an estimated aggregate amount of $60,400
for 1999. Background America has approximately $1,000,000 available from the
proceeds of the June 1997 sale of Series A Preferred Stock to fund its
operations, which Background America believes will provide it with sufficient
liquidity for the next three to six months. Background America intends to
continue to increase its revenues, both by acquisitions and penetration of new
markets and believes that its liquidity needs for the next six months to two
years will be satisfied by anticipated positive cash flows.
QUARTERLY FLUCTUATIONS. Background America normally does not have long
term contracts with its clients, and, accordingly, net sales are dependent upon
the initiation of new engagements, many of which may be for a short duration.
Period-to-period comparisons within a year or between years may not be
indicative of results for a full fiscal year, and results of operations for a
particular quarter may not be indicative of the results to be expected for other
quarters.
FORWARD-LOOKING STATEMENTS. Forward-looking statements are made throughout
this Management's Discussion and Analysis of Financial Conditions and Results of
Operations. Background America's results may differ materially from those in the
forward-looking statements. Forward-looking statements are based on management's
current views and assumptions, and involve risks and uncertainties that could
significantly affect expected results. For example, operating results may be
affected by external factors such as actions of competitors, changes in laws and
regulations, customer demand, effectiveness of programs, strategic relations,
fluctuations in the cost and availability of resources.
YEAR 2000 ISSUES AND CONTINGENCIES
STATE OF READINESS. Background America's business relies significantly on
the appropriate functioning of various internally-operated and designed software
system applications and also uses the Internet to process and receive requests
to conduct background checks. Background America's management believes that the
Year 2000 issue will not have an adverse effect on use of the Internet as an
order and delivery platform, but it is reviewing and updating other operating
systems on an ongoing basis to resolve the potential Year 2000 risks. Background
America plans to complete assessment, remediation, validation and implementation
of its multi-phase plan by August 31, 1999.
Background America began preliminary meetings in the fall of 1995 to
develop a Year 2000 plan. A formal Y2K Committee was formed in August 1998.
Based on this committee's work, Background America has implemented a
comprehensive working assessment for both information technology and
non-information technology systems. The Y2K Committee established goals and
deadlines and created the following three target categories to address:
- infrastructure & hardware
- operating systems and applications, and
- external factors.
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<PAGE> 46
Infrastructure and Hardware: Background America installed a Y2K
compliant core networking infrastructure in February 1999. Y2K compliant
application and file servers also have been installed. Currently,
analytical polling software is being used to record and diagnose Y2K
compliance problems on all work stations, and Background America promptly
addresses any problems that are identified.
Operating Systems and Applications: Background America has been
developing code in four-digit year format since its incorporation in 1995.
Therefore, Background America does not anticipate any material problems
with internally developed software. Further, Background America has already
replaced externally developed accounting and office software that was not
Y2K compliant. The polling software which is being used is expected to
identify any uncorrected issues by May 1999.
External Factors: In October 1998 Background America sent written
surveys to its vendors and clients requesting information regarding their
Y2K compliance issues, progress and/or plans. A follow-up survey to those
who did not respond was sent in April 1999. The Y2K Committee will review
and analyze the responses by June 1999. Vendors who fail to respond have
been warned that they risk being replaced with a vendor that is addressing
potential Y2K issues. Background America is continuing to assess the risks
and contingencies for third-party providers of records, strategic partners,
and governmental repositories and has initiated dialogue with its key
vendors and customers to determine the extent of any exposure that may
exist with respect to failure on the part of third parties to become Year
2000 compliant. Currently, Background America is working with all of the
vendors with whom it transmits key criminal records/data electronically to
address any Y2K issues in the transmission of that data.
COSTS. To date, Background America has spent approximately $75,000 to
address Year 2000 issues. Most of this amount has been spent on professional
services, hardware replacement, software support and maintenance. The cost of
replacement or new hardware/software purchased is capitalized. All other costs
associated with remedial actions are expensed as incurred. Background America
expects to incur approximately $115,000 in additional Y2K related expenses.
RISKS. The costs associated with Background America's efforts to become
Year 2000 compliant and the date it expects to complete the required
modifications are based on management's current estimates. These estimates
reflect numerous assumptions as to future events, including the continued
availability of required resources and the actions of third party vendors and
government agencies. There can be no assurance that the final costs of the Year
2000 compliance project will not exceed the current estimates or that all
systems will be compliant by the anticipated compliance date. Many of the
databases of public records that Background America accesses in its business of
performing background searches utilize a two-digit year format. If some portion
of these databases, or the information provided by other vendors, is not
available due to Year 2000 noncompliance, the timeliness of Background America's
service may be impacted. Background America would then have to resort to manual
searches, which would be more expensive and time-consuming and likely would
decrease its database revenues. There can be no assurances that any failure in
Background America's systems or those of third parties to be Year 2000 compliant
will not have an adverse material effect on Background America.
CONTINGENCY PLAN. Background America has begun to implement a contingency
plan to address the possible worst risk scenario relating to the Year 2000
issue. The contingency plan includes a search for alternative vendors,
installation of redundant server hardware, installation of terminal server
stations to cover workstation compliance, and staff rotation schedules from
12:01 a.m. New Years Day to support any disruptions in services. Background
America expects that the systems will be in place internally to accept and
process Year 2000 compliant information/data on or before December 31, 1999.
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BUSINESS
GENERAL
Background America provides background investigation services to
government, corporate, not-for-profit, professional and other clients.
Background America was incorporated in Tennessee on September 8, 1995.
Background America of Florida was incorporated in Tennessee on March 19, 1998,
as a wholly owned subsidiary of Background America, to act as the acquiring
company in a merger with Profiles Plus, Inc. of Clearwater, Florida. Prior to
its acquisition by Background America, Concord Security Services, Inc. was
incorporated in Maryland on March 21, 1991. Prior to its acquisition by
Background America, Quality Facts, Inc., was incorporated in Alabama on December
1, 1992. The corporate headquarters of Background America is located at 1900
Church Street, Suite 400, Nashville, Tennessee 37203.
Background America's founders established Background America in response to
a perceived need for faster access to background investigation services. The
core of Background America's senior management team was previously part of a
private criminal justice firm specializing in correctional facility management.
Recognizing the importance of pre-employment screening for potential employees
in correctional facilities management, Background America researched the
industry and the existing providers of background services. As a result,
Background America developed an automated system to obtain and report relevant
background information. In addition to traditional means of communication, such
as mail, fax and telephone, Background America's system utilizes the internet,
asynchronous dial-up and a computer telephony integration system to receive,
produce and report its findings to its customers, providing them with background
reports.
SERVICES
Background America's corporate headquarters is located in Nashville,
Tennessee, and Background America maintains operations centers and sales offices
in Hampstead, Maryland; Clearwater, Florida; and Nashville, Tennessee. In
addition, Background America has regional sales representatives located in
Birmingham, Alabama; Jacksonville, Florida; Memphis, Tennessee; Chicago,
Illinois; Omaha, Nebraska; and Annapolis, Maryland. Background America markets
five primary types of services: Conventional Contract Services, Automated
Contract Services, Telephony Services, Database Services and Due Diligence
Services.
CONVENTIONAL CONTRACT SERVICES. In providing Conventional Contract
Services, Background America delivers, in response to each background inquiry,
background reports specifically tailored for a particular client. The
information provided by Background America in each report is based on research
of both public and non-public sources of information. Historically, Background
America has performed Conventional Contract Services using conventional methods
of communication with the client and with Background America's information
sources, such as mail, fax and telephone.
AUTOMATED CONTRACT SERVICES. In February 1997, Background America
initiated its first internet client, bringing into first use its Automated
Contract Services, which it markets under the brand name BAI Online(sm).
Automated Contract Services are essentially a means of providing background
investigation services formerly available only under Background America's
Conventional Contract Services by more efficient methods. Automated Contract
Services simplify the Conventional Contract Services process and eliminate
duplication of effort, such as multiple faxes and redundant data entry, by
integrating the report request, data gathering and report delivery functions
with the information transfer capabilities of the internet.
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Background America expects Automated Contract Systems to become its largest
revenue generator over the next two to four years. As discussed above, Automated
Contract Systems, by automating the order entry, file transfer, information
procurement, report generation and integrated billing functions, significantly
increase efficiencies in operation by reducing human capital requirements.
Background America believes that these efficiencies will result in a higher
gross margin than services provided under Conventional Contract Services.
TELEPHONY SERVICES. In late 1997, Background America invested in a
computer telephony integration system, which Background America offers under the
brand name TelApply(sm). TelApply(sm)enables clients to screen respondents to
media advertisements for employment. Applicants are initially screened through a
series of questions asked by the computer telephony system, with the actual
format and questions established by the client. Candidates who satisfy the
client's initial screening requirements may be invited to a personal interview
with the client company. Background America intends to offer the TelApply(sm)
service by means of internet access in the future, through the U.R.L.
selectsuccess.com. In the future, Background America intends to offer clients
the ability to outsource verification of employment and educational history as a
part of its Telephony Services, as well.
DATABASE SERVICES. Database Services permit customers to search public
information maintained and regularly updated by Background America on its
central file server. The information available from this database includes local
arrest records and state felony records. Background America anticipates that
additional information will be added to this database in the future. Database
Services can be accessed directly by the client via the internet, allowing
Background America's customers to formulate and perform their own ad hoc
searches of available data. Background America also searches the information
available through its Database Services to assist in generating background
reports offered through its Conventional Contract and Automated Contract
Services. Database Services have a very low marginal service cost component,
with the majority of costs attributable to in-house technical support by
management information systems personnel. Costs of sales associated with the
provision of Database Services result from supplier costs incurred in the
pass-through of data.
DUE DILIGENCE SERVICES. Background America offers its more comprehensive
background searches through the Capital Intelligence(TM) brand name. Capital
Intelligence(TM) services are marketed to banks, investors and lawyers for
assistance with high level executive decisions. In addition to the information
provided by means of Conventional Contract Services, Capital Intelligence(TM)
services include a ten-year comprehensive search of tax liens, civil litigation
and periodical articles regarding individuals and business entities.
CUSTOMERS AND CONTRACTUAL ARRANGEMENTS
Background America's has approximately 3500 clients nationwide, including
large, publicly held companies, small, private businesses, non-profit
organizations and governmental entities. Significant clients include Mariner
Post-Acute Health Network, Gaylord Entertainment, American General Life &
Accident Insurance, Aerotek, SouthTrust Bank, Genesis Elder Care and Sylvan
Learning Centers. Background America has written service agreements with its
clients, but these agreements do not provide for any minimum level of usage and
typically may be terminated upon relatively short notice by either Background
America or the client. Approximately one-third of Background America's 1998
revenues were derived from only three clients, and the loss of one or more of
such clients could have a material, adverse effect on Background America's
results of operations. In particular, one client, Aerotek, generated over 10% of
Background America's revenues during 1998.
Background America relies upon outside vendors to retrieve public records
from remote sources. These vendors include individuals, private investigation
firms and large public record retrieval
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companies. Background America is not able to direct the search methodology of
its vendors or confirm that, in conducting a particular search, the vendor has
conducted an actual search, searched properly, deciphered public information
correctly, and returned search information to Background America with all
required information. Background America has entered into written contracts with
the majority of its vendors which require the vendors to indemnify Background
America against any claims by a consumer or customer based on inaccurate or
incomplete public record information.
MARKETING AND SALES
Background America has focused its marketing efforts on emphasizing its
transition to an information technology company. Background America strategy is
to grow by means of:
- forging strategic alliances with companies who can feed Background
America's core business;
- making strategic acquisitions of companies who offer a technological,
geographic or specific product advantage;
- developing internal systems to provide higher quality products requiring
less labor that may be delivered more quickly to the client;
- developing internal products and databases that allow Background America
to create new sources of revenue, providing Background America
opportunities to participate earlier in the hiring process, thereby
creating more demand for its core products;
- developing a cost-effective telephony system to automate data access and
permit Background America to access such data for its own core business
uses and for marketing to others; and
- earning a reputation for quality, fairness in pricing and staying on the
cutting edge of technology.
COMPETITION
Background America believes that the market for its services is crowded
with, and fragmented by, providers of various services. Background America
believes that one major vendor -- a spin-off of a credit bureau -- controls a
significant portion of the background investigation market. Background America
believes that a large segment of the market is occupied by thousands of "mom and
pop" competitors, that are often operated by a former law enforcement officer or
other individual with substantial courthouse contacts in a single locality who
can locate the records for a background report. Many of these businesses are
suppliers of public records to Background America.
Background America believes that the principal methods of competition in
its industry consist of differentiation based upon price; quality of service,
including both timeliness and accuracy; the ability to offer clients automated
solutions to information needs; and the ability to offer ancillary research and
information to permit clients to comply with legal requirements. Background
America believes that it is highly competitive within its industry when
evaluating these factors.
CERTIFICATION AND GOVERNMENT REGULATION
Background America's services are subject to various federal, state and
local laws, including laws designed to protect the privacy of persons and laws
requiring licensure of private investigators. Individuals who are the subject of
a background check are entitled by federal law to a reinvestigation. Background
America is licensed as a private investigation firm in Tennessee and Maryland,
and Background America of Florida is licensed as a private investigation firm in
the State of Florida. If the officers of Background America change following the
merger, the State of Tennessee requires notification, and the States of Florida
and Maryland require notification and application by the new
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officers. Various officers and employees of Background America and/or its
subsidiaries are licensed as private investigators in Tennessee, Florida or
Maryland. In some cases, notification of a change in ownership of the employer
of a private investigator is required.
ENVIRONMENTAL MATTERS
Background America is subject to various federal, state and local
environmental laws and regulations. Background America has obtained a Phase I
environmental report on its headquarters site in Nashville, Tennessee which
indicates that the site is "acceptable." Background America's Uninterrupted
Power Source backup system, maintained at its headquarters, contains sealed
batteries, the use and disposal of which are subject to environmental laws and
regulations. Since its formation in 1995, Background America has not received
any notices that it or its properties are not in compliance with environmental
laws and regulations.
EMPLOYEES
As of March 1, 1999, Background America had approximately 100 full-time
employees and approximately 25 part-time employees, none of whom are represented
by a labor organization. Background America considers its relations with its
employees to be good.
PROPERTIES
Background America does not own any real property. Background America
leases approximately 15,000 square feet at its headquarters site in Nashville,
Tennessee, and approximately 5,000 square feet in Hampstead, Maryland.
Background America of Florida leases approximately 4,000 square feet at its
location in Clearwater, Florida. Certain of these office leases are between
Background America and companies controlled by Michael D. Shmerling, the
President, Chief Executive Officer and a director of Background America.
Background America believes that the terms of its leases with Mr. Shmerling are
comparable to terms that would be obtained in arms-length transactions with
unaffiliated third parties. Background America believes that its properties,
including equipment, are adequate for its current needs, in generally good
condition and well maintained.
LEGAL PROCEEDINGS
From time to time, Background America is involved in litigation in the
ordinary course of its business. Background America currently does not believe
that there is any pending or overtly threatened litigation, individually or in
the aggregate, that is likely to have a material adverse effect on its business
or financial condition.
INTELLECTUAL PROPERTY
Background America has registered the trademark BACKGROUND AMERICA, INC.
(name and logo) with the United States Patent and Trademark Office. Background
America has also filed intent-to-use applications for the following marks:
TELAPPLY, HR INFOSOURCE, SELECTSUCCESS.COM, CAPITAL INTELLIGENCE, BAI ONLINE,
and ALIAS. Background America believes that it has taken adequate steps to
protect its intellectual property. There can be no assurance, however, that any
of the intent-to-use applications will be registered or that Background America
will be able to adequately protect its proprietary rights.
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PRINCIPAL SHAREHOLDERS AND HOLDINGS OF MANAGEMENT
The following table sets forth certain information as to the beneficial
ownership of Background America common and preferred stock as of May 1, 1999, by
each director and executive officer, all current executive officers and
directors as a group, and each beneficial owner of more than five percent of
Background America stock.
<TABLE>
<CAPTION>
NAME COMMON STOCK (%)(1) PREFERRED STOCK (%) TOTAL (%)(2)
- ---- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Shmerling(3)........... 1,130,267 (51.4%) 190,500 (16.7%) 1,320,767 (39.5%)
Jacob May(3)...................... 600,000 (27.3%) -- 600,000 (17.9%)
Noro-Moseley Partners III,
LP(3)........................... -- 285,700 (25.0%) 285,700 (8.5%)
Franklin Capital Associates III,
LP(3)........................... -- 238,100 (20.8%) 238,100 (7.1%)
R-H Capital Partners, LP(3)....... -- 190,500 (16.7%) 190,500 (5.7%)
Alan Wernick(3)................... 114,000 (5.1%) 14,000 (1.2%) 128,000 (3.8%)
Marc Curvin(3).................... 20,202 (*) 1,000 (*) 21,202 (*)
Robert Schlossnagle............... 51,428 (2.3%) -- 51,428 (1.5%)
Michael Rosen..................... 24,000 (1.1%) 5,000 (*) 29,000 (*)
Dana Caro......................... 19,286 (*) -- 19,286 (*)
Benny Ball........................ -- -- --
Thomas Ellis...................... 4,500 (*) -- 4,500 (*)
William Denny..................... 1,000 (*) 5,000 (*) 6,000 (*)
Tom Martin........................ 1,000 (*) 2,000 (*) 3,000 (*)
Tim Davison....................... 2,500 (*) -- 2,500 (*)
Nicholas Manis.................... -- -- --
Russell French(3)(4).............. -- 285,700 (25.0%) 285,700 (8.5%)
James Hoffman(3)(5)............... -- 238,100 (20.8%) 238,100 (7.1%)
Stacey Garrett.................... -- -- --
All directors and executive
officers as a group (15
persons)........................ 1,368,183 (61.0%) 741,300 (64.8%) 2,109,483 (62.3%)
</TABLE>
- ---------------
* Less than 1%.
(1) Includes shares of Background America common stock which may be acquired
through the exercise of stock options or warrants which are currently
exercisable or which will become exercisable within 60 days after May 1,
1999 in the following amounts: Mr. Wernick, 14,000 shares; Mr. Curvin,
20,202 shares; Mr. Rosen, 4,000 shares; Mr. Ellis, 500 shares; Mr. Denny,
1,000 shares; Mr. Martin, 1,000 shares; Mr. Davison, 2,500 shares; and all
directors and executive officers as a group, 43,202 shares. Does not include
options and warrants which are not exercisable until at least 60 days after
May 1, 1999 but will become exercisable at the time of the merger, as
described under "The Merger -- Interests of Certain Persons in the Merger."
(2) Gives effect to the conversion, on a one-for-one basis, of all shares of
Background America preferred stock to shares of Background America common
stock.
(3) The address of Messrs. Shmerling, May, Wernick, and Curvin is 1900 Church
Street, Nashville, Tennessee 37203. The address of Noro-Moseley Partners
III, LP and Mr. French is 9 North Parkway Square, 4200 Northside Parkway,
Atlanta, Georgia 30327. The address of Franklin Capital Associates III, LP
and Mr. Hoffman is 237 Second Avenue South, Franklin, Tennessee 37067. The
address of R-H Capital Partners, LP is 3333 Peachtree Road, Atlanta, Georgia
30326.
(4) Shares voting power with respect to stock owned by Noro-Moseley Partners
III, LP.
(5) Shares voting power with respect to stock owned by Franklin Capital
Associates III, LP.
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DESCRIPTION OF KROLL-O'GARA CAPITAL STOCK
Kroll-O'Gara's authorized capital stock consists of 50,000,000 shares of
common stock $.01 par value per share, of which 22,195,863 shares were
outstanding at May 1, 1999 and 1,000,000 shares of undesignated preferred stock,
$.01 par value per share, none of which is issued or outstanding. The following
description is only a summary of the material terms of the capital stock of
Kroll-O'Gara. Your rights as a shareholder of Kroll-O'Gara will be governed by
the provisions of Kroll-O'Gara's Amended and Restated Articles of Incorporation
and Code of Regulations and by the provisions of Ohio law, including the Ohio
General Corporation Law ("OGCL").
COMMON STOCK
You will be entitled to one vote for each share held of record by you on
all matters submitted to a vote of shareholders. You will not have the right to
cumulate your votes in the election of directors.
Subject to preferences which may be granted to holders of any preferred
stock which is issued, you will be entitled to share in any dividends that the
Board of Directors, in its discretion, validly declares from funds legally
available. In the event of liquidation, each outstanding share of Kroll-O'Gara
common stock entitles its holder to participate ratably in the assets remaining
after payment of liabilities and any preferred stock liquidation preferences.
You will have no preemptive or other rights to subscribe for or purchase
additional shares of any class of stock or any other securities of Kroll-O'Gara.
There are no redemption or sinking fund provisions with regard to the
Kroll-O'Gara common stock. All outstanding shares of Kroll-O'Gara common stock
are fully paid, validly issued and nonassessable.
The vote of holders of a majority of all outstanding shares of Kroll-O'Gara
common stock is required to amend the Kroll-O'Gara Articles and to approve
mergers, reorganizations, and similar transactions.
PREFERRED STOCK
Kroll-O'Gara may issue up to 1,000,000 authorized shares of preferred stock
from time to time in series having such designations, preferences and rights,
qualifications and limitations as the Board of Directors may determine, without
any need for your approval. Preferred stock could be given rights which would
adversely affect your equity and could have preference to your Kroll-O'Gara
common stock with respect to dividends and liquidation, voting and other rights
and privileges. Issuance of preferred stock could have the effect of acting as
an anti-takeover device to prevent or delay a change of control of Kroll-O'Gara.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Ohio law governs the rights of shareholders of Kroll-O'Gara. 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 Kroll-O'Gara, from entering into a "Chapter 1704 Transaction"
with the beneficial owner of 10% or more of the outstanding shares of the
corporation (an "INTERESTED SHAREHOLDER") for at least three years after the
date on which the interested shareholder attains a 10% ownership, unless the
board of directors of the corporation approves, prior to the person becoming an
interested shareholder, either the transaction or the acquisition of shares
resulting in the 10% ownership position. A "Chapter 1704 Transaction" includes,
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.
After
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the three-year period, a Chapter 1704 Transaction with the interested
shareholder is permitted only if either 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 required by the corporation's articles of
incorporation), including a majority of the shares not owned by the interested
shareholder, or the business combination results in shareholders other than the
interested 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 OGCL, Ohio's 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 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 the person to exercise or direct the
exercise of
(a) 20% or more, but less than 33 1/3%, of the voting power of the
corporation in the election of directors or
(b) 33 1/3% or more, but less than a majority, of such voting power or
(c) a majority or more of such voting power.
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 shareholders of Kroll-O'Gara the assurance that they will have adequate
time to evaluate the proposal of an 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 Kroll-O'Gara were before
them and, most importantly, that the interests of all shareholders will be taken
into account and the probability will be increased that they will be treated
equally regarding the price to be offered for their common shares if 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 that voting power excluding interested
shares. 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 Kroll-O'Gara of the
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value and validity of his offer may cause such offer to be more financially
attractive in order to gain shareholder approval.
In addition, Section 1701.59 of the OGCL provides that in determining what
such director reasonably believes to be in the best interests of the corporation
the director may consider, in addition to the interests of the corporation's
shareholders, any of the interests of the corporation's employees, suppliers,
creditors and customers, the economy of the State of Ohio and the U.S.,
community and societal considerations and the long-term as well as the
short-term interests of the corporation and its shareholders, including the
possibility that these interests may be best served by the continued
independence of the corporation.
Although Kroll-O'Gara believes that these provisions are in its best
interests, you should be aware that such provisions could be disadvantageous to
you 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 Kroll-O'Gara's common stock is The
Fifth Third Bank, Cincinnati, Ohio.
COMPARISON OF RIGHTS OF HOLDERS OF KROLL-O'GARA COMMON STOCK
AND BACKGROUND AMERICA COMMON STOCK
Your rights as a shareholder of Background America currently are governed
by the Tennessee Business Corporation Act ("TBCA") and by Background America's
Charter and Bylaws. Because Kroll-O'Gara is an Ohio corporation, your
shareholder rights after the merger will be governed by Ohio law and by
Kroll-O'Gara's Articles and Code of Regulations. The following discussion
summarizes material differences between Ohio and Tennessee law and between
Kroll-O'Gara's and Background America's governing documents which may affect
your rights as a shareholder.
AUTHORIZED CAPITAL. For the authorized capital of Kroll-O'Gara see
"Description of Kroll-O'Gara Capital Stock." The total number of authorized
shares of capital stock of Background America is 25,000,000, consisting of
20,000,000 shares of Background America common stock, no par value, and
5,000,000 shares of Background America preferred stock, $1.00 par value per
share.
DIRECTORS. There are no material differences in shareholder rights in this
area.
AMENDMENT OF CODE OF REGULATIONS AND BYLAWS. Kroll-O'Gara's Code may be
amended by the vote of Kroll-O'Gara shareholders entitled to exercise a majority
of the voting power of Kroll-O'Gara. Background America's Bylaws may be amended
by the affirmative vote of a majority of the outstanding shares entitled to vote
at any regular or special meeting of shareholders. Background America's Board
also may amend the Background America Bylaws, except to change the number of
directors.
AMENDMENT OF CHARTER DOCUMENTS. There are no material differences in
shareholder rights in this area.
CUMULATIVE VOTING. Neither Background America nor Kroll-O'Gara
shareholders may vote cumulatively in the election of directors.
FILLING VACANCIES ON THE BOARD OF DIRECTORS. There are no material
differences in shareholder rights in this area.
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SHAREHOLDER MEETINGS AND PROVISIONS FOR NOTICES. Kroll-O'Gara's Code
provides that special meetings of shareholders may be called by the Chairman of
the Board, the President, a majority of directors, or person or persons holding
50% of all voting power who would be entitled to vote at such meeting.
Background America's Bylaws provide that a special meeting of shareholders may
be called by the President, the Board of Directors or at the written request of
the holder or holders of 10% or more of the shares entitled to vote at the
meeting.
Under Kroll-O'Gara's Code, written notice of any meeting of shareholders
stating the time and place of the meeting must be given to each shareholder
entitled to vote at the meeting between seven and sixty days before the date of
the meeting. Written notice of a special meeting also must include the purpose
or purposes for which the meeting is called, and only the business stated in the
notice may be acted upon. Under Background America's Bylaws, notice of the time
and place of annual or special meetings of shareholders, and in the case of a
special meeting the purpose(s) for which the meeting is called and the person(s)
calling the meeting, must be given between ten and sixty days before the date of
the meeting.
NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS. Kroll-O'Gara's Code
provides that, with respect to an annual meeting of shareholders, nominations of
persons for election to the Kroll-O'Gara Board and the proposal of business to
be considered at the annual meeting must be specified in the notice of annual
meeting given by or at the direction of Kroll-O'Gara's Board, or brought before
the annual meeting by or at the direction of Kroll-O'Gara's Board or brought
before the annual meeting by a shareholder who has complied with advance notice
procedures set forth in Kroll-O'Gara's Code. There is no similar provision in
Background America's Charter or Bylaws.
QUORUM. Under Kroll-O'Gara's Code, a quorum for the transaction of
business at any regular or special meeting of the Kroll-O'Gara Board consists of
not less than one-half of the whole authorized number of directors. Under
Background America's Bylaws, a quorum for the transaction of business at any
regular or special meeting of the Background America Board consists of a
majority of the directors of the Board.
The quorum required for the transaction of business at shareholder meetings
of Kroll-O'Gara and Background America is essentially the same, i.e., a majority
of the shares entitled to vote.
PREEMPTIVE RIGHTS. Neither the Kroll-O'Gara shareholders nor the holders
of Background America common or preferred stock have preemptive rights.
VOTING BY SHAREHOLDERS. There are no material differences in shareholder
rights in this area.
ANTI-TAKEOVER STATUTES. Tennessee's "Business Combination Act" applies to
a broad range of business combinations between a Tennessee corporation and an
"interested shareholder." The Business Combination Act's definition of "business
combination" includes mergers; sales, leases, exchanges, mortgages, pledges or
transfers of assets; exchanges of shares; issuance of voting stock; and almost
any related party transaction.
The Business Combination Act prohibits a corporation from engaging in a
business combination with an interested shareholder for a period of five years
following the date on which the shareholder became an "interested shareholder"
unless the board of directors approved the business combination before the
shareholder became an "interested shareholder," or the corporation did not have
a class of voting stock registered or traded on a national securities exchange
or registered with the SEC or the interested shareholder became an interested
shareholder inadvertently. An "interested shareholder" is defined as any person
who owns, directly or indirectly, 10% or more of the outstanding voting stock of
a corporation. A person "owns" voting stock if such person individually or with
or through any of its affiliates or associates
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(a) beneficially owns such stock, directly or indirectly,
(b) has the right to acquire or vote such stock pursuant to any
agreement, except that a person who has the right to vote such stock
pursuant to an agreement which arises solely from a revocable proxy given
in response to a proxy solicitation is not deemed to be an owner for
purposes of the Business Combination Act, or
(c) has any agreement for the purposes of acquiring, holding, voting
or disposing of such stock with any other person who beneficially owns such
stock, directly or indirectly. A corporation may elect in the charter not
to be governed by the Business Combination Act. Background America has not
taken action to opt out of the Business Combination Act.
Ohio's anti-takeover statutes are described under "Description of
Kroll-O'Gara Capital Stock -- Provisions Affecting Business Combinations and
Changes in Control."
MERGERS, CONSOLIDATIONS AND OTHER CORPORATE TRANSACTIONS. Under the OGCL,
an agreement of merger or consolidation must be approved by the directors of
each constituent corporation and adopted by shareholders of each constituent
Ohio corporation (other than the surviving corporation) holding at least
two-thirds of the corporation's voting power, or a different proportion, but not
less than a majority of the voting power, as provided in the articles of
incorporation. In the case of a merger, the agreement must, in certain
situations, also be adopted by the shareholders of the surviving corporation by
a similar vote. Kroll-O'Gara's Articles provide that any such agreement must be
adopted by shareholders holding at least a majority of the voting power.
Holders of a majority of Kroll-O'Gara shares must approve combinations and
majority share acquisitions involving the transfer or issuance of that number of
shares as would entitle their holders to exercise at least one-sixth of the
voting power of the corporation in the election of directors immediately after
the consummation of the transaction; the disposition of all or substantially all
of the corporation's assets other than in the regular course of business; and
voluntary dissolutions.
Under the TBCA, an agreement of merger or consolidation must be approved by
the directors of each constituent corporation, or each corporation whose charter
is to be amended or adopted, by the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote on the proposal. The
separate vote of any class of shares is required, whether or not otherwise
entitled to vote, if the agreement of merger or consolidation provides for the
acquisition of all or part of the shares of the class. No vote of the
shareholders of the surviving corporation is required to approve the merger if
(a) the agreement of merger does not amend in any respect the
corporation's charter,
(b) each share outstanding immediately before the effective date is to
be an identical outstanding or treasury share of the surviving corporation
after the effective date, and
(c) the number of shares of the surviving corporation's common stock
to be issued in the merger plus the number of shares of common stock into
which any other securities to be issued in the merger are initially
convertible does not exceed 20% of its common stock outstanding immediately
before the effective date of the merger.
CLASS VOTING. There are no material differences in shareholder rights in
this area.
DISSENTERS' RIGHTS. Under the OGCL, shareholders are entitled to
dissenters' rights in connection with the lease, sale, exchange, transfer or
other disposition of all or substantially all of the assets of a corporation and
in connection with certain amendments to its articles of incorporation. In
addition, shareholders of an Ohio corporation being merged into a new
corporation are also entitled to dissenters'
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rights. Shareholders of an acquiring corporation are entitled to dissenters'
rights in a merger, combination or majority share acquisition in which the
shareholders are entitled to voting rights.
Under the TBCA, dissenting shareholders are entitled to dissenters' rights
in the event of several corporate actions. These include:
(1) consummation of a plan of merger to which the corporation is a
party, if shareholder approval is required and the shareholder is entitled
to vote on the merger, or if the corporation is a subsidiary that is merged
with its parent;
(2) consummation of a plan of share exchange where the corporation is
the party whose shares are being acquired, if the shareholder is
entitled to vote on the plan;
(3) consummation of a sale or exchange of all, or substantially all,
of the property of the corporation, if the shareholder is entitled to vote
on the sale or exchange; and
(4) certain amendments to a corporation's charter.
DIVIDENDS. Kroll-O'Gara may pay dividends out of surplus, however created,
but must notify its shareholders if a dividend is paid out of surplus other than
earned surplus. Kroll-O'Gara does not pay dividends on its common stock and
currently does not expect to do so in the foreseeable future. See "Market Prices
and Dividends -- Dividends." Background America may pay dividends out of any
surplus and, if it has no surplus, out of any net profits for the fiscal year in
which the dividend was declared or for the preceding fiscal year unless the
payment would prevent it from paying its debts as they become due in the usual
course of business or cause its total assets to be less than the sum of its
total liabilities plus the amount needed to satisfy all classes of shares having
a preference upon the distribution of assets.
REPURCHASES. Kroll-O'Gara may purchase or redeem its own shares unless its
assets would be less than its liabilities plus its stated capital, if any, or if
it is insolvent or would be rendered insolvent by such a purchase or redemption.
Background America may repurchase or redeem its shares unless it would be unable
to pay its debts as they come due in the ordinary course of business or if its
total assets would be less than the amount needed on dissolution to satisfy its
total liabilities and to make any preferential distributions to shareholders.
INDEMNIFICATION AND LIMITATION OF LIABILITY. Kroll-O'Gara's Code provides
that Kroll-O'Gara shall indemnify to the fullest extent permitted by law any
person who was or is made or is threatened to be made a party or is otherwise
involved in any action, suit or proceeding because he or she is or was a
director, officer, employee or agent of Kroll-O'Gara, or is or was serving at
the request of an executive officer of Kroll-O'Gara as a director, officer,
employee or agent of another entity, against all expense, liability and loss
actually incurred or suffered by the indemnitee.
Under the OGCL a director is liable for damages for any action or failure
to act only if it is proved by clear and convincing evidence that the action or
failure to act involved an act or omission undertaken with deliberate intent to
cause injury to the corporation or undertaken with reckless disregard for the
best interests of the corporation.
Background America's Bylaws provide that Background America shall indemnify
to the maximum extent permitted by law, and in the manner provided by law, any
person made, or threatened to be made, a party to any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative, including an action by or in the right of the corporation,
because he or she is or was a director or officer of Background America or
because such person, at the request of Background America, is or was serving
such other organization in any capacity against
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expenses, judgments, fines, and amounts paid in settlement actually and
reasonably incurred if he or she acted in good faith and reasonably believed
that:
(1) in the case of conduct in the officer's or director's official
capacity with Background America, his or her conduct was in Background
America's best interests;
(2) in all other cases, his or her conduct was at least not opposed to
Background America's best interests; and
(3) in the case of any criminal proceeding, the officer or director
had no reasonable cause to believe his or her conduct was unlawful.
Under the TBCA Background America may not indemnify a director or officer
until a determination has been made by Background America's Board of Directors
or by independent special legal counsel that indemnification is permissible in
the circumstances because the director has met the standard of conduct set forth
in the preceding paragraph.
Background America's Charter provides that, to the fullest extent
authorized or permitted by law, no director shall be personally liable for money
damages for breach of fiduciary duties, except for liability for any breach of
the director's duty of loyalty to Background America or its shareholders or for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law.
RIGHTS OF HOLDERS OF BACKGROUND AMERICA
PREFERRED STOCK
As a holder of Background America preferred stock, some of your rights are
superior to the rights of holders of Background America common stock. You will
lose these preferential rights when your Background America preferred stock
converts to Kroll-O'Gara common stock in the merger. Additionally, your rights
as a shareholder of Background America currently are governed by the TBCA and by
Background America's Charter and Bylaws. After the merger, your shareholder
rights will be governed by the OGCL and by Kroll-O'Gara's Articles and Code. The
following discussion summarizes your current rights as a holder of Background
America preferred stock. Please see the discussion of the rights of holders of
Kroll-O'Gara common stock on page 48 and the discussion of the differences
between Background America common stock and Kroll-O'Gara common stock on page 50
to understand what your rights will be after the merger.
DIVIDENDS. Dividends accrue beginning in June, 2000, the third anniversary
of the original issue date of the Background America preferred stock, and are
payable at an annual rate of $0.2625 per share until March 19, 2002 and at an
annual rate of $0.525 per share after that date.
LIQUIDATION RIGHTS. Unless the holders of a majority of the outstanding
shares of Background America preferred stock vote as a class to exclude a sale
or merger from triggering liquidation rights, you have the right to receive, in
the event of a sale or merger, in exchange for and in redemption of your
Background America preferred stock and in lieu of any other consideration, a
portion of the net proceeds of the sale or merger equal to the number of your
votes divided by the aggregate of votes of all holders of Background America
preferred and common stock.
Approval of the merger agreement by the holders of Background America
preferred stock constitutes a vote to exclude the merger from triggering
liquidation rights.
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A sale or merger includes a merger or consolidation of Background America
after which the shareholders of Background America own less than 50% of the
voting securities of the surviving corporation or the sale, transfer or lease of
all or substantially all of the assets of Background America.
VOTING RIGHTS. At any time, you are entitled to that number of votes equal
to the number of shares of Background America common stock into which your
shares of Background America preferred stock are convertible. You have voting
rights and powers equal to the voting rights and powers of the holders of
Background America common stock and vote with the holders of Background America
common stock on any matter submitted to a vote of shareholders, except those
required, either by law or by the terms of the Background America preferred
stock, to be submitted to a separate class vote. In the event of a sale or
merger, you vote both with the holders of Background America common stock and in
a separate class vote with the holders of Background America preferred stock.
If Background America fails for any reason to comply with the terms of the
Background America preferred stock, and this failure continues for 30 days after
written notice to Background America, then the holders of Background America
preferred stock will be entitled to elect that number of directors necessary to
constitute a majority of the full Board of Directors and also will have the
right to fill any vacancies that may occur in the directors that they elect.
This right will continue until the failure is cured.
CONVERSION. You may convert your shares of Background America preferred
stock into Background America common stock at any time. At present this is on a
one-for-one basis. Also, upon the affirmative vote of 60% of the then
outstanding shares of Background America preferred stock, each share of
Background America preferred stock will automatically be converted into
Background America common stock.
REDEMPTION. You have no redemption rights prior to March 19, 2002. After
that date, if the holders of a majority of the Background America preferred
stock so vote or request, Background America must redeem the Background America
preferred stock as follows: one quarter of all then outstanding shares within 90
days of the vote or request; one-third of the then remaining shares 6 months
after the initial redemption; one-half of the then remaining shares on or before
the first anniversary of the initial redemption; and all then remaining shares
on or before 18 months after the initial redemption. Payment for redeemed shares
must be made in cash at the fair market value of the shares as established by
Background America's Board of Directors.
PROTECTIVE PROVISIONS. Holders of a majority of the Background America
preferred stock must approve the sale, assignment, lease or other disposal of
any of Background America's assets or those of any subsidiary other than in the
ordinary course of business. Holders of a majority of the Background America
preferred stock also must approve the payment of any dividend with respect to
the Background America common stock.
Holders of two-thirds of the Background America preferred stock must
approve any alteration or change in the preferences, rights, privileges or
powers of the Background America preferred stock. Holders of two-thirds of the
Background America preferred stock also must approve Background America entering
into any sale or merger agreement.
LEGAL MATTERS
The validity of the Kroll-O'Gara common stock to be issued in connection
with the merger will be passed upon by Taft, Stettinius & Hollister LLP,
Cincinnati, Ohio.
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Sherrard & Roe, PLC has delivered an opinion to the effect that the
description of the federal income tax consequences of the merger under the
heading "The Merger -- United States Federal Income Tax Consequences" correctly
sets forth the material federal income tax consequences of the merger to
Background America shareholders.
EXPERTS
The consolidated financial statements of Kroll-O'Gara as of December 31,
1997 and 1998 and for each of the three years in the period ended December 31,
1998, incorporated by reference in this proxy statement/prospectus, 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 report of other independent public
accountants, namely Deloitte & Touche LLP for the year ended December 31, 1996.
Reference is made to said report, which includes an explanatory paragraph with
respect to the change in the method of accounting in 1997 for costs incurred in
connection with business process reengineering activities. The audited
consolidated financial statements referred to above are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said reports.
The consolidated financial statements of Kroll Holdings, Inc. and
subsidiaries for the year ended December 31, 1996 (not incorporated by reference
separately herein) have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report incorporated by reference herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of Background America as of December
31, 1998 and for the year then ended, included in this proxy
statement/prospectus, have been audited by Arthur Andersen LLP, independent
public accountants, as set forth in their report. The audited consolidated
financial statements referred to above are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of Background America as of December
31, 1997 and for the year then ended, included in this proxy
statement/prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of Kizorek, Inc. as of October 31, 1997 and for
the year ended October 31, 1997, included in this proxy statement/prospectus,
have been audited by Crowe, Chizek and Company LLP, independent certified public
accountants, as indicated in their report with respect thereto, and are included
in reliance upon the authority of said firm as experts in accounting and
auditing.
It is expected that representatives of Arthur Andersen LLP will be
available at the time of the special meeting, to respond to appropriate
questions of shareholders and to make a statement if they so desire.
OTHER BUSINESS
We are not aware of any matters which properly may be presented at the
special meeting other than those discussed above. However, if other matters do
come before the special meeting, proxies will be voted on those matters in
accordance with the recommendation of Background America's Board of Directors.
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WHERE YOU CAN FIND MORE INFORMATION
Kroll-O'Gara files annual, quarterly and special reports, proxy statements
and other information with the SEC. These SEC filings are available to the
public over the Internet at the SEC's web site at http://www.sec.gov. You also
may read and copy any document filed by Kroll-O'Gara at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms.
Kroll-O'Gara has filed a registration statement with the SEC covering the
shares of Kroll-O'Gara common stock to be issued in the Background America
merger. This proxy statement/prospectus does not contain all of the information
set forth in the registration statement. The full registration statement is on
the SEC's web site and is available at the SEC's public reference rooms.
You should rely only on the information provided in this proxy
statement/prospectus. No one is authorized to provide you with different
information. Kroll-O'Gara is not making an offer of its common stock in any
state where the offer is not permitted. You should not assume that the
information in this proxy statement/prospectus is accurate as of any date other
than the date on the front of this document.
The SEC allows Kroll-O'Gara to "incorporate by reference" information into
this proxy statement/prospectus, which means that Kroll-O'Gara can disclose
important information about itself to you by referring you to another document
filed separately with the SEC. The information about Kroll-O'Gara that is
incorporated by reference is considered part of this proxy statement/prospectus,
except for any information superseded by information contained directly in this
proxy statement/prospectus or in later filed documents incorporated by reference
in this document.
This proxy statement/prospectus incorporates by reference the documents
listed below that Kroll-O'Gara has previously filed with the SEC.
<TABLE>
<CAPTION>
THE KROLL-O'GARA COMPANY SEC FILINGS
(FILE NO. 000-21629 PERIOD/AS OF DATE
- --------------------------------------------- -----------------
<S> <C>
Annual Report on Form 10-K/A................. Year ended December 31, 1998
Current Reports on Form 8-K and 8-K/A........ September 1, 1998 (filed September 15,
1998 and amended on October 23, 1998)
December 31, 1998 (filed January 15,
1999 and amended on March 11, 1999)
January 21, 1999 (filed January 29,
1999)
March 9, 1999 (filed March 11, 1999)
Description of Kroll-O'Gara's common stock in
Registration Statement on Form 8-A......... October 28, 1996
</TABLE>
Kroll-O'Gara also incorporates by reference all additional documents that
it files with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 between the date of this proxy statement/prospectus and the
termination of this offering. These include periodic reports, such as Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, as well as proxy statements.
You can obtain any of the documents incorporated by reference through
Kroll-O'Gara, the SEC or the SEC's Internet world wide web site as described
above. Kroll-O'Gara will provide without charge to each person, including any
beneficial owner, to whom this prospectus is delivered, upon written or oral
request, a copy of any or all of the information incorporated by reference in
this prospectus but not delivered with this prospectus. Exhibits are not
available unless Kroll-O'Gara has specifically incorporated an exhibit by
reference.
You should direct any requests for delivery of such information to Abram S.
Gordon, Esq., Vice President and General Counsel, The Kroll-O'Gara Company, 9113
LeSaint Drive, Fairfield, Ohio 45014, telephone (513) 874-2112.
57
<PAGE> 62
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
BACKGROUND AMERICA, INC.
Reports of Independent Public Accountants
Report of Arthur Andersen LLP............................. F-1
Report of Deloitte & Touche LLP........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1998................................ F-4
Consolidated Statements of Common Shareholders' Equity
(Deficit) for the Years Ended December 31, 1997 and
1998...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998................................ F-6
Notes to Consolidated Financial Statements.................. F-7
KIZOREK, INC.
Report of Independent Auditors.............................. F-17
Balance Sheet as of October 31, 1997........................ F-18
Statement of Income and Retained Earnings for the Year Ended
October 31, 1997.......................................... F-19
Statement of Cash Flows for the Year Ended October 31,
1997...................................................... F-20
Notes to Financial Statements............................... F-21
Balance Sheet as of April 30, 1998 (unaudited).............. F-24
Statements of Income and Retained Earnings for the Six
Months Ended April 30, 1997 and 1998 (unaudited).......... F-25
Statements of Cash Flows for the Six Months Ended April 30,
1997 and 1998 (unaudited)................................. F-26
Notes to Unaudited Financial Statements..................... F-27
THE KROLL-O'GARA COMPANY PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
Kroll-O'Gara and Background America Unaudited Pro Forma
Combining Condensed Financial Statements.................. F-28
Kroll-O'Gara and Background America Unaudited Pro Forma
Combining Condensed Balance Sheets as of December 31, 1997
and 1998.................................................. F-29
Kroll-O'Gara and Background America Unaudited Pro Forma
Combining Condensed Statements of Operations for the Years
Ended December 31, 1996 and 1997.......................... F-31
Kroll-O'Gara and Background America Unaudited Pro Forma and
Kizorek Unaudited Pro Forma Combining Condensed Statement
of Operations for the Year Ended December 31, 1998........ F-35
</TABLE>
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO BOARD OF DIRECTORS AND SHAREHOLDERS OF
BACKGROUND AMERICA, INC.:
We have audited the accompanying consolidated balance sheet of BACKGROUND
AMERICA, INC. (a Tennessee corporation) and subsidiaries as of December 31,
1998, and the related consolidated statements of operations, common
shareholders' equity (deficit) and cash flows for the year then ended. 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 audit. The consolidated financial statements of Background America, Inc. as
of and for the year ended December 31, 1997, were audited by other auditors
whose report dated December 18, 1998 (January 21, 1999 as to a certain
subsequent event), expressed an unqualified opinion on those statements.
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Background
America, Inc. and subsidiaries as of December 31, 1998 and their results of
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Cincinnati, Ohio
March 26, 1999
F-1
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Background America, Inc.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheet of Background
America, Inc. and subsidiaries (the "Company") as of December 31, 1997, and the
related consolidated statements of operations, common shareholders' deficit and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our 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 Background America, Inc. and
subsidiaries as of December 31, 1997, 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
Nashville, Tennessee
December 18, 1998
(January 21, 1999 as to
first paragraph of
Note 15)
F-2
<PAGE> 65
BACKGROUND AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,925,547 $ 1,177,772
Accounts receivable --
Trade, net of allowance for doubtful accounts of $8,682
and $51,682 in 1997 and 1998, respectively............ 608,569 1,389,938
Related party (Note 14)................................ 272,244 42,644
Prepaid expenses and other current assets................. 53,302 64,462
----------- -----------
Total current assets.............................. 3,859,662 2,674,816
PROPERTY AND EQUIPMENT...................................... 925,641 1,523,417
Less -- accumulated depreciation and amortization......... (296,248) (776,455)
----------- -----------
629,393 746,962
GOODWILL AND OTHER INTANGIBLE ASSETS, net (Notes 2 and 3)... 703,808 1,209,596
OTHER ASSETS................................................ 9,080 14,458
----------- -----------
$ 5,201,943 $ 4,645,832
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of note payable (Note 6)............... $ -- $ 34,547
Accounts payable, trade................................... 201,013 435,943
Accounts payable, related party (Note 14)................. 231,499 11,875
Accrued expenses and other current liabilities (Notes 4
and 7)................................................. 224,301 786,865
Notes payable to shareholders (Notes 9 and 14)............ 152,000 --
----------- -----------
Total current liabilities......................... 808,813 1,269,230
NOTE PAYABLE (Note 6)....................................... -- 89,310
----------- -----------
Total liabilities................................. 808,813 1,358,540
SERIES A REDEEMABLE AND CONVERTIBLE CUMULATIVE PREFERRED
STOCK (Notes 9 and 15) ($1 par value; authorized,
5,000,000 shares; issued and outstanding, 1,143,700)...... 5,968,052 5,968,052
COMMITMENTS (Note 13)
COMMON SHAREHOLDERS' EQUITY (DEFICIT) (Notes 9, 10, 11, 14,
and 15):
Common stock (no par value; authorized, 20,000,000 shares;
issued and outstanding, 2,144,172 and 2,199,728,
respectively).......................................... 966,571 1,277,107
Retained deficit.......................................... (2,541,493) (3,957,867)
----------- -----------
Total common shareholders' deficit................ (1,574,922) (2,680,760)
----------- -----------
$ 5,201,943 $ 4,645,832
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE> 66
BACKGROUND AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
REVENUES.................................................... $ 4,221,059 $ 7,350,666
COST OF SALES............................................... 3,447,569 5,103,967
----------- -----------
Gross profit...................................... 773,490 2,246,699
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 1,899,086 2,879,725
Depreciation and amortization (Notes 2 and 3)............. 279,214 513,394
Merger related costs (Note 15)............................ -- 388,000
----------- -----------
Total operating expenses.......................... 2,178,300 3,781,119
Operating loss.................................... (1,404,810) (1,534,420)
OTHER INCOME (EXPENSE):
Interest expense (Notes 5, 6 and 14)...................... (84,463) (12,258)
Interest income........................................... 93,106 91,639
Other, net................................................ 59,523 38,665
----------- -----------
Total other income................................ 68,166 118,046
----------- -----------
Loss before income taxes.......................... (1,336,644) (1,416,374)
INCOME TAX (Note 8)......................................... -- --
----------- -----------
NET LOSS.................................................... $(1,336,644) $(1,416,374)
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-4
<PAGE> 67
BACKGROUND AMERICA, INC.
CONSOLIDATED STATEMENTS OF
COMMON SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK TOTAL COMMON
----------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT DEFICIT EQUITY (DEFICIT)
--------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996.............. 2,140,572 $ 962,071 $(1,204,849) $ (242,778)
Exercise of stock options (Note 11)... 3,600 4,500 -- 4,500
Net loss.............................. -- -- (1,336,644) (1,336,644)
--------- ---------- ----------- -----------
BALANCE, December 31, 1997.............. 2,144,172 966,571 (2,541,493) (1,574,922)
Exercise of stock put option (Note
14)................................ (27,778) (166,668) -- (166,668)
Issuance of common stock in
acquisition (Note 3)............... 83,334 477,204 -- 477,204
Net loss.............................. -- -- (1,416,374) (1,416,374)
--------- ---------- ----------- -----------
BALANCE, December 31, 1998.............. 2,199,728 $1,277,107 $(3,957,867) $(2,680,760)
========= ========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-5
<PAGE> 68
BACKGROUND AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,336,644) $(1,416,374)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 279,214 513,394
Noncash compensation related to consulting arrangement
(Note 6).............................................. -- 147,914
Changes in assets and liabilities, net of effects of
acquisition:
Increase in accounts receivable........................ (436,155) (372,570)
Increase in prepaid expenses and other current
assets................................................ (37,471) (5,781)
Increase in other assets............................... (4,375) (5,378)
Increase in accounts payable and accrued expenses...... 53,112 375,678
----------- -----------
Net cash used in operating activities................ (1,482,319) (763,117)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (495,488) (382,221)
Cash paid for acquisitions, net of cash acquired (Note
3)..................................................... -- (125,716)
Cash paid for non-compete agreements (Note 3)............. -- (133,996)
----------- -----------
Net cash used in investing activities................ (495,488) (641,933)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net of issuance
costs.................................................. 4,914,317 --
Proceeds from issuance of notes payable to shareholders... 761,000 --
Repayment of notes payable................................ (868,875) (176,057)
Advances under line-of-credit facility.................... 232,000 --
Payments under line-of-credit facility.................... (232,000) --
Exercise of stock options................................. 4,500 --
Exercise of stock put option (Note 3)..................... -- (166,668)
----------- -----------
Net cash provided by (used in) financing
activities.......................................... 4,810,942 (342,725)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 2,833,135 (1,747,775)
CASH AND CASH EQUIVALENTS, beginning of year................ 92,412 2,925,547
----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,925,547 $ 1,177,772
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 107,042 $ 12,258
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Retirement of shareholders' notes payable and accrued
interest............................................... $ 1,053,735 $ --
=========== ===========
Issuance of preferred stock............................... $ 1,053,735 $ --
=========== ===========
Common stock issued in acquisition........................ $ -- $ 477,204
=========== ===========
Issuance of note payable (Note 6)......................... $ -- $ 147,914
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
<PAGE> 69
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION --
Background America, Inc. (the "Company"), a Tennessee corporation, was
formed in September 1995 to deliver background investigation services to
government, corporate and other professional clients. The consolidated financial
statements include the amounts of the Company and its inactive subsidiaries, all
of which are wholly owned. All significant intercompany balances and
transactions have been eliminated.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(a) ACCOUNTING 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.
(b) CASH AND CASH EQUIVALENTS -- Cash equivalents consist of highly liquid
investments with original maturities of three months or less at the
date of purchase. The carrying amount of cash and cash equivalents
approximates fair value of those instruments due to their short
maturity.
(c) PROPERTY AND EQUIPMENT -- Property and equipment is carried at cost and
is depreciated using an accelerated method over the estimated useful
lives of the assets, generally five years. Significant improvements are
capitalized while maintenance and repairs are expensed as incurred. The
components of property and equipment at December 31, 1997 and 1998 are
as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $ 36,471 $ 63,270
Equipment................................................... 158,673 282,643
Computers, copiers and software............................. 717,574 1,068,071
Leasehold improvements...................................... 12,923 54,309
Construction-in-progress.................................... -- 55,124
--------- ----------
925,641 1,523,417
Less accumulated depreciation and amortization.............. (296,248) (776,455)
--------- ----------
$ 629,393 $ 746,962
========= ==========
</TABLE>
(d) SOFTWARE POLICY -- External direct costs of materials and services and
payroll-related costs of employees working solely on development of the
software system are capitalized. Capitalized costs are amortized over
the estimated useful life of the software, which is five years.
Training costs and costs to reengineer business processes are expensed
as incurred.
(e) INTANGIBLE ASSETS -- Intangible assets are comprised of goodwill and
non-compete agreements with former shareholders of acquired companies.
Goodwill represents the excess of the purchase cost over the fair value
of net tangible assets acquired in a purchase business combination.
Goodwill is amortized using the straight-line method over twelve years
which represents its estimated useful life. The non-compete agreements
are amortized using the straight-line method over the terms of each
agreement. The Company reviews its long-lived and intangible assets for
F-7
<PAGE> 70
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recovered. Intangible assets as of
December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Goodwill.................................................... $ 666,112 $1,161,926
Non-compete agreements...................................... 150,000 283,996
--------- ----------
816,112 1,445,922
Less accumulated amortization............................... (112,304) (236,326)
--------- ----------
$ 703,808 $1,209,596
========= ==========
</TABLE>
(f) INCOME TAXES -- The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under such statement, deferred tax
assets and liabilities are determined based on the differences between
the financial reporting and tax bases of assets and liabilities using
enacted tax rates. A valuation allowance is provided if it is more
likely than not that some portion of the deferred tax assets will not
be realized.
(g) REVENUE RECOGNITION -- Revenues from background investigation services
are recognized at the time that the services are completed using the
accrual method of accounting.
(h) 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 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 market value-based method of accounting for
compensation cost related to stock options and other forms of
stock-based 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 proforma disclosures required by
SFAS 123 are presented in Note 11.
(i) CONCENTRATIONS OF CREDIT RISK -- Financial instruments which
potentially subject the Company to credit risk consist principally of
cash investments and trade receivables. The Company places its cash
investments in high credit quality commercial paper, federal government
agency securities and FDIC insured financial institutions thus reducing
potential risk. Concentrations of credit risk with respect to trade
receivables are limited due to the Company's large number of customers
and their dispersion across many geographic areas, solely in the United
States.
(j) NEW ACCOUNTING PRONOUNCEMENT -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). SFAS 133 establishes accounting and reporting standards
which require that derivative instruments be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. The Company will be required to adopt the provisions of SFAS 133
on
F-8
<PAGE> 71
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 2000. Management does not believe that the adoption of SFAS
133 will have a material impact on the Company's financial position or
results of operations.
(k) RECLASSIFICATIONS -- Certain reclassifications have been made to the
1997 financial statements to conform with the 1998 presentation.
(3) ACQUISITION --
In March 1998, the Company entered into an Agreement and Plan of Merger to
acquire the outstanding stock of Profiles Plus, Inc. ("Profiles") for
83,334 shares of common stock valued at approximately $477,000 or $5.73 per
share. Profiles is in the business of providing conventional background
investigation services to its clients and is headquartered in Clearwater,
Florida. For accounting purposes, the acquisition of Profiles was effective
March 23, 1998 and its results of operations have been included with those
of the Company from that date forward.
In conjunction with the acquisition of Profiles, the shareholders of
Profiles had the option to put such shares to the Company for cash of $6.00
per share at any time during the period beginning June 1, 1998 and ending
June 30, 1998. The put option relating to 27,778 shares issued in
connection with this acquisition was exercised for $166,668 in cash with
the remaining put options expiring unexercised. Additionally, the Company
entered into non-compete agreements with the shareholders of Profiles for
total cash consideration of approximately $134,000. The amounts paid by the
Company for the non-compete agreements are being amortized over the terms
of the agreements.
The above acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated to the
assets purchased and liabilities assumed based upon their estimated fair
values at the date of acquisition. The excess of the purchase price over
the estimated fair value of all net assets acquired ("goodwill") is being
amortized on a straight-line basis over 12 years. The purchase price,
including direct acquisition costs of approximately $75,700, has been
allocated as follows:
<TABLE>
<S> <C>
Accounts receivable and other current assets................ $ 134,336
Property and equipment...................................... 83,351
Goodwill.................................................... 537,185
Liabilities assumed......................................... (202,192)
---------
$ 552,680
=========
</TABLE>
(4) BALANCE SHEET ACCOUNTS --
(a) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES -- Accrued expenses and
other current liabilities consist of the following as of December 31,
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Payroll and related benefits................................ $158,901 $140,691
Accrued professional fees................................... -- 508,000
Other....................................................... 65,400 138,174
-------- --------
$224,301 $786,865
======== ========
</TABLE>
F-9
<PAGE> 72
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) ALLOWANCE FOR DOUBTFUL ACCOUNTS -- The following summarizes the
activity in the allowance for doubtful accounts on trade accounts
receivable for 1997 and 1998:
<TABLE>
<CAPTION>
ADDITIONS
CHARGED
BALANCE TO BALANCE
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1997......................... $8,682 -- -- $ 8,682
Year ended December 31, 1998......................... $8,682 43,000 -- $51,682
</TABLE>
(5) LINE OF CREDIT --
The Company has a credit agreement with a bank which provides for a working
capital line of $1,000,000 in maximum principal. There were no borrowings
outstanding under the credit facility at December 31, 1998 and 1997. In
addition, there were no amounts drawn on the line of credit during 1998.
The credit facility bears interest at the bank's index rate, is due and
payable monthly, matures on April 4, 1999 and is guaranteed by certain
shareholders of the Company.
(6) NOTE PAYABLE --
In March 1998, the Company entered into a consulting agreement with a
former shareholder of Profiles, which among others, obligates the Company
to pay a guaranteed amount of $175,000 over a four-year period. Interest
has been imputed at a rate of 8.5%, with principal payments totaling
approximately $148,000. Interest expense for the year ended December 31,
1998 was $8,756. The following is a schedule of the future maturity of this
note as of December 31, 1998:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
1999...................................................... $ 34,547
2000...................................................... 37,601
2001...................................................... 40,925
2002...................................................... 10,784
--------
$123,857
========
</TABLE>
(7) SELF-INSURED RISK --
The Company maintains a self-insured health benefits program on behalf of
its employees, covering major medical and hospitalization costs. The
Company has limited its exposure to claims costs by securing an insurance
policy for the plan. The insurance policy reimburses the Company for
accumulated costs incurred and paid during a calendar year related to any
covered individual which exceeds $10,000. Additionally, the insurance
limits the maximum amount of costs the Company will be responsible for
based on the number of employees and families covered by the Plan during
the year.
As of December 31, 1997 and 1998, the Company accrued for claims which had
occurred, but had not been paid of $27,306 and $46,500, respectively.
Claims expense, net of insurance reimbursements relative to the health
benefit program for the years ended December 31, 1997 and 1998 was $105,168
and $104,985, respectively.
F-10
<PAGE> 73
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES --
At December 31, 1997 and 1998, the Company had federal and state net
operating loss carryforwards of approximately $2.4 million and $3.8
million, respectively, available to offset future taxable income. The net
operating loss carryforwards expire in 2011 through 2013. The carryforwards
represent a deferred tax asset of the Company which has been offset fully
by a valuation allowance as of December 31, 1997 and 1998 due to the
uncertainty as to the amount, if any, of the carryforwards which will
ultimately be realized.
(9) PREFERRED STOCK --
On June 16, 1997, the Company's charter was amended and restated to
authorize 5,000,000 shares of preferred stock having a par value of $1.00
per share. Concurrently, the Company issued 1,143,700 shares of Series A
Preferred Stock ("Preferred Stock") for $5.25 per share. Cash proceeds from
this investor financing totaled $4,914,317, net of issuance costs totaling
$36,373, with the remaining proceeds received in the form of cancellation
of the principal and accrued interest amounts due under certain notes
payable previously issued by the Company to certain shareholders totaling
$1,053,735.
The holders of Preferred Stock are entitled to vote on an "as converted"
basis with the common shares and have the right to elect a certain number
of representatives to the Company's Board of Directors as defined by the
amended and restated corporate charter. At the holders' option, the
Preferred Stock may be converted into the Company's common stock on a share
for share basis, subject to certain anti-dilution conversion adjustments.
The holders of Preferred Stock will be entitled to accrued dividends
beginning in June 2000 at a rate of $.2625 per share, which are payable
quarterly in arrears. Beginning in March 2002, the dividend rate will be
increased to $.5250 per outstanding share. Such dividends are cumulative
and are paid in preference to any declared dividends on common stock. In
the event of a sale, merger, liquidation, dissolution or winding up of the
Company, the holders of Preferred Stock are entitled to receive from the
proceeds of such an event an amount not less than the initial issuance
price of the stock, $5.25 per share, plus a ten percent (10%) per annum
compounded return on investment, net of dividends paid in preference to
holders of common stock or any other class or series of stock.
Additionally, the holders of Preferred Stock, as a group, may elect to
redeem their shares on or after March 2002 at the greater of the fair
market value or the initial issuance price, plus a ten percent (10%) per
annum compounded return on investment from the date of issuance, net of
dividends paid. Preferred Stock redeemed will be retired in four quarterly
installments beginning June 19, 2002. Should redemption as to any shares of
Preferred Stock not occur when required based on the terms described above,
interest will accrue on the unpaid redemption price at a bank's prime rate
plus 1% per annum during the first year of such delay and at a bank's prime
rate plus 3% per annum thereafter.
As is described in Note 15, the Company subsequently entered into an
Agreement and Plan of Merger with the Kroll-O'Gara Company. In connection
with this Agreement and Plan of Merger, the holders of the Preferred Stock
have agreed to vote in favor of the transaction and, upon consummation,
will receive 0.2689628 shares of the Kroll-O'Gara Company's common stock
for each share of Preferred Stock. This conversion ratio is the same as
that being provided to common shareholders upon consummation of the
transaction.
F-11
<PAGE> 74
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the preferred stock issuances, certain shareholders
entered into shareholder agreements whereby the Company maintains the first
right of refusal in future transfers of such stock.
(10) STOCK WARRANTS --
As of December 31, 1997 and 1998, the Company had the following outstanding
warrants to purchase shares of common stock (each warrant entitles the
holder to acquire one share of common stock of the Company at the stated
exercise price per share):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE VESTING DATE
------ -------- ----------------
<S> <C> <C> <C>
Warrants granted during 1996..................... 4,000 $1.25 June 30, 1999
Warrants granted during 1996..................... 500 $3.50 July 15, 2001
----- ----- ----------------
Balance, December 31, 1996....................... 4,500 $1.50
Warrants granted during 1997..................... -- --
----- ----- ----------------
Balance, at December 31, 1997.................... 4,500 $1.50
Warrants granted during 1998..................... 3,000 $5.25 January 16, 2001
----- ----- ----------------
Balance, at December 31, 1998.................... 7,500 $3.00
===== ===== ================
</TABLE>
Upon the occurrence of a merger, sale or initial public offering of common
stock of the Company, all warrants become immediately exercisable. If not
exercised upon such occurrence, 7,000 of the warrants would expire. The
remaining 500 warrants do not expire unless there is a breach of certain
contractual terms as defined by the Stock Purchase Warrant Agreement.
(11) STOCK OPTIONS PLANS --
The Company has two stock option plans, the 1997 Plan and 1996 Plan
(collectively, the Stock Option Plans), which provide for the granting of
either incentive stock options or nonqualified stock options to purchase
shares of the Company's common stock to officers, directors and other key
employees who have substantial responsibility for the direction and
management of the Company. At December 31, 1998, 340,000 total shares of
common stock were reserved for issuance under the Stock Option Plans.
Approximately 17,000 of such reserved shares are available for future
grants under the Stock Option Plans.
Outstanding options covering 219,862 shares are incentive stock options
with vesting periods of three years and maximum option terms of five years.
Vesting is accelerated in the event of the Company's shares being sold in
an initial public offering or ten days preceding the date on which the
Company enters into a merger in which the Company is not the surviving
corporation. The remaining 103,500 options are non-qualified stock options
of which outstanding options covering 97,300 shares vest only upon an
initial public offering or ten days preceding the date in which the Company
enters into a merger in which the Company is not the surviving corporation.
Under the provisions of APB 25, no compensation expense related to grants
under the Stock Option Plans was recorded in 1997 or 1998.
F-12
<PAGE> 75
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair market value on the date of grant is the per share value of the
Company's common stock determined by the Board of Directors in their sole
discretion, taking into consideration those factors affecting or reflecting
value that they deem appropriate including but not limited to the Company's
net worth, prospective earning power and dividend paying capacities, the
goodwill of the business, the economic outlook in the industry, the values
of securities of corporations engaged in the same or similar lines of
business that are listed on a public stock exchange or are traded in the
over-the-counter market or for which there is other information regarding
value, the importance and presence of nonoperating assets and the economic
environment.
A summary of the status of the Stock Option Plans for the years ended
December 31, 1997 and 1998 and changes during those years are presented
below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Balance, December 31, 1996.................................. 59,852 $1.23
Options granted........................................... 189,125 2.68
Options forfeited......................................... (2,350) 2.21
Options exercised......................................... (3,600) 1.25
------- -----
Balance, December 31, 1997.................................. 243,027 2.34
Options granted........................................... 112,200 2.15
Options forfeited......................................... (31,865) 2.40
------- -----
Balance, December 31, 1998.................................. 323,362 $2.27
======= =====
</TABLE>
No options were exercisable as of December 31, 1997 and 1998.
Information relating to options under the 1997 and 1996 Plans at December
31, 1998 summarized by exercise price is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RANGE OF REMAINING VESTED WEIGHTED
EXERCISE OPTIONS CONTRACTUAL OPTIONS AVERAGE
PRICES OUTSTANDING LIFE OUTSTANDING EXERCISE PRICE
- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
$0.10 3,500 4.31 -- $0.10
$0.75 6,000 3.52 -- $0.75
$1.25-$1.50 53,152 2.56 -- $1.26
$2.00-$3.00 255,525 3.75 -- $2.47
$5.00-$6.00 5,185 4.57 -- $5.98
------- ---- -----
323,362 3.57 -- $2.27
======= ==== =====
</TABLE>
If compensation cost for stock-based compensation had been determined based
on the fair value of the options at the grant dates consistent with the
provisions of SFAS 123, the Company's net loss
F-13
<PAGE> 76
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the years ended December 31, 1997 and 1998 would have been increased to
the pro forma amounts presented below:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Net loss
As reported............................................. $(1,336,644) $(1,416,374)
Pro forma............................................... (1,383,360) (1,475,749)
</TABLE>
The fair value of each option grant in 1998 was estimated on the date of
grant utilizing the Black-Scholes option pricing model. The fair value of
each option grant in 1997 was estimated on the date of grant utilizing the
minimum value option-pricing model. The difference in the fair value of
option grants between the two methods was not material to the pro forma
disclosures above. The following weighted average assumptions were used for
options granted in 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---- ---------
<S> <C> <C>
Expected dividend yield..................................... -- --
Expected volatility......................................... 0.0% 40.0%
Risk-free interest rate..................................... 5.8% 4.2%-5.7%
Expected life of options (years)............................ 5 5
</TABLE>
The weighted average fair value on the dates of grant for the 189,125
options granted during 1997 approximated $0.66. The weighted average fair
value on the dates of grant for the 112,200 options granted during 1998
approximated $4.18.
(12) RETIREMENT PLAN
The Company offers a defined contribution retirement plan which is
available to all full-time employees of the Company with a minimum of one
year of service. Participants in the plan can contribute up to 14% of
annual earnings as defined by the plan and the Company may contribute a
discretionary matching amount. The Company made no contributions to the
plan in 1997 or 1998. The Company does not offer any other post-retirement
or post-employment benefits to employees.
(13) COMMITMENTS
The Company leases certain office space under noncancelable operating lease
agreements. Total rent expense under operating leases for the years ended
December 31, 1997 and 1998 was $214,009 and $261,076, respectively (see
Note 14).
The following is a schedule of the future minimum rental payments required
under noncancelable operating leases as of December 31, 1998:
<TABLE>
<S> <C>
1999........................................................ $221,729
2000........................................................ 170,122
2001........................................................ 79,292
2002........................................................ 28,875
--------
Total............................................. $500,018
========
</TABLE>
F-14
<PAGE> 77
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) RELATED PARTIES
(a)LEASES -- The Company has entered into a month to month lease agreement
with a company controlled by the Chief Executive Officer of the Company.
The lease involves the use of a 7,500 square foot office building
located near the corporate offices and certain furniture and equipment.
The lease calls for monthly rentals in the amount of $8,050 and may be
terminated by either party with ninety days notice. The Company owed
$64,400 under the lease agreement as of December 31, 1997 and reported
rent expense of $96,600 for the years ended December 31, 1997 and 1998.
The Company subleases approximately 2,500 square feet of its corporate
office space to a company with common ownership as that of the Company,
including certain officers and directors of the Company. The lease is on
a month to month basis and the monthly rental charged by the Company is
at cost, allocated based on the percentage of space used by the
affiliate. The monthly rental amount during 1997 ranged from $2,775 to
$4,400 and ranged from $4,151 to $4,398 in 1998. This sublease income
has been reflected as a reduction of rental expense totaling $53,300 and
$50,100 for the years ended December 31, 1997 and 1998, respectively.
In October 1998, the Chief Executive Officer of the Company purchased a
building that was being leased by the Company for its corporate office.
The company leases 10,290 square feet of this building through either
direct or sub-lease agreements which call for escalating monthly rentals
which ranged from $12,863 to $13,292 in 1998. The Company reported rent
expense of approximately $31,100 under these agreements for the year
ended December 31, 1998.
(b)ACCOUNTING AND OTHER SERVICES -- The Company has provided a company with
common ownership as that of the Company with certain accounting services
for a fee which totaled $127,000 and $91,100 for the years ended
December 31, 1997 and 1998, respectively. The affiliated company also
provided the Company with temporary personnel on a per hour basis and
was paid a fee for employee recruiting services based on successful
efforts. Total expense incurred for temporary employees and recruiting
services was $36,525 and $80,800 for the years ended December 31, 1997
and 1998, respectively. Receivables from the affiliate were $17,000 and
$18,900, and payables to the affiliate were $1,200 and $1,550 as of
December 31, 1997 and 1998, respectively.
The Company provided administrative payroll and personnel benefit
services on behalf of certain companies controlled by certain
shareholders, officers and directors of the Company. The Company ceased
providing these services on June 30, 1998. Charges for these services
are based on cost plus an administrative fee. Total billings for these
services totaled $1,146,800 and $730,300 for the years ended December
31, 1997 and 1998, respectively, and receivables due to the Company
resulting from such services were $216,700 and $1,500 as of December 31,
1997 and 1998, respectively.
(c)NOTES PAYABLE TO SHAREHOLDERS -- During 1996 and 1997 certain officers
of the Company issued loans to the Company, due on demand, bearing
interest at annual rates ranging from 8.50% to 8.75%. Interest expense
recognized by the Company on these loans totaled $78,950 and $1,100 for
the years ended December 31, 1997 and 1998, respectively. In June 1997,
approximately $1,053,735 of principal and accrued interest was canceled
in part consideration
F-15
<PAGE> 78
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the purchase of Series A Preferred Stock shares (see Note 9). The
outstanding balance due under these loans was paid in full during 1998.
(15)SUBSEQUENT EVENT --
On January 21, 1999, the Company entered into an Agreement and Plan of
Merger with the Kroll-O'Gara Company (Kroll), of Fairfield, Ohio, whereby
Kroll will acquire all of the outstanding capital stock and common stock
equivalents of the Company for approximately 989,000 shares of Kroll's
common stock. The acquisition is subject to the approval of the Company's
shareholders and is expected to qualify as a pooling of interests for
accounting purposes.
Through December 31, 1998, the Company had incurred approximately $388,000
for direct costs related to the proposed merger with Kroll. The merger
related costs consist primarily of fees for attorneys and accountants and
such costs have been expensed as incurred. In addition, upon consummation of
the merger, compensation charges of approximately $550,000 will be incurred
by Kroll related to the Company's non-qualified stock options.
F-16
<PAGE> 79
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Kizorek, Inc.
Naperville, Illinois
We have audited the accompanying balance sheet of Kizorek, Inc. as of
October 31, 1997 and the related statements of income and retained earnings and
cash flows for the year then ended. 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 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Kizorek, Inc. as of October
31, 1997 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
December 10, 1997, except for Note 8,
as to which the date is August 31, 1998
F-17
<PAGE> 80
KIZOREK, INC.
BALANCE SHEET
AS OF OCTOBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 558,315
Accounts receivable (less allowance for doubtful accounts
of $65,000)............................................ 2,405,538
Employee loans............................................ 97,069
Prepaid vehicle lease costs............................... 175,473
Other prepaid expenses.................................... 111,458
----------
Total current assets................................... 3,347,853
Property and equipment
Photo equipment........................................... 1,033,364
Office and computer equipment............................. 2,121,218
Vehicles.................................................. 229,329
Leasehold improvements.................................... 76,962
----------
3,460,873
Accumulated depreciation.................................. 2,291,904
----------
1,168,969
Other assets
S corporation tax deposit................................. 30,153
Security deposits......................................... 36,734
----------
66,887
----------
$4,583,709
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt (Note 3)............. $ 19,204
Accounts payable.......................................... 677,779
Accrued payroll........................................... 161,107
Accrued other expenses.................................... 120,388
----------
Total current liabilities.............................. 978,478
Long-term debt (Note 3)..................................... 25,669
Stockholder's equity
Common stock, no par value; authorized 100 shares, issued
and outstanding 10 shares.............................. 1,000
Retained earnings......................................... 3,578,562
----------
3,579,562
----------
$4,583,709
==========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE> 81
KIZOREK, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
REVENUE..................................................... $14,476,272
Operating expenses
Payroll, payroll taxes, and fringe benefits............... 7,205,295
Vehicle operating and leasing............................. 1,718,389
Travel.................................................... 1,004,521
Occupancy................................................. 340,129
Depreciation.............................................. 478,540
Outside services.......................................... 221,149
Insurance................................................. 488,275
Advertising and promotion................................. 245,531
Telephone................................................. 443,902
Office and computer related expenses...................... 521,926
Other..................................................... 556,566
-----------
13,224,223
-----------
Income from operations...................................... 1,252,049
Interest expense............................................ 19,816
Net income.................................................. 1,232,233
Retained earnings at beginning of year...................... 2,730,052
Dividends to stockholder.................................... (383,723)
-----------
RETAINED EARNINGS AT END OF YEAR............................ $ 3,578,562
===========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE> 82
KIZOREK, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $1,232,233
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation........................................... 478,540
Gain on disposal of equipment.......................... (1,103)
Change in assets and liabilities
Accounts receivable.................................. (360,027)
Other current assets................................. (79,983)
Other assets......................................... 18,851
Accounts payable..................................... 145,260
Other current liabilities............................ 4,959
----------
Net cash provided by operating activities......... 1,438,730
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment........................... 36,103
Additions to property and equipment....................... (296,230)
----------
Net cash used in investing activities.................. (260,127)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit............................ (450,000)
Repayment of long-term debt............................... (18,938)
Dividends to stockholder.................................. (383,723)
----------
Net cash used in financing activities.................. (852,661)
----------
NET CHANGE IN CASH.......................................... 325,942
CASH AT BEGINNING OF YEAR................................... 232,373
----------
CASH AT END OF YEAR......................................... $ 558,315
==========
Supplemental disclosures of cash flow information
Cash paid during the year for Interest.................... $ 20,132
Supplemental schedule of noncash investing activity
Equipment acquired through a capital lease................ $ 59,108
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 83
KIZOREK, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Kizorek, Inc. (the Company) is an insurance claims
investigation agency based in Naperville, Illinois. The Company's primary
service is providing video surveillance to insurance companies investigating
disability claims primarily throughout the United States.
Use of Estimates in Preparation of Financial Statements: 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.
Revenue Recognition: Kizorek, Inc. provides surveillance services for its
clients. Fees are generated and recognized for hours incurred based upon
established hourly rates. Accounts receivable include unbilled balances of
$192,000 for services provided prior to the end of the period but billed
subsequently.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is computed based on the estimated useful lives of the related
assets using the straight-line method for financial reporting and accelerated
methods for income tax purposes. For each classification of property and
equipment, the depreciable lives are as follows:
<TABLE>
<S> <C>
Photo equipment......................................... 6 years
Office and computer equipment........................... 3 to 6 years
Vehicles................................................ 3 years
Leasehold improvements.................................. 5 years
</TABLE>
Income Taxes: The Company, with the consent of its stockholder, elected to
have its income taxed as an S corporation which provides that, in lieu of
corporate income taxes, the stockholder is taxed on the Company's taxable
income.
NOTE 2 -- LINE OF CREDIT
The Company has a line of credit of $1,000,000 with Northern Trust
Bank/DuPage. The line of credit bears interest at the prime rate and is secured
by all business assets of the Company. The bank's commitment under the line of
credit expires on March 1, 1998. Restrictive covenants contained in the loan
agreement require the maintenance of certain financial ratios. At October 31,
1997, no borrowings had been made against the line of credit.
NOTE 3 -- LONG-TERM DEBT
Long-term debt consists of the following at October 31, 1997:
<TABLE>
<S> <C>
Lease payable, Naper Leasing Service, maturing January 2000
with interest at 12.8%, payable in monthly installments
of $1,988, secured by equipment.......................... $44,873
Less current maturities.................................... 19,204
-------
$25,669
=======
</TABLE>
F-21
<PAGE> 84
KIZOREK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31,
-----------
<S> <C>
1998..................................................... 19,204
1999..................................................... 21,795
2000..................................................... 3,874
</TABLE>
NOTE 4 -- PROFIT SHARING PLAN
The Company maintains a defined contribution profit sharing plan for
substantially all employees which provides for contributions at the discretion
of the Board of Directors, voluntary employee 401(k) contributions, and matching
contributions by the Company up to specified limits. The matching contribution
for the year ended October 31, 1997 was $46,335. There was no discretionary
contribution for the year ended October 31, 1997.
NOTE 5 -- LEASE COMMITMENTS
The Company conducts its operations from leased office facilities in
Illinois, South Carolina, Hawaii, California, and South Africa. The leases
expire at various dates through 1999.
The total office rental expense was $309,909 for the year ended October 31,
1997.
The Company leases vehicles under operating leases with two- or three-year
lease terms. Total expense amounted to $750,559 for the year ended October 31,
1997.
Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31, AMOUNT
----------- ------
<S> <C>
1998................................................... $ 788,614
1999................................................... 213,392
-----------
$ 1,002,006
===========
</TABLE>
NOTE 6 -- CONTINGENCY
The Company entered into an agreement with North American Benefits, Inc.,
whereby North American Benefits, Inc. provides certain administrative services
and North American Specialty Insurance Company provides stop loss coverage.
However, the Company is responsible for the funding of all claims up to $17,500
per individual per policy year and up to approximately $250,000 per year on the
group as a whole. A liability has been recorded for the estimate of claims
pending at the balance sheet date.
NOTE 7 -- PENDING LITIGATION
The Company is a defendant in several lawsuits arising from the performance
of their regular business activities. These lawsuits are being defended by
counsel for the Company's insurance carrier. Damages being sought are covered by
the Company's existing insurance policies and are not expected to exceed
existing coverage limitations. These matters, when finally concluded and
determined, will not, in
F-22
<PAGE> 85
KIZOREK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the opinion of management, have a material adverse effect on the results of
operations or financial position of the Company.
NOTE 8 -- SUBSEQUENT EVENTS
Effective November 1, 1997, the Company established a deferred compensation
plan for key executives and employees. The total amount of benefits awarded
under this plan is $1,350,000, payable November 1, 2004 plus interest accrued
from the date of the award. If there is a change in control of the Company
through merger, consolidation, liquidation, dissolution, or sale of all or
substantially all of the Company's assets, payments become due in three
installments plus interest commencing on the December 1 following the date of
the change in control of the Company with the balance being due in two
installments on December 1 of each of the next two years.
On August 31, 1998, all of the outstanding shares of common stock of the
Company were exchanged for cash and shares of common stock of The Kroll-O'Gara
Company under the terms of a merger agreement.
F-23
<PAGE> 86
KIZOREK, INC.
BALANCE SHEET
APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1998
----------
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 294,276
Accounts receivable (less allowance for doubtful accounts
of $65,000)............................................ 2,006,922
Employee loans............................................ 102,418
Prepaid vehicle lease costs............................... 135,582
Other prepaid expenses and advances....................... 367,711
----------
Total current assets................................... 2,906,909
Property and equipment
Photo equipment........................................... 1,040,296
Office and computer equipment............................. 2,142,860
Vehicles.................................................. 141,741
Leasehold improvements.................................... 76,962
----------
3,401,859
Accumulated depreciation.................................. 2,444,481
----------
957,378
Other assets
S corporation tax deposit................................. 30,153
Security deposits......................................... 34,471
----------
64,624
----------
$3,928,911
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Note payable -- line of credit............................ $ --
Accounts payable.......................................... 603,148
Accrued payroll........................................... 164,179
Accrued other expenses.................................... 149,427
----------
Total current liabilities.............................. 916,754
Stockholder's equity
Common stock, no par value; authorized 100 shares, issued
and outstanding 10 shares.............................. 1,000
Retained earnings......................................... 3,011,157
----------
3,012,157
----------
$3,928,911
==========
</TABLE>
See accompanying notes to unaudited financial statements.
F-24
<PAGE> 87
KIZOREK, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
SIX MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUE..................................................... $6,366,531 $6,531,797
Operating expenses
Payroll, payroll taxes, and fringe benefits............... 3,559,547 3,408,442
Vehicle operating and leasing............................. 794,925 799,139
Travel.................................................... 442,124 443,889
Occupancy................................................. 163,247 157,356
Depreciation.............................................. 206,040 195,394
Outside services.......................................... 39,424 47,687
Insurance................................................. 241,958 230,074
Advertising and promotion................................. 101,308 128,794
Telephone................................................. 190,622 223,162
Office and computer related expenses...................... 270,323 180,530
Other..................................................... 327,571 510,755
---------- ----------
6,337,089 6,325,222
---------- ----------
INCOME FROM OPERATIONS...................................... 29,442 206,575
Interest expense............................................ 1,769 13,243
---------- ----------
NET INCOME.................................................. 27,673 193,332
Retained earnings at beginning of period.................... 3,578,562 2,730,052
Dividends to stockholder.................................... (595,078) (104,659)
---------- ----------
RETAINED EARNINGS AT END OF PERIOD.......................... $3,011,157 $2,818,725
========== ==========
</TABLE>
See accompanying notes to unaudited financial statements.
F-25
<PAGE> 88
KIZOREK, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 27,673 $193,332
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation........................................... 206,040 195,394
Gain on disposal of equipment.......................... (3,540) (3,895)
Change in assets and liabilities
Accounts receivable.................................. 398,616 90,817
Other current assets................................. 289,211 (91,206)
Other assets......................................... 2,263 789
Accounts payable..................................... 157,806 492,543
Other current liabilities............................ (200,328) (189,290)
----------- --------
Net cash provided by operating activities......... 877,741 688,484
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment........................... 4,838 24,895
Additions to property and equipment....................... (122,944) (209,471)
----------- --------
Net cash used in investing activities.................. (118,106) (184,576)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit............................ -- (250,000)
Repayment of long-term debt............................... (44,873) (4,703)
Dividends to stockholder.................................. (978,801) (104,659)
----------- --------
Net cash used in financing activities.................. (1,023,674) (359,362)
----------- --------
Net change in cash.......................................... (264,039) 144,546
Cash at beginning of year................................... 558,315 232,373
----------- --------
CASH AT END OF YEAR......................................... $ 294,276 $376,919
=========== ========
Supplemental disclosures of cash flow information
Cash paid during the year for Interest.................... $ 1,769 $ 13,559
</TABLE>
See accompanying notes to unaudited financial statements.
F-26
<PAGE> 89
KIZOREK, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
APRIL 30, 1998 AND 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Kizorek, Inc. (the Company) is an insurance claims
investigation agency based in Naperville, Illinois. The Company's primary
service is providing video surveillance to insurance companies investigating
disability claims.
Revenue Recognition: The Company provides surveillance services for its
clients. Fees are generated and recognized for hours incurred based upon
established hourly rates. Accounts receivable include unbilled balances for
services provided prior to the end of the period but billed subsequently.
Income Taxes: The Company, with the consent of its stockholder, elected to
have its income taxed as an S corporation which provides that, in lieu of
corporate income taxes, the stockholder is taxed on the Company's taxable
income.
Basis of Presentation: The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, the accompanying interim unaudited financial
statements contain all adjustments (consisting of normal recurring items)
necessary to present fairly the financial position of the Company as of April
30, 1998 and 1997.
NOTE 2 -- SUBSEQUENT EVENT
On August 31, 1998, all of the outstanding shares of common stock of the
Company were exchanged for cash and shares of common stock of the Kroll-O'Gara
Company under the terms of a merger agreement.
F-27
<PAGE> 90
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combining financial statements give effect to the
merger as a pooling of interests, and should be read in conjunction with, and is
qualified by reference to, the audited consolidated financial statements of
Kroll-O'Gara and Background America and the notes thereto included elsewhere in
this proxy statement / prospectus. For purposes of the unaudited pro forma
operating data, Kroll-O'Gara's consolidated financial statements for the three
fiscal years ended December 31, 1998 have been combined with the consolidated
financial statements of Background America for the three fiscal years ended
December 31, 1998. For purposes of the unaudited pro forma combined condensed
balance sheets, Kroll-O'Gara's consolidated financial statements have been
combined with Background America's consolidated financial statements at December
31, 1997 and 1998.
The pro forma financial statements are presented for illustrative purposes
only and are not necessarily indicative of the operating results or financial
position that would have been achieved if the merger had been consummated as of
the beginning of the periods indicated, nor are they indicative of future
financial position or results of operations.
F-28
<PAGE> 91
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BACKGROUND
KROLL-O'GARA AMERICA PRO FORMA
------------- ---------- ---------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 9,468 $2,926 $ 12,394
Accounts receivable billed and unbilled, net........ 37,046 881 37,927
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 11,898 -- 11,898
Inventories......................................... 16,666 -- 16,666
Other current assets................................ 5,886 53 5,939
Net current assets of discontinued operations....... 6,027 -- 6,027
-------- ------ --------
Total current assets............................. 86,991 3,860 90,851
Property, plant and equipment, net.................... 17,435 629 18,064
Databases, net........................................ 8,335 -- 8,335
Costs in excess of assets acquired and other
intangible assets, net.............................. 23,426 704 24,130
Other assets, net..................................... 2,977 9 2,986
Net non-current assets of discontinued operations..... 4,705 -- 4,705
-------- ------ --------
Total assets..................................... $143,869 $5,202 $149,071
======== ====== ========
Current liabilities:
Accounts payable.................................... $ 28,320 $ 433 $ 28,753
Accrued liabilities................................. 14,133 224 14,357
Other current liabilities........................... 9,260 152 9,412
-------- ------ --------
Total current liabilities........................ 51,713 809 52,522
Long-term debt, net of current portion................ 49,641 -- 49,641
Other long-term liabilities........................... 4,047 -- 4,047
Shareholders' equity.................................. 38,468 4,393(1) 42,861
-------- ------ --------
Total liabilities and shareholders' equity....... $143,869 $5,202 $149,071
======== ====== ========
</TABLE>
(1) This amount includes a reclass of approximately $6.0 million for mandatorily
redeemable preferred stock that was historically reflected as a long-term
liability but is treated as essentially the same as common stock in the
merger transaction.
F-29
<PAGE> 92
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BACKGROUND
KROLL-O'GARA AMERICA PRO FORMA
------------ ---------- ---------
<S> <C> <C> <C>
Current Assets:
Cash and equivalents................................ $ 26,002 $1,178 $ 27,180
Accounts receivable billed and unbilled, net........ 58,034 1,433 59,467
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 26,408 -- 26,408
Inventories......................................... 18,607 -- 18,607
Other current assets................................ 7,684 64 7,748
Net current assets of discontinued operations....... 6,837 -- 6,837
-------- ------ --------
Total current assets............................. 143,572 2,675 146,247
Property, plant and equipment, net.................... 23,825 747 24,572
Databases, net........................................ 9,239 -- 9,239
Costs in excess of assets acquired and other
intangible assets, net.............................. 57,943 1,210 59,153
Other assets, net..................................... 4,868 14 4,882
Net non-current assets of discontinued operations..... 4,275 -- 4,275
-------- ------ --------
Total assets..................................... $243,722 $4,646 $248,368
======== ====== ========
Current liabilities:
Accounts payable.................................... $ 32,463 $ 448 $ 32,911
Accrued liabilities................................. 19,964 787 20,751
Other current liabilities........................... 7,774 34 7,808
-------- ------ --------
Total current liabilities........................ 60,201 1,269 61,470
Long-term debt, net of current portion................ 39,257 89 39,346
Other long-term liabilities........................... 3,169 -- 3,169
Shareholders' equity.................................. 141,095 3,288(1) 144,383
-------- ------ --------
Total liabilities and shareholders' equity....... $243,722 $4,646 $248,368
======== ====== ========
</TABLE>
(1) This amount includes a reclass of approximately $6.0 million for mandatorily
redeemable preferred stock that was historically reflected as a long-term
liability but is treated as essentially the same as common stock in the
merger transaction.
F-30
<PAGE> 93
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
-------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales............................... $157,148 $ 1,776 $158,924
Cost of sales........................... 111,640 1,624 113,264
-------- ------- --------
Gross profit....................... 45,508 152 45,660
Selling, general and administrative
expenses, including amortization...... 36,138 1,237 37,375
Asset impairment........................ 125 -- 125
-------- ------- --------
Operating income (loss)............ 9,245 (1,085) 8,160
Interest expense........................ (3,002) (42) (3,044)
Other income (loss), net................ 332 (2) 330
-------- ------- --------
Income (loss) from continuing
operations before provision for
income taxes....................... 6,575 (1,129) 5,446
Provision for income taxes.............. 365 -- 365
-------- ------- --------
Income (loss) from continuing
operations (3)(4).................. $ 6,210 $(1,129) $ 5,081
======== ======= ========
Basic earnings per share from continuing
operations (3)(4)..................... $ 0.54 $ 0.42(5)
======== ========
Basic weighted average shares
outstanding........................... 11,607 505(1) 12,112(2)
======== ========
Diluted earnings per share from
continuing operations (3)(4).......... $ 0.50 $ 0.39(5)
======== ========
Diluted weighted average shares
outstanding........................... 12,161 510(1) 12,671(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(2) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the year ended December 31, 1996:
<TABLE>
<CAPTION>
INCOME SHARES
------ ------
<S> <C> <C>
Basic earnings per share.................................... $5,081 12,112
Effect of dilutive securities:
Options................................................... -- 137
Restricted stock.......................................... (162) 288
Warrants.................................................. -- 102
Convertible note payable.................................. -- 32
------ ------
Diluted earnings per share.................................. $4,919 12,671
====== ======
</TABLE>
F-31
<PAGE> 94
(3) During the fourth quarter of 1996, a subsidiary of Kroll-O'Gara discontinued
its clinical operations. The related operating loss and shut down expenses
of $1,274, net of a benefit for income taxes of $747, were reported as
discontinued operations by Kroll-O'Gara in its consolidated statement of
operations for the year ended December 31, 1996. The pro forma basic and
diluted earnings per share impact of the discontinued clinical operations
for the year ended December 31, 1996 were $0.11 and $0.10, respectively.
(4) On April 28, 1999, Kroll-O'Gara's Board of Directors approved a formal plan
to discontinue operations of the Voice and Data Communications Group.
Kroll-O'Gara received an outside expression of interest for this business in
April 1999 and intends to make the assets of the segment available for sale
immediately and expects to complete the disposal of this segment within the
next twelve months. The 1996 income of $333 of this group has been
classified as discontinued operations. The pro forma basic and diluted
earnings per share impact of the income from discontinued operations for the
year ended December 31, 1996 was $0.03.
(5) Pro forma basic and diluted earnings per share would have been $0.42 and
$0.39, respectively, under the assumption that all shares in escrow were
returned to Kroll-O'Gara.
F-32
<PAGE> 95
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................. $188,665 $ 4,221 $192,886
Cost of sales............................. 125,453 3,448 128,901
-------- ------- --------
Gross profit......................... 63,212 773 63,985
Selling, general and administrative
expenses, including amortization........ 44,589 2,178 46,767
Merger related costs...................... 7,205 -- 7,205
-------- ------- --------
Operating income (loss).............. 11,418 (1,405) 10,013
Interest expense.......................... (4,726) (84) (4,810)
Other income (expense), net............... (325) 152 (477)
-------- ------- --------
Income (loss) before minority interest,
provision for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ 6,367 (1,337) 5,030
Minority interest......................... (156) -- (156)
-------- ------- --------
Income (loss) before provision for
income taxes, extraordinary item and
cumulative effect of change in
accounting principle................. 6,211 (1,337) 4,874
Provision for income taxes................ 3,305 -- 3,305
-------- ------- --------
Income (loss) from continuing
operations(3)(4)..................... $ 2,906 $(1,337) $ 1,569
======== ======= ========
Basic earnings per share from continuing
operations(3)(4)........................ $ 0.21 $ 0.11(5)
======== ========
Basic weighted average shares
outstanding............................. 14,007 744(1) 14,751(2)
======== ========
Diluted earnings per share from continuing
operations(3)(4)........................ $ 0.20 $ 0.10(5)
======== ========
Diluted weighted average shares
outstanding............................. 14,799 761(1) 15,560(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
F-33
<PAGE> 96
(2) The following is a reconciliation of the numerator and denominator for
basic and diluted earnings per share for the year ended December 31, 1997:
<TABLE>
<CAPTION>
INCOME SHARES
------ -------
<S> <C> <C>
Basic earnings per share.................................... $1,569 14,751
Effect of dilutive securities:
Options................................................... -- 255
Restricted stock.......................................... -- 443
Warrants.................................................. -- 97
Convertible note payable.................................. -- 14
------ -------
Diluted earnings per share.................................. $1,569 15,560
====== =======
</TABLE>
(3) During the second quarter of 1997, Kroll-O'Gara recorded an extraordinary
charge of $194, net of a benefit for income taxes of $129, related to the
refinancing of certain debt obligations in 1997. In addition, during the
fourth quarter of 1997, Kroll-O'Gara changed its method of accounting for
costs incurred in connection with business process reengineering activities
relating to information technology transformation and recorded a cumulative
effect of change in accounting principle of $360, net of a benefit for
income taxes of $240. The pro forma basic and diluted earnings per share
impact of the extraordinary item was $0.01 and the pro forma basic and
diluted earnings per share impact of the cumulative effect of change in
accounting principle was $0.02 for the year ended December 31, 1997.
(4) On April 28, 1999, Kroll-O'Gara's Board of Directors approved a formal plan
to discontinue operations of the Voice and Data Communications Group.
Kroll-O'Gara received an outside expression of interest for this business
in April 1999 and intends to make the assets of the segment available for
sale immediately and expects to complete the disposal of this segment
within the next twelve months. The 1997 loss of $305 of this group has been
classified as discontinued operations. The pro forma basic and diluted
earnings per share impact of the loss from discontinued operations for the
year ended December 31, 1997 was $0.02.
(5) Pro forma basic and diluted earnings per share would have been $0.11 and
$0.10, respectively, under the assumption that all shares in escrow were
returned to Kroll-O'Gara.
F-34
<PAGE> 97
KROLL-O'GARA AND BACKGROUND AMERICA UNAUDITED PRO FORMA
AND KIZOREK
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
BACKGROUND PRO FORMA PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA KIZOREK(3) ADJUSTMENTS(4) PRO FORMA
------------ ---------- ----------- --------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $247,192 $ 7,351 $254,543 $ 6,385 $260,928
Cost of sales........ 159,187 5,104 164,291 3,911 168,202
-------- ------- -------- --------- -------- --------
Gross profit..... 88,005 2,247 90,252 2,474 92,726
Selling, general and
administrative
expenses, including
amortization....... 57,901 3,393 61,294 2,411 169(5) 63,874
Merger related
costs.............. 5,339 388 5,727 -- -- 5,727
-------- ------- -------- --------- -------- --------
Operating income
(loss)........... 24,765 (1,534) 23,231 63 (169) 23,125
Interest expense..... (4,194) (12) (4,206) -- (35) (6) (4,241)
Other income, net.... 1,310 130 1,440 -- 1,440
-------- ------- -------- --------- -------- --------
Income (loss)
before provision
for income
taxes............ 21,881 (1,416) 20,465 63 (204) 20,324
Provision for income
taxes.............. 7,466 -- 7,466 -- (57) (7) 7,409
-------- ------- -------- --------- -------- --------
Net income
(loss)......... $ 14,415 $(1,416) $ 12,999 $ 63 $ (147) $ 12,915
======== ======= ======== ========= ======== ========
Basic earnings per
share from
continuing
operations......... $ 0.78 $ 0.67(2) $ 0.67(9)(10)
======== ======== ========
Basic weighted
average shares
outstanding........ 18,439 906(1) 19,345(8) 19,345(8)
======== ======== ========
Diluted earnings per
share from
continuing
operations......... $ 0.76 $ 0.65(2) $ 0.65(9)(10)
======== ======== ========
Diluted weighted
average shares
outstanding........ 18,965 952(1) 19,917(8) 19,917(8)
======== ======== ========
</TABLE>
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(2) Pro forma basic and diluted earnings per share would have been $0.68 and
$0.66, respectively, under the assumption that all shares in escrow were
returned to Kroll-O'Gara.
(3) To include historical results of operations for Kizorek for the six months
ended April 30, 1998. Kizorek's operating costs have been allocated into
categories consistent with the Company's statement of operations
presentation policies. Kizorek's results of operations from July 1, 1998
through December 31, 1998 are included in the consolidated results of
operations of Kroll-O'Gara.
F-35
<PAGE> 98
(4) Pro forma adjustments exclude the impact of compensation expense for a
non-recurring charge under the Kizorek deferred compensation plan associated
with the accelerated vesting of benefits resulting from a change in control
of the company.
(5) Pro forma adjustments are comprised of the following components:
amortization of goodwill resulting from the acquisition of Kizorek (gross
cost of $6,772 over 25 years), amortization of capitalized acquisition costs
associated with Kizorek ($545 over 25 years) and amortization of customer
lists and detective licenses identified in conjunction with the acquisition
($700 over 15 years).
(6) To record interest expense under Kizorek deferred compensation plan ($1,350
at 5.125%).
(7) To recognize the benefit for income taxes on pro forma adjustments and the
provision for income taxes on the historical results of Kizorek, which had
been previously treated as an S Corporation for income tax purposes. An
effective rate of 40% was used to determine the pro forma income tax impact.
(8) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the year ended December 31, 1998:
<TABLE>
<CAPTION>
INCOME SHARES
------- ------
<S> <C> <C>
Basic earnings per share.................................... $12,915 19,345
Effect of dilutive securities:
Options................................................... -- 569
Warrants.................................................. -- 3
------- ------
Diluted earnings per share.................................. $12,915 19,917
======= ======
</TABLE>
(9) On April 28, 1999, Kroll-O'Gara's Board of Directors approved a formal plan
to discontinue operations of the Voice and Data Communications Group.
Kroll-O'Gara received an outside expression of interest for this business
in April 1999 and intends to make the assets of the segment available for
sale immediately and expects to complete the disposal of this segment
within the next twelve months. The 1998 loss of $1,325 of this group has
been classified as discontinued operations. The pro forma basic and diluted
earnings per share impact of the loss from discontinued operations for the
year ended December 31, 1998 was $0.07.
(10) Pro forma basic and diluted earnings per share would have been $0.67 and
$0.65, respectively, under the assumption that all shares in escrow were
returned to Kroll-O'Gara.
F-36
<PAGE> 99
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of January 21,
1999, among The Kroll-O'Gara Company ("TKOG"), an Ohio corporation and a party
to this Agreement but not a constituent corporation in the Merger (as
hereinafter defined), Kroll-O'Gara Tennessee, Inc. ("Merger Sub"), a Tennessee
corporation all of whose capital stock is owned directly by TKOG and Background
America, Inc. (the "Company"), a Tennessee corporation.
WHEREAS, the Boards of Directors of Merger Sub and the Company, deeming it
advisable and for the respective benefit of Merger Sub and the Company, and
their shareholders, have approved the merger of Merger Sub with and into the
Company on the terms and conditions hereinafter set forth, and have approved
this Agreement and authorized the transactions contemplated hereby; and
WHEREAS, the Board of Directors of the Company has determined to recommend
to all of the Company's shareholders that the Merger and this Agreement be
approved; and
WHEREAS, TKOG, Merger Sub and the Company desire to make certain
representations, warranties and agreements in connection with, and establish
various conditions precedent to, the Merger.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
1 DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"ARTICLES OF MERGER" -- as defined in Section 2.2.
"CLOSING" -- as defined in Section 2.1.
"CLOSING DATE" -- the date and time as of which the Closing actually takes
place.
"CODE" -- the Internal Revenue Code of 1986, as amended, and any successor
law.
"COMMISSION" -- the United States Securities and Exchange Commission.
"COMPANY" -- as defined in the first paragraph of this Agreement.
"COMPANY COMMON STOCK" -- the common stock, no par value, of the Company.
"COMPANY PARTIES" -- as defined in Section 11.3.
"COMPANY SHAREHOLDERS" -- the holders of the Company Common Stock
(including shares of Company Common Stock issuable upon exercise of the Options
at any time prior to the Closing) and the Series A Preferred Stock.
"COMPANY'S KNOWLEDGE" -- includes the knowledge of Michael D. Shmerling, A.
Michael Rosen, Marc Curvin, Steve Cavin, Robert Schlossnagle, Tom Ellis, Gerald
Belko, Alan Wernick and Benny Ball.
"CONTRACT" -- any agreement, contract, obligation, promise or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"DAMAGES" -- as defined in Section 11.2.
A-1
<PAGE> 100
"DISCLOSURE SCHEDULE" -- the disclosure schedule delivered by the Company
to TKOG and Merger Sub concurrently with the execution and delivery of this
Agreement.
"DISSENTING SHAREHOLDERS" -- as defined in Section 2.7(d).
"EFFECTIVE TIME" -- as defined in Section 2.2.
"ENCUMBRANCE" -- any mortgage, charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest, right of
first refusal or restriction of any kind, including any restriction on use,
voting, transfer, receipt of income or exercise of any other attribute of
ownership.
"ENVIRONMENT" -- soil, land surface or subsurface strata, surface waters,
groundwaters, drinking water supply, stream sediments, ambient air, plant and
animal life and any other environmental medium or natural resource.
"ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES" -- any cost, damages,
expense, liability, obligation or other responsibility arising from or under any
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to: (a) any environmental, health or safety matter or condition
(including on-site or off-site contamination, generation, handling and disposal
of hazardous substances, occupational safety and health, and regulation of
chemical and hazardous substances or products); (b) fines, penalties, judgments,
awards, settlements, legal or administrative proceedings, damages, losses,
litigation, including civil and criminal claims, demands and response,
investigative, remedial, response or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law; (c) financial
responsibility under Environmental Law or Occupational Safety and Health Law for
cleanup costs or corrective action, including any investigation, cleanup,
removal, containment, or other remediation or response actions required by
applicable Environmental Law or Occupational Safety and Health Law and for any
natural resource damages; or (d) any other compliance, corrective,
investigative, or remedial measures required under Environmental Law or
Occupational Safety and Health Law. The terms "removal," "remedial," and
"response action," include the types of activities covered by the United States
Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C.
sec. 9601 et seq., as amended ("CERCLA").
"ENVIRONMENTAL LAW" -- any and all federal, state, local, provincial, and
foreign, civil and criminal laws, statutes, ordinances, orders, codes, rules,
regulations, permits, policies, guidance documents, judgments, decrees and
agreements with any Governmental Authority of or relating to the protection of
health and the Environment, worker health and safety, and/or governing the
handling, use, generation, treatment, storage, transportation, disposal,
manufacture, distribution, packaging, labeling or release of Hazardous
Materials, including CERCLA; the Resource Conservation and Recovery Act, 42
U.S.C sec. 6901 et seq.; the Clean Air Act, 42 U.S.C sec. 7401 et seq.; and the
Occupational Safety and Health Act, 29 U.S.C sec. 651 et seq.; and the state
analogues thereto and any common law doctrine, including negligence, nuisance,
trespass, personal injury or property damage related or arising out of the
presence, release or exposure to Hazardous Materials.
"ERISA" -- the Employee Retirement Income Security Act of 1974, as amended,
or any successor law.
"ESCROW AGENT" -- as defined in Section 2.8(a).
"ESCROW AGREEMENT" -- as defined in Section 2.8(a).
"ESCROW FUND" -- as defined in Section 2.8(a).
"EXCHANGE ACT" -- the Securities Exchange Act of 1934, as amended, or any
successor law.
A-2
<PAGE> 101
"FACILITIES" -- any real property, leaseholds or other interests currently
or formerly owned or operated by the Company and any buildings, plants,
structures or equipment (including motor vehicles) currently or formerly owned
or operated by the Company.
"FINANCIAL STATEMENTS" -- as defined in Section 4.5.
"GAAP" -- generally accepted United States accounting principles applied on
a basis consistent with the basis on which the financial statements of the
Company referred to in Section 4.5 were prepared.
"GOVERNMENTAL AUTHORITY" -- any court, tribunal, authority, agency,
commission, bureau, department, official or other instrumentality of the United
States, any foreign country or any domestic, foreign, state, local, county, city
or other political subdivision.
"GOVERNMENTAL PERMIT" -- any license, franchise, permit or other
authorization of any Governmental Authority.
"HAZARDOUS ACTIVITY" -- the distribution, generation, handling,
manufacturing, processing, production, release, storage, transportation,
treatment, disposal or use of Hazardous Materials in, on, under, about, or from
the Facilities or any part thereof into the Environment, and any other act,
business or operation that increases the danger or poses an unreasonable risk of
harm to persons or property on or off the Facilities or that may affect the
value of the Facilities or the Company.
"HAZARDOUS MATERIALS" -- any waste or other substance that is listed,
defined, designated or classified as, or otherwise determined to be, hazardous,
radioactive or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law.
"INTELLECTUAL PROPERTY ASSETS" -- as defined in Section 4.21.
"IRS" -- the United States Internal Revenue Service or any successor agency
and, to the extent relevant, the United States Department of the Treasury.
"MARKET VALUE" -- with respect to any date, the average of the last sales
price on the NASDAQ National Market of TKOG Common Stock for the five
consecutive trading days ending on the trading day that is four days immediately
prior to such date.
"MATERIAL ADVERSE EFFECT" -- as defined in Section 4.7.
"MERGER" -- as defined in Section 2.1(a).
"MERGER SUB" -- as defined in the first paragraph of this Agreement.
"NEW CERTIFICATES" -- as defined in Section 2.8(a)(i).
"OCCUPATIONAL SAFETY AND HEALTH LAW" -- any legal or governmental
requirement or obligation relating to safe and healthful working conditions and
to reduce occupational safety and health hazards, and any program, whether
governmental or private (including those promulgated or sponsored by industry
associations and insurance companies), designed to provide safe and healthful
working conditions.
"OLD CERTIFICATES" -- as defined in Section 2.8(a).
"OPTIONS" -- as defined in Section 2.11.
"ORGANIZATIONAL DOCUMENTS" -- (a) the articles or certificate of
incorporation and the bylaws or code of regulations of a corporation; (b) the
partnership agreement and any statement of partnership of a general partnership;
(c) the limited partnership agreement and the certificate of limited partnership
of a
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limited partnership; (d) the certificate of formation and operating agreement of
a limited liability company; (e) any charter or similar document adopted or
filed in connection with the creation, formation or organization of a Person;
and (e) any amendment to any of the foregoing.
"PERSON" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union or other entity
or governmental body.
"PROCEEDING" -- as defined in Section 4.13.
"SECURITIES ACT" -- the Securities Act of 1933, as amended, or any
successor law.
"SERIES A PREFERRED STOCK" -- as defined in Section 2.7(a).
"SHAREHOLDERS" -- the Company Shareholders and the holders of Options
exercised pursuant to Section 2.11(b).
"SUBSIDIARY" -- any corporation, joint venture, limited liability company,
partnership, association or other business entity of which more than 50% of the
total voting power of stock or other equity entitled to vote generally in the
election of directors or managers thereof is owned or controlled, directly or
indirectly, by the Company or TKOG, as the case may be.
"SURVIVING CORPORATION" -- as defined in Section 2.1(a).
"TKOG" -- The Kroll-O'Gara Company, an Ohio corporation.
"TKOG COMMON STOCK" -- the Common Stock, $0.01 par value per share, of
TKOG.
"TKOG DISCLOSURE SCHEDULE" -- the disclosure schedule delivered by TKOG and
Merger Sub to the Company concurrently with the execution and delivery of this
Agreement.
"TKOG SEC REPORTS" -- as defined in Section 5.4.
"TKOG SHARES" -- the shares of TKOG Common Stock to be issued to the
Company Shareholders in connection with the Merger.
"TOTAL COMPANY COMMON STOCK ON A FULLY DILUTED BASIS" -- as defined in
Section 2.7(a).
"TRANSACTION DOCUMENTS" -- the Escrow Agreement and the employment
agreements referred to in Section 6.12.
2 THE MERGER; CLOSING
2.1 THE MERGER
(a) Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the Tennessee Business Corporation Act, as
amended (the "TBCA"), Merger Sub shall be merged with and into the Company at
the Effective Time (the "Merger"). Following the Merger, the separate corporate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation (the "Surviving Corporation") under the name "Background
America, Inc."
(b) Unless this Agreement shall have been terminated and the transactions
herein contemplated shall have been abandoned pursuant to Section 10 and subject
to the satisfaction or waiver of the conditions set forth in Sections 8 and 9,
the consummation of the Merger will take place as promptly as practicable (and
in any event within two business days) after satisfaction or waiver of the
conditions set forth in Sections 8 and 9 at the offices of Kramer Levin Naftalis
& Frankel LLP, 919 Third Avenue, New York, New York (the "Closing"), unless
another date, time or place is agreed to in writing by the parties hereto.
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2.2 EFFECTIVE TIME
As soon as practicable following the Closing, the parties shall (i) file
articles of merger (the "Articles of Merger") in such form as is required by and
executed in accordance with the relevant provisions of the TBCA, and (ii) make
all other filings or recordings required under the TBCA. The Merger shall become
effective at such time as the Articles of Merger are duly filed with the
Secretary of State of the State of Tennessee or at such subsequent time as the
Company and TKOG shall agree and be specified in the Articles of Merger (the
date and time the Merger becomes effective being the "Effective Time").
2.3 EFFECTS OF THE MERGER
At and after the Effective Time, the Merger will have the effects set forth
in the TBCA. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all property owned by the Company or Merger Sub
shall be vested in the Surviving Corporation without reversion or impairment;
all liabilities of the Company or Merger Sub shall be vested in the Surviving
Corporation; and a proceeding pending against the Company or Merger Sub may be
continued as if the Merger did not occur or the Surviving Corporation may be
substituted in the proceeding for the Company or Merger Sub.
2.4 ARTICLES OF INCORPORATION
At the Effective Time, the articles of incorporation of the Surviving
Corporation shall be amended in accordance with the TBCA such that the articles
of incorporation of the Surviving Corporation shall consist of the provisions of
the articles of incorporation of Merger Sub, until thereafter changed or amended
as provided therein or by applicable law, except that Article I of the Articles
of Incorporation of the Surviving Corporation shall be amended to read in its
entirety as follows: "The name of this Corporation is 'Background America,
Inc."' The articles of incorporation of Merger Sub shall be amended to provide
for the indemnification by Merger Sub of its officers, directors, employees and
other persons serving at their request to the full extent authorized under the
laws of the jurisdiction of incorporation thereof.
2.5 BY-LAWS
The by-laws of Merger Sub as in effect at the Effective Time shall be the
by-laws of the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law.
2.6 OFFICERS AND DIRECTORS OF SURVIVING CORPORATION
The officers of the Company as of the Effective Time shall be the officers
of the Surviving Corporation until the earlier of their resignation or removal
or otherwise ceasing to be an officer or until their respective successors are
duly elected and qualified. The directors of Merger Sub as of the Effective Time
shall be the directors of the Surviving Corporation until the earlier of their
resignation or removal or otherwise ceasing to be a director or until their
respective successors are duly elected and qualified.
2.7 CONVERSION OR CANCELLATION OF CAPITAL STOCK OF THE COMPANY
At the Effective Time of the Merger, by virtue of the Merger and without
any action on the part of any holder thereof:
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(a) Subject to the provisions of Sections 2.7(c), 2.8 and 2.9, each
share of the Company's Series A Preferred Stock, par value $1.00 per share
(the "Series A Preferred Stock"), issued and outstanding immediately prior
to the Effective Time of the Merger and not theretofore converted into
Company Common Stock shall be converted into the right to receive 0.2689628
of one fully paid and non-assessable share of TKOG Common Stock.
(b) Subject to the provisions of Sections 2.7(c), 2.8 and 2.9, each
share of Company Common Stock issued and outstanding immediately prior to
the Effective Time shall be converted into the right to receive 0.2689628
of one fully paid and non-assessable share of TKOG Common Stock.
(c) Shares of Series A Preferred Stock and shares of Company Common
Stock owned by a holder who (i) shall not have voted in favor of the
Merger, and (ii) shall have delivered to the Company a written notice of
his intent to demand payment for his shares if the Merger is effectuated in
the manner provided in Section 48-23-201 et seq. of the TBCA (collectively,
the "Dissenting Shareholders"), shall not be converted as provided above,
but shall be entitled to receive such consideration as shall be provided in
such Sections of the TBCA, except that shares of any Dissenting Shareholder
who shall thereafter not perfect his right to appraisal as provided in such
Sections of the TBCA shall thereupon be deemed to have been converted, as
of the Effective Time of the Merger, into shares of TKOG Common Stock, as
provided in Section 2.7(a) and (b), as the case may be. The Company shall
notify TKOG and Merger Sub in writing of the details of the Dissenting
Shareholders and the number of shares of Series A Preferred Stock or shares
of Company Common Stock that they own. The Company shall not enter into any
agreement or settlement with any Dissenting Shareholder without the prior
written consent of TKOG.
(d) Each authorized but unissued share of Series A Preferred Stock and
Company Common Stock shall cease to exist.
(e) Each share of Merger Sub's Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger shall be converted
into one share of Common Stock, par value $.01 per share, of the Surviving
Corporation.
2.8 ISSUANCE OF MERGER CONSIDERATION
(a) Subject to the provisions of Section 2.9, and the proviso to this
Section 2.8(a), at or as soon as practicable after the Effective Time of the
Merger, TKOG shall issue and deliver, upon surrender by a Company Shareholder of
one or more certificates ("Old Certificates") representing Series A Preferred
Stock or Company Common Stock for cancellation, to:
(i) a holder that surrenders Old Certificates representing Series A
Preferred Stock, one or more certificates ("New Certificates"), registered
in the name of such holder, for the number of shares of TKOG Common Stock
equal to the product of (x) the number of shares of TKOG Common Stock
determined pursuant to the provisions of Section 2.7(a) (subject to
appropriate adjustment for any stock splits or combinations after the date
hereof and on or prior to the Effective Time of the Merger) and (y) the
number of shares of Series A Preferred Stock represented by such Old
Certificates; and
(ii) a holder that surrenders Old Certificates representing Company
Common Stock, one or more New Certificates, registered in the name of such
holder, for the number of shares of TKOG Common Stock equal to the product
of (x) the number of shares of TKOG Common Stock determined pursuant to the
provisions of Section 2.7(b) (subject to appropriate adjustment for any
stock splits or combinations after the date hereof and on or prior to the
Effective Time of the
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Merger) and (y) the number of shares of Company Common Stock represented by
such Old Certificates;
provided, however, that, in lieu of delivering to such holders New Certificates
for the full number of shares of TKOG Common Stock provided for in Sections
2.8(a)(i) and (ii), TKOG shall deliver to (A) each such holder one or more New
Certificates, registered in the name of such holder, for a number of shares of
TKOG Common Stock equal to the total number of shares of TKOG Common Stock
otherwise to be delivered pursuant to this Section 2.8 less the Internal Escrow
Amount and the Applicable Amount determined pursuant to the following provisions
of this proviso to Section 2.8; (B) Michael D. Shmerling, as escrow agent for
deposit into an escrow fund for the benefit of the Shareholders to secure any
obligations of the Shareholders under Section 12.1, one or more New
Certificates, registered in the name of Michael D. Shmerling as escrow agent,
for a number of shares of TKOG Common Stock equal to 2% of the total number of
shares of TKOG Common Stock issuable to the Shareholders (the "INTERNAL ESCROW
AMOUNT"), with any fraction of a share being rounded down to the nearest whole
share; and (C) Star Bank, N.A. as escrow agent (the "ESCROW AGENT") for deposit
into the escrow fund (the "ESCROW FUND") provided for in the escrow agreement in
the form attached hereto as Exhibit A (the "ESCROW AGREEMENT"), to secure the
indemnification obligations under Section 11.2, one or more New Certificates,
registered in the name of the Escrow Agent, for such Applicable Amount, all of
which will be held as part of the Escrow Fund and disposed of by the Escrow
Agent in accordance with the provisions of the Escrow Agreement:
The Applicable Amount for each holder of Series A Preferred Stock and
each holder of Company Common Stock is that number of whole shares of TKOG
Common Stock equal to 10% of the total number of shares of TKOG Common
Stock issuable to such holder pursuant to Section 2.8(a), with any fraction
of a share being rounded down to the nearest whole share.
The Escrow Agreement is incorporated herein by reference and shall be considered
part of this Agreement. By voting for or failing to dissent from the approval of
this Agreement, each Company Shareholder automatically and without any further
act or deed irrevocably agrees that such Company Shareholder:
(A) accepts and shall be bound by the terms and provisions of the
Escrow Agreement;
(B) consents to the appointment of Russell R. French as Shareholder
Representative (the "SHAREHOLDER REPRESENTATIVE") for purposes of the
Escrow Agreement with all rights, powers and authority provided for in the
Escrow Agreement and that any action taken by the Shareholder
Representative pursuant to the Escrow Agreement shall be conclusive, valid,
binding and enforceable with respect to such Company Shareholder; and
(C) agrees to indemnify the Shareholder Representative for any costs
and expenses (including reasonable attorney's fees) incurred by the
Shareholder Representative pursuant to Section 11.
By exercising Options pursuant to Section 2.11(b), each holder of such Options
automatically and without any further act or deed irrevocably agrees that such
holder:
(A) accepts and shall be bound by the terms and provisions of the
Escrow Agreement;
(B) consents to the appointment of Russell R. French as Shareholder
Representative for purposes of the Escrow Agreement with all rights, powers
and authority provided for in the Escrow Agreement and that any action
taken by the Shareholder Representative pursuant to the Escrow Agreement
shall be conclusive, valid, binding and enforceable with respect to such
holder; and
(C) agrees to indemnify the Shareholder Representative for any costs
and expenses (including reasonable attorney's fees) incurred by the
Shareholder Representative pursuant to Section 11.
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(b) No dividends or other distributions declared on shares of TKOG Common
Stock that are to be represented by New Certificates shall be paid to any Person
otherwise entitled to receive the same until Old Certificates have been
surrendered in exchange for such New Certificates in the manner herein provided,
and upon such surrender such dividends or other distributions shall be paid to
such Persons in accordance with their terms. In no event shall the Persons
entitled to receive such dividends or other distributions be entitled to receive
interest on such dividends or other distributions.
(c) The Company shall pay any transfer taxes in connection with the
exchange of Old Certificates for New Certificates, except that if any New
Certificate is to be issued in a name other than that in which the Old
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Person requesting such exchange shall pay to
TKOG any transfer or other taxes required by reason of the issuance of the New
Certificate in a name other than the registered holder of such Old Certificate,
or shall establish to the satisfaction of TKOG that such tax has been paid or is
not applicable.
(d) All New Certificates representing shares of TKOG Common Stock subject
to restrictions on transfer by virtue of Rule 145 or the Pooling Rules as
described in Section 6.4 shall be delivered to an escrow agent selected by the
Shareholder Representative for the holders thereof or stop-transfer instructions
shall be entered with the transfer agent of TKOG Common Stock with respect to
the shares represented thereby.
(e) Upon receipt of notice and instructions from Michael D. Shmerling, as
escrow agent for the Shareholders, TKOG shall issue to its stock transfer agent
instructions to issue certificates for TKOG Common Stock in the names and for
the amounts provided by Michael D. Shmerling, subject to the surrender of the
certificates representing the Internal Escrow Amount by Michael D. Shmerling to
TKOG's stock transfer agent for cancellation.
2.9 NO FRACTIONAL SHARES
Neither certificates nor scrip for fractional shares of TKOG Common Stock
shall be issued in connection with the Merger or in payment for the Options, but
in lieu thereof each holder of shares of Company Common Stock or Options
otherwise entitled to a fraction of a share of TKOG Common Stock pursuant to the
provisions of Section 2.7 or 2.11 shall be paid in cash an amount equal to such
fraction multiplied by the Market Value at the Closing Date (subject to
appropriate adjustment for any stock splits or combinations after the date
hereof and prior to the Effective Time of the Merger). No such holder shall be
entitled to dividends or interest on or, except for the cash payment referred to
in the preceding sentence, other rights in respect of any such fractional
interest. If more than one Old Certificate shall be surrendered for the account
of the same Company Shareholder, the number of full shares of TKOG Common Stock
for which Old Certificates shall be exchanged pursuant to Section 2.8 shall be
computed on the basis of the aggregate number of shares of Company Common Stock
represented by the Old Certificates.
2.10 STOCK TRANSFER BOOKS
At the close of business on the day prior to the Effective Time of the
Merger, the stock transfer books of the Company shall be closed and no transfer
of Company Common Stock shall thereafter be made on such stock transfer books.
2.11 OPTIONS
(a) Upon the Effective Time, each option outstanding at the date of this
Agreement to purchase shares of Company Common Stock granted under the Company's
1996 Stock Option Plan or 1997
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Stock Option Plan, as such plans are amended as required by Section 2.11 of the
Disclosure Schedule, and each warrant to purchase shares of Company Common Stock
(collectively, the "Options"), all as listed in Section 4.3 of the Disclosure
Schedule, shall have been amended pursuant to Section 2.11 of the Disclosure
Schedule.
(b) At the Effective Time, each outstanding Option shall, subject to the
amended terms of such Option and the agreement of the holder thereof, be deemed
to have been exercised and each such Option holder shall receive from TKOG,
against surrender of the Option and the payment of the exercise price therefor
and in settlement and cancellation of each such Option, an amount of
consideration per Option equal to 0.2689628 of one fully paid and non-assessable
share of TKOG Common Stock; provided, however, that if such exercise price is
paid in shares of TKOG Common Stock, such shares shall be valued at the last
sales price on the NASDAQ National Market of TKOG Common Stock on the Closing
Date;
provided, further, however, that, in lieu of delivering to such holder New
Certificates for the full number of shares of TKOG Common Stock provided for in
Section 2.11(b), TKOG shall deliver to (A) each such holder one or more New
Certificates, registered in the name of such holder, for a number of shares of
TKOG Common Stock equal to the total number of shares of TKOG Common Stock
otherwise to be delivered pursuant to this Section 2.11(b) less the Internal
Escrow Amount and the Applicable Amount determined pursuant to the following
provisions of this proviso to Section 2.11(b); (B) Michael D. Shmerling, as
escrow agent for deposit into an escrow fund for the benefit of the Shareholders
to secure any obligations of the Shareholders under Section 12.1, one or more
New Certificates, registered in the name of Michael D. Shmerling as escrow
agent, for the Internal Escrow Amount, with any fraction of a share being
rounded down to the nearest whole share; and (C) the Escrow Agent for deposit
into the Escrow Fund provided for in the Escrow Agreement, to secure the
indemnification obligations under Section 11.2, one or more New Certificates,
registered in the name of the Escrow Agent, for such Applicable Amount, all of
which will be held as part of the Escrow Fund and disposed of by the Escrow
Agent in accordance with the provisions of the Escrow Agreement:
The Applicable Amount for each holder of Options is that number of
whole shares of TKOG Common Stock equal to 10% of the total number of
shares of TKOG Common Stock issuable to such holder, after giving effect to
any "cashless" exercise, pursuant to Section 2.11(b), with any fraction of
a share being rounded down to the nearest whole share.
(c) With respect to those holders of Options who do not agree to the
exercise of their Options pursuant to Section 2.11(b), such Options shall,
pursuant to Section 2.11 of the Disclosure Schedule, upon exercise thereof (or
any portion thereof) and against delivery of the Options, receive in settlement
and cancellation therefor (or for such portion) the number of shares of TKOG
Common Stock as the holder of such Options would have been entitled to receive
pursuant to the Merger had such holder so exercised such Options immediately
prior to the Effective Time at a price per share equal to (x) the aggregate
exercise price for Company Common Stock otherwise issuable upon such exercise of
such Options upon such exercise divided by (y) the number of shares of TKOG
Common Stock issuable upon such exercise of such Options pursuant to Section
2.11; provided, however, that the number of shares of TKOG Common Stock that may
be purchased upon exercise of any such Option shall not include any fractional
share and, upon exercise of the Option, any fractional share shall be rounded up
to the nearest whole number.
2.12 TAX-FREE REORGANIZATION
The parties intend that the Merger qualify as a tax-free reorganization
pursuant to Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code").
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3. [INTENTIONALLY OMITTED]
4. REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY
The Company hereby represents and warrants to TKOG and Merger Sub as
follows.
4.1 ORGANIZATION AND GOOD STANDING
(a) Section 4.1 of the Disclosure Schedule contains a complete and accurate
list for the Company and each of its Subsidiaries of its name, its jurisdiction
of incorporation, other jurisdictions in which it is authorized to do business
and its capitalization (including the identity of each shareholder and the
number of shares held by each). The Company and each of its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, with full corporate power and authority to
conduct its business as it is now being conducted and to own or use the
properties and assets that it purports to own or use. The Company and each of
its Subsidiaries is duly qualified to do business as a foreign corporation and
is in good standing under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by it, or the nature
of the activities conducted by it, requires such qualification, except where the
failure to be so qualified could not reasonably be expected to have a Material
Adverse Effect on the Company and its Subsidiaries taken as a whole.
(b) The Company has delivered to Merger Sub correct and complete copies of
the Organizational Documents of the Company and each of its Subsidiaries.
4.2 AUTHORITY; NO CONFLICT
(a) The Company has the right, power, authority and capacity to execute and
deliver this Agreement and the Transaction Documents to which it is a party, to
consummate the Merger and to perform its obligations under this Agreement and
the Transaction Documents to which it is a party. This Agreement has been duly
authorized and approved, executed and delivered by the Company and constitutes
the legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms. Upon the authorization and approval,
execution and delivery by the Company of the Transaction Documents to which it
is a party, such Transaction Documents will constitute legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms.
(b) Except as set forth in Section 4.2 of the Disclosure Schedule, neither
the execution and delivery of this Agreement by the Company nor the consummation
or performance by the Company of the Merger or any of the other transactions
contemplated hereby will, directly or indirectly (with or without notice or
lapse of time or both):
(i) contravene, conflict with or result in a violation or breach of
(A) any provision of the Organizational Documents of the Company or any of
its Subsidiaries, (B) any resolution adopted by the board of directors or
the shareholders of the Company or any of its Subsidiaries, (C) subject to
obtaining the approval of the Merger by the Company Shareholders, any legal
requirement or any order to which the Company or any of its Subsidiaries or
any of the assets owned or used by the Company or any of its Subsidiaries
may be subject, or (D) any Governmental Permit, including any private
investigator license or other similar license, which is held by the Company
or any of its Subsidiaries or that otherwise relates to the business of, or
any of the assets owned or used by, the Company or any of its Subsidiaries;
(ii) result in a breach of or constitute a default, give rise to a
right of termination, cancellation or acceleration, create any entitlement
to any payment or benefit, or require the consent or approval
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of or any notice to or filing with any third party under any Contract to
which the Company or any of its Subsidiaries is a party or to which their
respective assets are bound, or require the consent or approval of or any
notice to or filing with any Governmental Authority to which the Company or
any of its Subsidiaries or their respective assets is subject; or
(iii) result in the imposition or creation of any Encumbrance upon or
with respect to any of the assets owned or used by the Company or any of
its Subsidiaries;
except, with respect to clauses (ii) or (iii) of this Section 4.2, where any
such breach, default, termination right, cancellation or acceleration right or
Encumbrance would not have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole or would not adversely affect the ability of the
Company to consummate the Merger or the other transactions contemplated by this
Agreement.
4.3 CAPITALIZATION
As of the date hereof, the authorized equity securities of the Company
consist of 20,000,000 shares of common stock, no par value per share, of which
2,199,728 shares are issued and outstanding, and 5,000,000 shares of preferred
stock, par value $1.00 per share, with rights and preferences to be designated
by the board of directors of the Company, of which 1,200,000 shares have been
designated as Series A Preferred Stock, of which 1,143,700 shares of Series A
Preferred Stock, and no other series or class of preferred stock, are issued and
outstanding. Each share of Series A Preferred Stock is convertible into one (1)
share of Company Common Stock. The authorized, issued and outstanding shares of
capital stock of each of the Company's Subsidiaries are accurately and
completely set forth in Section 4.3 of the Disclosure Schedule. All of the
outstanding equity securities of the Company and each of the Company's
Subsidiaries have been duly authorized and validly issued and are fully paid and
nonassessable. Section 4.3 of the Disclosure Schedule sets forth a complete and
correct list of all Options, including as to each holder thereof, the number of
shares of Company Common Stock subject thereto and the exercisability, exercise
price and termination date thereof. Except as set forth on Section 4.3 of the
Disclosure Schedule, there are no voting trusts or other agreements or
understandings to which the Company or any of its Subsidiaries is a party with
respect to the transfer, voting or registration of the capital stock of the
Company or any of its Subsidiaries. There are no Contracts relating to the
issuance, sale or transfer of any equity securities or other securities of the
Company or any of its Subsidiaries. None of the outstanding equity securities or
other securities of the Company or any of its Subsidiaries were issued in
violation of the Securities Act or any other legal requirement. Neither the
Company nor any of its Subsidiaries owns or has any Contract to acquire, any
equity securities or other securities of any Person (other than a Subsidiary) or
any, direct or indirect, equity or ownership interest in any other business. No
Person has any pre-emptive rights with respect to any security of the Company or
any of its Subsidiaries.
4.4 BOOKS AND RECORDS
Except as disclosed in Section 4.4 of the Disclosure Schedule, the books of
account and other records of the Company and its Subsidiaries, all of which have
been made available to Merger Sub, are true, complete and correct. Except as
disclosed in Section 4.4 of the Disclosure Schedule, the minute books of the
Company and its Subsidiaries contain true, accurate and complete records of all
meetings held of, and corporate action taken by, the shareholders, the Boards of
Directors, and committees of the Boards of Directors of the Company and its
Subsidiaries. The stock books of the Company and its Subsidiaries are true,
accurate and complete. At the Closing, all of such books and records will be in
the possession of the Company.
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4.5 FINANCIAL STATEMENTS
(a) For purposes of this Agreement: "Financial Statements" shall mean (i)
the consolidated balance sheets of the Company as of December 31, 1996 and 1997,
and the related consolidated income statements for the years then ended, as set
forth in Section 4.5 of the Disclosure Schedule and (ii) the unaudited
consolidated balance sheet of the Company dated as of October 31, 1998 and the
related consolidated income statement for the ten months ended on such date (the
"Interim Financial Statements"). The Company has delivered to TKOG true and
complete copies of the Financial Statements.
(b) The Financial Statements for the years ended December 31, 1996 and
1997, (i) have been prepared from the books and records of the Company and its
Subsidiaries in accordance with GAAP, (ii) fully reflect all liabilities and
contingent liabilities of the Company required to be reflected therein on such
basis as at the date thereof, and (iii) fairly present in all material respects
the financial position of the Company as of the date of the balance sheet
included in the Financial Statements and the results of its operations for the
period indicated. The Interim Financial Statements (i) have been prepared from
the books and records of the Company in accordance with GAAP on a basis
consistent with the Financial Statements for the years ended December 31, 1996
and 1997, and (ii) fairly present in all material respects the financial
position of the Company as at the date of the balance sheet included therein and
the results of its operations for the period indicated; provided, however, the
Interim Financial Statements (x) are subject to normal year-end adjustments and
(y) do not include footnotes.
4.6 NO UNDISCLOSED LIABILITIES
Except as set forth in Section 4.6 of the Disclosure Schedule, neither the
Company nor any of its Subsidiaries has any liabilities or obligations of any
nature (whether absolute, accrued, contingent, or otherwise) except for
liabilities or obligations reflected or reserved against in the Financial
Statements and current liabilities incurred in the ordinary course of business
since the date of the Financial Statements, which current liabilities are
consistent with the representations and warranties contained in this Agreement
and will not, individually or in the aggregate, have a Material Adverse Effect
on the Company and its Subsidiaries taken as a whole.
4.7 NO MATERIAL ADVERSE CHANGE
Since October 31, 1998, there has not been any material adverse change in
the business, operations, properties, assets, prospects, liabilities, results of
operations or condition (financial or otherwise) (a "Material Adverse Effect")
of the Company and its Subsidiaries taken as a whole and no event has occurred
or circumstance exists that could reasonably be expected to result in a Material
Adverse Effect on the Company and its Subsidiaries taken as a whole.
4.8 TAXES
The Company and its Subsidiaries have properly and timely, taking into
account any extensions granted, filed all federal, state and local Tax Returns
and have timely paid all Taxes, assessments and penalties due and payable,
whether or not shown on such returns. All such Tax Returns were correct in all
respects as filed, and no claims have been assessed with respect to such
returns. The provisions made for Taxes on the balance sheets of the Company
included in the Financial Statements are sufficient in all respects for the
payment of all Taxes whether disputed or not that are due or are hereafter found
to have been due with respect to the conduct of the business of the Company and
its Subsidiaries up to and through the date of such Financial Statements; and
the Company and its Subsidiaries have not, since the date of such Financial
Statements, incurred any liability for Taxes other than in the ordinary course
of
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business. Except as set forth in Section 4.8 of the Disclosure Schedule, there
are no present disputes as to Taxes of any nature payable by the Company or any
of its Subsidiaries, nor any Tax liens whether existing or inchoate on any of
the assets of the Company or any of its Subsidiaries, except for current year
Taxes not presently due and payable. The federal income Tax Returns of the
Company and its Subsidiaries have never been audited. No IRS or foreign, state,
county or local tax audit is currently in progress, pending or, to the Company's
Knowledge, threatened with respect to the Company and its Subsidiaries. Neither
the Company nor any of its Subsidiaries has waived the expiration of the statute
of limitations with respect to any Taxes. Except as set forth in Section 4.8 of
the Disclosure Schedule, neither the Company nor any of its Subsidiaries has
requested any extension of time within which to file any currently unfiled Tax
Returns.
Neither the Company nor any of its Subsidiaries has filed or been included
in a combined, consolidated or unitary return (or substantial equivalent
thereof) of any Person other than the Company and its Subsidiaries. Neither the
Company nor any of its Subsidiaries is liable for Taxes of any Person other than
the Company and its Subsidiaries, or currently under any contractual obligation
to indemnify any Person with respect to Taxes, or a party to any tax sharing
agreement or any other agreement providing for payments by the Company or any of
its Subsidiaries with respect to Taxes. Except entities the beneficial ownership
of which is wholly-owned by the Company and/or its Subsidiaries, neither the
Company nor any of its Subsidiaries is a party to any joint venture, partnership
or other arrangement or contract which could be treated as a partnership for
United States federal income tax purposes. Neither the Company nor any of its
Subsidiaries is a party to any agreement, contract, arrangement or plan that
would result (taking into account the transactions contemplated by this
Agreement), separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code. The prices
for any property or services (or for the use of property) provided by the
Company or any of its Subsidiaries to any other Subsidiary or to the Company
have been arm's length prices determined using a method permitted by the
Treasury Regulations under Section 482 of the Code. Neither the Company nor any
of its Subsidiaries is, or has been, a United States real property holding
corporation (as defined in Section 897(c)(2) of the Code) during the applicable
period specified in Section 897(c)(1)(A)(ii) of the Code.
For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes, fees,
levies, duties, tariffs, imposts and governmental impositions or charges of any
kind in the nature of (or similar to) taxes, payable to any federal, state,
local or foreign taxing authority, including (without limitation) (i) income,
franchise, profits, gross receipts, ad valorem, net worth, value added, sales,
use, service, real or personal property, special assessments, capital stock,
license, payroll, withholding, employment, social security, workers'
compensation, unemployment compensation, utility, severance, production, excise,
stamp, occupation, premiums, windfall profits, transfer and gains taxes, and
(ii) interest, penalties, additional taxes and additions to tax imposed with
respect thereto; and "Tax Returns" shall mean returns, reports, and information
statements with respect to Taxes required to be filed with the IRS or any other
taxing authority, domestic or foreign, including, without limitation,
consolidated, combined and unitary tax returns.
4.9 ACCOUNTS RECEIVABLE
All accounts receivable of the Company that are reflected on the Financial
Statements or on the accounts receivable ledger of the Company as of the Closing
Date (collectively, the "ACCOUNTS RECEIVABLE") represent or will represent valid
obligations arising from sales actually made or services actually performed in
the ordinary course of business. All of the Accounts Receivable are or will be
collectible at the full recorded amount thereof, less any applicable reserves
established in accordance with GAAP, in the ordinary course of business without
resort to litigation, except for such Accounts
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Receivable, the failure of which to collect will not have a Material Adverse
Effect on the Company and its Subsidiaries taken as a whole.
4.10 TITLE TO PROPERTIES; ENCUMBRANCES
Section 4.10 of the Disclosure Schedule contains a complete and accurate
list of all real property, leaseholds or other interests therein owned or held
by the Company. The Company does not own, and has not owned, any real property.
The Company has delivered or made available to Merger Sub true, correct and
complete copies of the real property leases to which the Company or any of its
Subsidiaries is party or pursuant to which it uses or occupies any real
property. Except as set forth in Section 4.10 of the Disclosure Schedule, the
Company and each of its Subsidiaries has good title to all of the properties and
assets, real or personal, tangible and intangible, it owns or purports to own,
including those reflected on its books and records and in the Financial
Statements (except for accounts receivable collected and materials and supplies
disposed of in the ordinary course of business consistent with past practice
after the date of the most recent Financial Statements). The Company and its
Subsidiaries have a valid leasehold, license or other interest in all of the
other assets, real or personal, tangible or intangible, which are used in the
operation of their respective businesses. Except as set forth in Section 4.10 of
the Disclosure Schedule, all material properties and assets owned, leased or
used by the Company and its Subsidiaries are free and clear of all Encumbrances,
except for (a) liens for current taxes not yet due, (b) workman's, common
carrier and other similar liens arising in the ordinary course of business, none
of which materially detracts from the value or impairs the use of the property
or asset subject thereto, or impairs the operations of the Company or any of its
Subsidiaries, (c) Encumbrances disclosed in the Financial Statements, (d)
equipment leases or purchase money security interests for or in an amount not in
excess of $25,000 in any one case and (e) with respect to real property, (i)
minor imperfections of title, if any, none of which is substantial in amount,
materially detracts from the value or impairs the use of the property subject
thereto, or impairs the operations of the Company or any of its Subsidiaries,
and (ii) zoning laws and other land use restrictions that do not impair the
present or anticipated use of the property subject thereto.
4.11 CONDITION AND SUFFICIENCY OF ASSETS
The Facilities and other property and assets owned or used by the Company
and its Subsidiaries are in good operating condition and repair, other than
ordinary wear and tear, and are adequate for the uses to which they are being
put, and none of such Facilities or other property and assets owned or used by
the Company and its Subsidiaries is in need of maintenance or repairs except for
ordinary, routine maintenance and repairs that are not material in nature or
cost. The Facilities and other property and assets owned or used by the Company
and its Subsidiaries are sufficient for the continued conduct of their
respective businesses after the Closing in substantially the same manner as
conducted prior to the Closing.
4.12 COMPLIANCE WITH LAWS; GOVERNMENTAL AUTHORIZATIONS
(a) Except as set forth in Section 4.12 of the Disclosure Schedule, the
Company and its Subsidiaries are in compliance in all material respects with all
laws, regulations, licenses, orders, ordinances, judgments and decrees affecting
the properties or assets owned or used by the Company and its Subsidiaries and
the business or operations of the Company and its Subsidiaries, including,
without limitation, federal, state and local: (i) Occupational Safety and Health
Laws; (ii) private investigatory and other similar laws; (iii) securities laws,
rules and regulations; (iv) the Fair Credit Reporting Act and similar state and
local laws; (v) any state or local law regarding or relating to defamation,
libel or slander; and (vi) any federal, state or local law regarding or relating
to trespass or violations of privacy
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rights. Neither the Company nor any of its Subsidiaries has been charged with
violating, nor to the Company's Knowledge, threatened with a charge of
violating, nor, to the Company's Knowledge, is the Company or any of its
Subsidiaries under investigation with respect to a possible violation of, any
provision of any federal, state or local law, order or administrative ruling,
license or regulation relating to any of their respective properties or assets
or any aspect of their respective businesses.
(b) Section 4.12 of the Disclosure Schedule contains a complete and
accurate list of each Governmental Permit that is held by the Company or any of
its Subsidiaries or that otherwise relates to the business of, or to any of the
properties or assets owned or used by, the Company or any of its Subsidiaries.
Each Governmental Permit listed or required to be listed in Section 4.12 of the
Disclosure Schedule is valid and in full force and effect.
4.13 LEGAL PROCEEDINGS
Except as set forth in Section 4.13 of the Disclosure Schedule, there is no
pending claim, action, investigation, arbitration, litigation or other
proceeding ("PROCEEDING"):
(i) that has been commenced by or against the Company or any of its
Subsidiaries or that otherwise relates to or may affect the business of, or
any of the assets owned or used by, the Company or any of its Subsidiaries;
or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
transactions contemplated hereby.
To the Company's Knowledge, no such Proceeding has been threatened. The
Company has made available to Merger Sub true, correct and complete copies of
all pleadings, correspondence and other documents relating to each Proceeding
listed in Section 4.13 of the Disclosure Schedule. The Proceedings listed in
Section 4.13 of the Disclosure Schedule could not reasonably be expected to have
a Material Adverse Effect on the Company and its Subsidiaries taken as a whole.
4.14 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in Section 4.14 of the Disclosure Schedule, from
December 31, 1997 until the date of this Agreement, the Company and its
Subsidiaries have conducted their respective businesses only in the ordinary
course, consistent with past practice, and there has not been any:
(a) declaration or payment of any dividend or other distribution or
repurchase or payment in respect of shares of capital stock;
(b) issuance or sale or authorization for issuance or sale, or grant
of any options with respect to, any shares of its capital stock or any
other type of its securities, or any change in its outstanding shares of
capital stock or other ownership interests or its capitalization, whether
by reason of a reclassification, recapitalization, stock split or
combination, exchange or readjustment of shares, stock dividend or
otherwise;
(c) mortgage, pledge or grant any security interest in any of its
assets, except security interests solely in tangible personal property
granted pursuant to any purchase money agreement, conditional sales
contract or capital lease under which there exists an aggregate future
liability not in excess of $25,000 (which amount is not more than the
purchase price for such personal property and which security interest does
not extend to any other item or items of personal property);
(d) payment or increase of any bonuses, salaries or other compensation
to any stockholder, director, officer, consultant or (except in the
ordinary course of business consistent with past
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practice) employee or entry into any employment, severance or similar
Contract with any director, officer or employee;
(e) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement or other employee benefit plan for or with any employees;
(f) damage to or destruction or loss of any customer, asset or
property, whether or not covered by insurance, which could reasonably be
expected to have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole;
(g) entry into, termination of, or receipt of notice of termination of
any Contract or transaction involving a total remaining commitment by or to
the Company or any Subsidiary of at least $25,000, including the entry into
(i) any document evidencing any indebtedness; (ii) any capital or other
lease; or (iii) any guaranty;
(h) sale, lease or other disposition (other than in the ordinary
course of business consistent with past practice) of any property or asset
or mortgage, pledge, or imposition of any Encumbrance on any material
property or asset;
(i) cancellation, compromise or waiver of any claim or right with a
value to the Company or any or its Subsidiaries in excess of $25,000;
(j) incurrence or assumption of any indebtedness for borrowed money or
guarantee any obligation or the net worth of any Person in an aggregate
amount in excess of $25,000, except for endorsements of negotiable
instruments for collection in the ordinary course of business;
(k) discharge or satisfaction of any Encumbrance other than those
which are required to be discharged or satisfied during such period in
accordance with their original terms;
(l) payment of any material obligation or liability, absolute,
accrued, contingent or otherwise, whether due or to become due, except for
any current liabilities, and the current portion of any long term
liabilities, shown on the Financial Statements (or not required as of the
date thereof to be shown thereon in accordance with GAAP) or incurred since
the date of the most recent balance sheet in the ordinary course of
business consistent with past practice;
(m) any loan or advance to any Person other than travel and other
similar routine advances in the ordinary course of business consistent with
past practice, or acquire any capital stock or other securities of or any
ownership interest in any other business enterprise; (n) any capital
expenditure or capital addition or betterment in amounts which exceed
$25,000 in the aggregate;
(o) institution or settlement of any Proceeding before any court or
governmental body relating to it or its property;
(p) except in the ordinary course of business consistent with past
practice, commitment to provide services for an indefinite period or a
period of more than twelve months;
(q) enter into other Contracts, except Contracts made in the ordinary
course of business consistent with past practice;
(r) change in the method of accounting or the accounting principles or
practices used by the Company in the preparation of the Financial
Statements except as required by GAAP; or
(s) agreement, whether oral or written, by the Company or any of its
Subsidiaries to do any of the foregoing.
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4.15 CONTRACTS; NO DEFAULTS
(a) As of the date of this Agreement, Section 4.15(a) of the Disclosure
Schedule contains a complete and accurate list, and the Company has delivered or
made available to Merger Sub true, correct and complete copies, of:
(i) each Contract that involves performance of services or delivery of
goods or materials by the Company or any Subsidiary of the Company of an
amount or value in excess of $25,000;
(ii) each Contract that involves performance of services or delivery
of goods or materials to the Company or any Subsidiary of the Company of an
amount or value in excess of $25,000;
(iii) each lease, license and other Contract affecting any leasehold
or other interest in any real or personal property;
(iv) each licensing agreement or other Contract with respect to
patents, trademarks, copyrights, trade secrets or other intellectual
property, including agreements with current or former employees,
consultants or contractors regarding the appropriation or the
non-disclosure of any intellectual property;
(v) each collective bargaining agreement and other Contract to or with
any labor union or other employee representative of a group of employees;
(vi) each joint venture, partnership and other Contract involving a
sharing of profits, losses, costs or liabilities by the Company or any of
its Subsidiaries with any other Person or requiring the Company or any of
its Subsidiaries to make a capital contribution;
(vii) each Contract containing covenants that in any way purport to
restrict the business activity of the Company or any of its Subsidiaries or
limit the freedom of the Company or any of its Subsidiaries to engage in
any line of business or to compete with any Person or hire any Person;
(viii) each employment or consulting agreement;
(ix) each agreement between the Company or any of its Subsidiaries and
an officer or director of the Company or any affiliate of any of the
foregoing;
(x) each power of attorney that is currently effective and
outstanding;
(xi) each Contract for capital expenditures in excess of $25,000;
(xii) each agreement under which any money has been or may be borrowed
or loaned or any note, bond, factoring agreement, indenture or other
evidence of indebtedness has been issued or assumed (other than those under
which there remain no ongoing obligations of the Company or any of its
Subsidiaries), and each guaranty (including "take-or-pay" and "keepwell"
agreements) of any evidence of indebtedness or other obligation, or of the
net worth, of any Person (other than endorsements for the purpose of
collection in the ordinary course of business);
(xiii) each agreement containing restrictions with respect to the
payment of dividends or other distributions in respect of the Company's or
any of its Subsidiaries' capital stock;
(xiv) each stock purchase, merger or other agreement pursuant to which
the Company acquired any of its Subsidiaries or any material amount of
assets, and all relevant documents and agreements delivered in connection
therewith;
(xv) each agreement containing a change of control provision;
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(xvi) each other agreement having an indefinite term or a fixed term
of more than one (1) year (other than those that are terminable at will or
upon not more than sixty (60) days' notice by the Company or any of its
Subsidiaries without penalty) or requiring payments by the Company or any
of its Subsidiaries of more than $25,000 per year; and
(xvii) each standard form of agreement pursuant to which the Company
or any of its Subsidiaries provides services to customers.
(b) Except as set forth in Section 4.15(b) of the Disclosure Schedule, each
Contract identified or required to be identified in Section 4.15(a) of the
Disclosure Schedule is in full force and effect and is valid and enforceable
against the Company or a Subsidiary of the Company and, to the Company's
Knowledge, against the other parties thereto in accordance with its terms.
(c) Except as set forth in Section 4.15(c) of the Disclosure Schedule:
(i) the Company and its Subsidiaries are in full compliance with all
applicable terms and requirements of each Contract under which the Company
and its Subsidiaries have any obligation or liability or by which the
Company or any of its Subsidiaries or any of the assets owned or used by
the Company or any of its Subsidiaries is or was bound, except for such
noncompliance that would not have a Material Adverse Effect on the Company
and its Subsidiaries taken as a whole;
(ii) to the Company's Knowledge, each other person that has or had any
obligation or liability under any Contract under which the Company or any
of its Subsidiaries has any rights is in full compliance with all
applicable terms and requirements of such Contract; and
(iii) no event has occurred or, to the Company's Knowledge,
circumstance exists that (with or without notice or lapse of time or both)
may result in a violation or breach of any Contract, which violation or
breach would have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
4.16 INSURANCE
Section 4.16 of the Disclosure Schedule sets forth the premium payments and
describes all the insurance policies of the Company and its Subsidiaries, which
policies are now in full force and effect in accordance with their terms and
expire on the dates shown on Section 4.16 of the Disclosure Schedule. There has
been no material default in the payment of premiums on any of such policies,
and, to the Company's Knowledge, there is no ground for cancellation or
avoidance of any such policies, or any increase in the premiums thereof, or for
reduction of the coverage provided thereby. Such policies insure the Company and
its Subsidiaries in amounts and against losses and risks customary and
sufficient for businesses similar to that of the Company and its Subsidiaries,
and, to the Company's Knowledge, such policies shall continue in full force and
effect up to the expiration dates shown in Section 4.16 of the Disclosure
Schedule. True, correct and complete copies of all insurance policies listed in
Section 4.16 have been previously furnished to Merger Sub.
4.17 ENVIRONMENTAL MATTERS
Except as set forth in Section 4.17 of the Disclosure Schedule:
(a) The Company and its Subsidiaries are, and at all times have been,
in full compliance with, and have not been and are not in violation of or
liable under, any Environmental Law. The Company and its Subsidiaries have
obtained and are in compliance with all permits required under
Environmental Laws. Neither the Company nor any of its Subsidiaries has
received any actual or threatened order, notice or other communication from
(i) any Governmental Authority or third
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party, or (ii) the current or prior owner or operator of any Facilities, of
any actual or potential violation or failure to comply with any
Environmental Law, or of any actual or threatened Environmental, Health,
and Safety Liabilities with respect to any of the Facilities or any other
properties or assets in which the Company or any of its Subsidiaries has
had an interest or the operation of their respective businesses, or with
respect to any property or Facility at or to which Hazardous Materials were
generated, manufactured, transported, used or processed by the Company or
any of its Subsidiaries.
(b) There are no pending or, to the Company's Knowledge, threatened
claims, Encumbrances, or other restrictions of any nature, resulting from
any Environmental, Health, and Safety Liabilities or arising under or
pursuant to any Environmental Law, with respect to or affecting any of the
Facilities or any other properties and assets in which the Company or any
of its Subsidiaries has or had an interest.
(c) Neither the Company nor any of its Subsidiaries has knowledge of
any basis to expect, nor has any of them received, any inquiry, notice,
order or other communication that relates to Hazardous Activity, Hazardous
Materials, or any violation or failure to comply with any Environmental
Law, or of any obligation to undertake or bear the cost of any
Environmental, Health, and Safety Liabilities with respect to any of the
Facilities or any other properties or assets in which the Company or any of
its Subsidiaries had an interest, or with respect to any property or
facility to which Hazardous Materials generated, manufactured, transported,
used, or processed by the Company or any of its Subsidiaries have been
transported, treated, stored, handled or disposed.
(d) Neither the Company nor any of its Subsidiaries has any
Environmental, Health, and Safety Liabilities with respect to the
Facilities or with respect to any other properties and assets in which the
Company (or any predecessor) or any of its Subsidiaries has or had an
interest that could reasonably be expected to have a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole.
(e) There are no Hazardous Materials present on, in, under or
migrating to or from the Environment at the Facilities, to the Company's
Knowledge. Neither the Company nor any of its Subsidiaries has permitted or
conducted, or is aware of, any Hazardous Activity conducted with respect to
the Facilities or any other properties or assets in which the Company or
any of its Subsidiaries has or had an interest except in compliance in all
material respects with all applicable Environmental Laws.
(f) There has been no release or, to the Company's Knowledge, threat
of release, of any Hazardous Materials at or from the Facilities or at any
other locations where any Hazardous Materials were generated, manufactured,
transported, produced, used, disposed, or processed from or by the
Facilities, or from or by any other properties and assets in which the
Company or any of its Subsidiaries has or had an interest whether by the
Company, any Subsidiary of the Company or any other Person, which release
could reasonably be expected to have a Material Adverse Effect on the
Company and the Subsidiaries, taken as a whole.
(g) The Company has delivered to Merger Sub true, correct and complete
copies and results of any and all reports, studies, analyses, tests, or
monitoring possessed or initiated by the Company or any Subsidiary of the
Company pertaining to Hazardous Materials or Hazardous Activities in, on,
or under the Facilities, or concerning compliance by the Company and its
Subsidiaries with Environmental Laws.
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4.18 EMPLOYEES
(a) Section 4.18 of the Disclosure Schedule contains a complete and
accurate list of the following information for each employee of the Company and
its Subsidiaries: name; job title; current compensation; vacation accrued; and
service credited for purposes of vesting and eligibility to participate under
any employee benefit plan of any nature.
(b) No key employee or any officer of the Company or any of its
Subsidiaries is a party to, or is otherwise bound by, any agreement or
arrangement, including any confidentiality, noncompetition, or proprietary
rights agreement, between such key employee or officer and any other Person that
materially and adversely affects (i) the performance of his duties as an officer
or employee of the Company or any of its Subsidiaries, or (ii) the ability of
the Company or any of its Subsidiaries to conduct its business. To the Company's
Knowledge, no officer or other key employee of the Company or any of its
Subsidiaries intends to terminate his or her employment with the Company.
4.19 EMPLOYEE BENEFITS
(a) Except as listed on Section 4.19 of the Disclosure Schedule, neither
the Company nor any ERISA Affiliate maintains any Employee Benefit Plans.
"Employee Benefit Plan" means any "employee benefit plan" as defined in Section
3(3) of ERISA and any other plan, policy, program, practice, agreement,
understanding or arrangement (whether written or otherwise) providing
compensation or other benefits to any current or former director, officer,
employee or consultant (or to any dependent or beneficiary thereof), of the
Company or any of its Subsidiaries or any ERISA Affiliate, which are now, or
were within the past six years, maintained by the Company or any of its
Subsidiaries or any ERISA Affiliate, or under which the Company or any of its
Subsidiaries or any ERISA Affiliate has any obligation or liability, whether
actual or contingent, including, without limitation, all incentive, bonus,
deferred compensation, vacation, holiday, cafeteria, medical, disability, stock
purchase, stock option, stock appreciation, phantom stock, restricted stock or
other stock-based compensation plans, policies, programs, practices or
arrangements. "ERISA Affiliate" means any entity (whether or not incorporated)
other than the Company or any of its Subsidiaries that, together with the
Company or any of its Subsidiaries, is or was a member of (i) a controlled group
of corporations within the meaning of Section 414(b) of the Code; (ii) a group
of trades or businesses under common control within the meaning of Section
414(c) of the Code; or (iii) an affiliated service group within the meaning of
Section 414(m) of the Code.
The Company has delivered to TKOG or its counsel prior to the date hereto
true and complete copies of (i) any employment agreements and any procedures and
policies relating to the employment of employees of the Company or any of its
Subsidiaries and the use of temporary employees and independent contractors by
the Company or any of its Subsidiaries (including written summaries of any
procedures and policies that are unwritten), (ii) plan instruments and
amendments thereto for all Employee Benefit Plans and related trust agreements,
insurance and other contracts (including written summaries of any plans that are
unwritten), summary plan descriptions, and summaries of material modifications,
and material communications distributed to the participants of each Plan, (iii)
to the extent annual reports on Form 5500 are required with respect to any
Employee Benefit Plan, the three most recent annual reports and attached
schedules for each Employee Benefit Plan as to which such report is required to
be filed, (iv) where applicable, the most recent (A) opinion, notification and
determination letters, (B) audited financial statements, (C) actuarial valuation
reports and (D) nondiscrimination tests performed under the Code (including
401(k) and 401(m) tests) for each Employee Benefit Plan and (v) representative
forms of communication used in (X) making distributions under any plan intended
to be qualified under Section 401(a) of the Code, (Y) explaining benefit rights
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on termination of employment (including rights to elect health care continuation
coverage under Part 6 of Subtitle B of Title I ERISA and Section 4980B of the
Code ("COBRA").
(b) None of the Company, any of its Subsidiaries nor any ERISA Affiliate
maintains or has ever maintained an Employee Benefit Plan subject to Title IV of
ERISA.
(c) With respect to each Employee Benefit Plan, (i) no party in interest or
disqualified person (as defined in Section 3(14) of ERISA and Section 4975 of
the Code, respectively) has at any time engaged in a transaction which could
subject TKOG, Merger Sub, the Company or any of the Company's Subsidiaries,
directly or indirectly, to a tax, penalty or liability for prohibited
transactions imposed by ERISA or the Code and (ii) no fiduciary (as defined in
Section 3(21) of ERISA) with respect to any Employee Benefit Plan, or for whose
conduct the Company or any of its Subsidiaries could have any material liability
(by reason of indemnities or otherwise), has breached any of the
responsibilities or obligations imposed upon the fiduciary under Title I of
ERISA.
(d) Except as disclosed in Section 4.19 of the Disclosure Schedule, each
Employee Benefit Plan which is a "welfare plan" within the meaning of Section
3(1) of ERISA and which provides health, disability or death benefits is fully
insured; the Company is not obligated to directly pay any such benefits or to
reimburse any third party payor for the payment of such benefits.
(e) Each Employee Benefit Plan which is an "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA (a "Pension Plan") and which is
subject to Sections 201, 301 or 401 of ERISA has received a favorable
determination letter from the Internal Revenue Service covering all amendments
required by the Tax Reform Act of 1986 and prior legislation and, to the
Company's Knowledge, there are no circumstances that are reasonably likely to
result in revocation of any such favorable determination letter. To the
Company's Knowledge, each Employee Benefit Plan is and has been operated in all
material respects in compliance with its terms and all applicable laws, and by
its terms can be amended and/or terminated at any time. As of and including the
Closing Date, the Company and its Subsidiaries shall have made all contributions
required to be made by them up to and including the Closing Date with respect to
each Employee Benefit Plan, or adequate accruals therefor will have been
provided for and will be reflected on the Financial Statements provided to TKOG
by the Company. All notices, filings and disclosures required by ERISA or the
Code (including notices under Section 4980B of the Code) have been timely made.
(f) The Company has not received or is not aware of any Proceeding (other
than routine claims for benefits) pending or, to the Company's Knowledge,
threatened with respect to any Employee Benefit Plan or against any fiduciary of
any Employee Benefit Plan, and the Company has no knowledge of any facts that
could give rise to any such Proceeding. To the Company's Knowledge, there has
not occurred any circumstances by reason of which the Company or any of its
Subsidiaries may be liable for an act, or a failure to act, by a fiduciary with
respect to any Employee Benefit Plan.
(g) No Employee Benefit Plan provides for medical or health benefits
(through insurance or otherwise) or provided for the continuation of such
benefits or coverage for any participant or any dependent or beneficiary of any
participant after such participant's retirement or other termination of
employment except as may be required by COBRA.
(h) None of the Company, any of its Subsidiaries nor any ERISA Affiliate
has ever contributed to, or withdrawn in a partial or complete withdrawal from,
any "multiemployer plan" (as defined in Section 3(37) of ERISA) or has any fixed
or contingent liability under Section 4204 of ERISA.
(i) No Employee Benefit Plan is a "multiple employer plan" as described in
Section 3(40) of ERISA or Section 413(c) of the Code.
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(j) No Employee Benefit Plan, other than a "pension plan" within the
meaning of Section 3(2) of ERISA ("Pension Plan"), is funded through a trust
intended to be exempt from tax pursuant to Section 501 of the Code.
(k) Except as required by law, neither the Company nor any of its
Subsidiaries has proposed or has agreed to any changes to any Employee Benefit
Plan that would cause an increase in benefits under any such Employee Benefit
Plan (or the creation of new benefits or plans) or to change any employee
coverage which would cause an increase in the expense of maintaining any such
plan.
(l) Except as provided in Section 4.19 of the Disclosure Schedule, no
person or entity has an employment, severance, consulting or independent
contractor agreement with the Company or any of its Subsidiaries. No "leased
employee" (within the meaning of Section 414(n) or (o) of the Code) performs any
material services for the Company or any of its Subsidiaries.
Except as set forth in Section 4.19 of the Disclosure Schedule, the
consummation of the transactions contemplated by this Agreement will not result
in (i) any payment (including, without limitation, severance, unemployment
compensation, golden parachute or bonus payments or otherwise) becoming due to
any director, officer, employee or consultant of the Company or any of its
Subsidiaries, (ii) any increase in the amount of compensation or benefits
payable in respect of any director, officer, employee or consultant of the
Company or any of its Subsidiaries, or (iii) accelerate the vesting or timing of
payment of any benefits or compensation payable in respect of any director,
officer, employee or consultant of the Company or any of its Subsidiaries. No
Employee Benefit Plan provides benefits or payments contingent upon, triggered
by, or increased as a result of a change in the ownership or effective control
of the Company.
4.20 LABOR RELATIONS
Except as set forth in Section 4.20 of the Disclosure Schedule:
(a) To the Company's Knowledge, the Company and its Subsidiaries have
satisfactory relationships with their respective employees.
(b) To the Company's Knowledge, no condition or state of facts or
circumstances exists which could materially adversely affect the Company's
or any of its Subsidiaries relations with its employees, including the
consummation of the transactions contemplated by this Agreement.
(c) The Company and its Subsidiaries are in compliance in all material
respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours and none
of them is engaged in any unfair labor practice.
(d) No collective bargaining agreement with respect to the business of
the Company or any of its Subsidiaries is currently in effect or being
negotiated. Neither the Company nor any of its Subsidiaries has encountered
any labor union or collective bargaining organizing activity with respect
to its employees. Neither the Company nor any of its Subsidiaries has any
obligation to negotiate any such collective bargaining agreement and, to
the Company's Knowledge, there is no indication that the employees of the
Company or any of its Subsidiaries desire to be covered by a collective
bargaining agreement.
(e) There are no strikes, slowdowns, work stoppages or other labor
trouble pending or, to the Company's Knowledge, threatened with respect to
the employees of the Company or any of its Subsidiaries, nor has any of the
above occurred or, to the Company's Knowledge, been threatened.
(f) There is no representation claim or petition pending before the
National Labor Relations Board or any state or local labor agency and, to
the Company's Knowledge, no question concerning
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representation has been raised or threatened respecting the employees of
the Company or any of its Subsidiaries.
(g) There are no complaints or charges against the Company or any of
its Subsidiaries pending before the National Labor Relations Board or any
state or local labor agency and, to the Company's Knowledge, no complaints
or charges have been filed or threatened to be filed against the Company or
any of its Subsidiaries with any such board or agency.
(h) To the Company's Knowledge, no charges with respect to or relating
to the business of the Company or any of its Subsidiaries are pending
before the Equal Employment Opportunity Commission or any state or local
agency responsible for the prevention of unlawful employment practices.
(i) Section 4.20 of the Disclosure Schedule accurately sets forth all
unpaid severance which, as of the date hereof, is due or claimed, in
writing, to be due from the Company or any of its Subsidiaries to any
Person whose employment with the Company or any of its Subsidiaries was
terminated.
(j) Neither the Company nor any of its Subsidiaries has received
notice of the intent of any government body responsible for the enforcement
of labor or employment laws to conduct an investigation of the Company or
any of its Subsidiaries and no such investigation is in progress.
(k) Neither the Company nor any of its Subsidiaries is, and to the
Company's Knowledge no employee of the Company or any of its Subsidiaries
is, in violation in any material respect of any employment agreement,
non-disclosure agreement, non-compete agreement or any other agreement
regarding an employee's employment with the Company or any of its
Subsidiaries.
(l) The Company and its Subsidiaries have paid all wages which are due
and payable to each employee and each independent contractor.
4.21 INTELLECTUAL PROPERTY
(a) Intellectual Property Assets -- The term "Intellectual Property Assets"
includes: (i) the name "Background America," all business names, trade names,
registered and unregistered trademarks, service marks and applications
(collectively, "MARKS"); (ii) all patents, patent applications and inventions
and discoveries (collectively, "PATENTS"); (iii) all copyrights in both
published works and unpublished works, including software, training manuals and
videos (collectively, "COPYRIGHTS"); (iv) all know-how, trade secrets,
confidential information, customer lists, proprietary information, technologies,
processes and formulae, all software, source and object code, algorithms,
architecture, structure, display screens and development tools, data, plans,
drawings and blue prints (collectively, "TRADE SECRETS"); and (v) all
documentation and media constituting, describing or relating to items (i)
through (iv); owned, used or licensed by the Company and its Subsidiaries as
licensee or licensor.
(b) Agreements -- Section 4.21(b) of the Disclosure Schedule contains a
true, correct and complete list and summary description, including any royalties
paid or received by the Company and its Subsidiaries, of all Contracts relating
to the Intellectual Property Assets to which the Company and its Subsidiaries
are a party or by which the Company and its Subsidiaries are bound.
(c) Know-How Necessary for the Business -- The Intellectual Property Assets
are all those necessary for the operation of the business of the Company and its
Subsidiaries as it is currently conducted. The Company and its Subsidiaries own
all right, title and interest in and to each of the Intellectual Property
Assets, free and clear of all Encumbrances, or have valid licenses to use each
of
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the Intellectual Property Assets, as applicable, and have the right to use
without payment to a third party all of the Intellectual Property Assets.
(d) Trademarks -- (i) Section 4.21(d) of Disclosure Schedule contains a
true, correct and complete list of all Marks; (ii) the Company and its
Subsidiaries own all right, title and interest in and to the Marks, free and
clear of all Encumbrances, or have valid licenses to use the Marks, as
applicable; (iii) all Marks that have been registered with the United States
Patent and Trademark Office are currently in compliance in all material respects
with all formal legal requirements and are valid and enforceable; (iv) no Mark
is infringed or, to the Company's Knowledge, has been challenged or threatened
in any way. None of the Marks used by the Company or any of its Subsidiaries
infringes or is alleged to infringe any trade name, trademark or service mark of
any Person.
(e) Copyrights -- (i) Section 4.21(e) of the Disclosure Schedule contains a
true, correct and complete list of all Copyrights; (ii) the Company and its
Subsidiaries own all right, title and interest in and to each of the Copyrights,
free and clear of all Encumbrances, or have valid licenses to use each of the
Copyrights, as applicable; (iii) all the Copyrights have been registered and are
currently in compliance in all material respects with formal legal requirements,
and are valid and enforceable; (iv) no Copyright is infringed or, to the
Company's Knowledge, has been challenged or threatened in any way; (v) none of
the subject matter of any of the Copyrights infringes or is alleged to infringe
any copyright of any Person or is a derivative work based on the work of a third
Person; and (vi) all works encompassed by the Copyrights have been marked with
the proper copyright notice.
(f) Trade Secrets -- (i) The Company and its Subsidiaries have taken all
reasonable precautions to protect the secrecy, confidentiality and value of
their Trade Secrets; and (ii) the Company and its Subsidiaries have good title
and an absolute right to use the Trade Secrets. To the Company's Knowledge, the
Trade Secrets have not been used, divulged or appropriated either for the
benefit of any Person (other than the Company and its Subsidiaries) or to the
detriment of the Company. No Trade Secret is subject to any claim or, to the
Company's Knowledge, has been challenged or threatened in any way.
(g) Year 2000 -- (i) The Company and its Subsidiaries have: (w) undertaken
a detailed inventory, review, and assessment of all areas within and affecting
their businesses and operations that could be adversely affected by the failure
of the Company or any of its Subsidiaries to be Year 2000 Compliant (as
hereinafter defined) on a timely basis; (x) developed a plan and time line for
becoming Year 2000 Compliant on or before December 31, 1999; (y) to date,
implemented that plan in accordance with the specified timetable in all material
respects; and (z) delivered to TKOG or its representatives a copy of any such
plan or time line; (ii) it is anticipated that the Company and all of its
Subsidiaries will be Year 2000 Compliant on or before December 31, 1999; and
(iii) the Company, pursuant to its plan for becoming Year 2000 Compliant, is
currently investigating its and its Subsidiaries' vendors and suppliers to
determine that the computer systems which such vendors and suppliers are using
are Year 2000 Compliant.
As used here, "Year 2000 Compliant" shall mean that all software, embedded
microchips and other processing capabilities utilized by the Company or any of
its Subsidiaries, or the Company's or any of its Subsidiaries' key suppliers,
vendors and customers will provide, among other things, the following
functionality: (i) accurate processing of date-related information before,
during and after January 1, 2000, including accepting the date input, providing
the date output, and performing calculations on dates or portions of dates; (ii)
accurate functioning without interruption before, during and after January 1,
2000 without any change in operation associated with the advent of the new
century; (iii) ability to respond to two-digit date input in a way that resolves
any ambiguity as to century in a disclosed,
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defined and predetermined manner; and (iv) the ability to store and provide
output date information in ways that are unambiguous as to century.
(h) Development Tools -- Section 4.21(h) of the Disclosure Schedule
contains a complete list of all material development tools used or currently
intended to be used by the Company or any of its Subsidiaries in the development
of any product or service of the Company or any of its Subsidiaries or used in
the conduct of the Company's or any Subsidiary's business as presently conducted
and as it is expected to be conducted after the date of this agreement, except
for any such tools that are generally available and are used in their generally
available form (the "Company Development Tools"). Section 4.21(h) of the
Disclosure Schedule also sets forth, for each Company Development Tool: (a) for
any Company Development Tool not entirely developed internally by employees of
the Company or any of its Subsidiaries, the identity of the independent
contractors and consultants involved in such development and a list of the
agreements with such independent contractors and consultants; (b) a list of any
third parties with any rights to receive royalties or other payments with
respect to such Company Development Tools, and a schedule of all such royalties
payable; (c) a list of agreements containing any restrictions on the Company's
or any Subsidiary's unrestricted right to use and distribute such Company
Development Tools; and (d) a list of all agreements with third parties for the
use by such third party of such Company Development Tools. The Company and its
Subsidiaries have sufficient right, title and interest in and to the Company
Development Tools necessary for the conduct of their respective businesses as
currently conducted and as to any products or services currently in development
or proposed to be developed and, except as set forth on the Disclosure Schedule,
all Company Development Tools are works made-for-hire and the Company or any of
its Subsidiaries is the author and owner of all such Company Development Tools
under the Copyright Act of 1976, as amended.
4.22 CERTAIN PAYMENTS
Neither the Company nor any of its Subsidiaries nor any director, officer,
agent or employee of the Company or any of its Subsidiaries, or to the Company's
Knowledge, any other Person associated with or acting for or on behalf of the
Company or any of its Subsidiaries, has directly or indirectly (a) made any
contribution, gift, bribe, rebate, payoff, influence payment, kickback or other
payment to any Person, private or public, regardless of form, whether in money,
property or services, that is illegal or prohibited by any Contract to which the
Company or any of its Subsidiaries is a party, (i) to obtain favorable treatment
in securing business, (ii) to pay for favorable treatment for business secured,
(iii) to obtain special concessions, or for special concessions already
obtained, for or in respect of the Company or any affiliate of the Company, or
(iv) in violation of any legal requirement, or (b) established or maintained any
fund or asset that has not been recorded in the books and records of the
Company.
4.23 RELATIONSHIPS WITH RELATED PERSONS
Except as set forth in Section 4.23 of the Disclosure Schedule, none of the
Company Shareholders, nor any officer, director or employee of the Company, nor
any spouse or child of any of them or any Person associated with any of them
("Related Person") has any interest in any property used in or pertaining to the
business of the Company or any of its Subsidiaries. Except as set forth in
Section 4.23 of the Disclosure Schedule, no Related Person has owned an equity
interest or any other financial or profit interest in a Person that has (i) had
business dealings with the Company or any of its Subsidiaries, or (ii) engaged
in competition with the Company or any of its Subsidiaries. Except as set forth
in Section 4.23 of the Disclosure Schedule, no Related Person is a party to any
Contract with, or has any claim or right against, the Company or any of its
Subsidiaries, except employment or consulting agreements listed in Section
4.15(a) of the Disclosure Schedule.
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4.24 BROKERS OR FINDERS
Neither the Company nor its agents has incurred any obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or financial advisory services or other similar payment in
connection with this Agreement.
4.25 DEPOSIT ACCOUNTS
Section 4.25 of the Disclosure Schedule contains a true, correct and
complete list of (a) the name of each financial institution in which the Company
has an account or safe deposit box, (b) the names in which each account or box
is held, (c) the type of account, and (d) the name of each person authorized to
draw on or have access to each account or box.
4.26 POOLING OF INTERESTS
The Company has fully, completely and accurately responded to all requests
made by the independent accountants of TKOG for information concerning actions
taken or agreed to be taken by the Company that relate to such accountants'
determinations with respect to the ability of TKOG to account for the business
combination to be effected by the Merger as a pooling of interests.
4.27 CUSTOMER RELATIONSHIPS
To the Company's Knowledge, there are no facts or circumstances, including
the consummation of the transactions contemplated by this Agreement, that are
reasonably likely to result in the loss of any material customer of the Company
or any of its Subsidiaries or a material change in the relationship of the
Company or any of its Subsidiaries with such a customer.
4.28 CONDUCT OF BUSINESS; USE OF NAME
The business carried on by the Company and its Subsidiaries has been
conducted by the Company and each Subsidiary directly and not through any
affiliate of any shareholder, officer, director or employee of the Company or
through any other Person. The Company owns and has the exclusive right, title
and interest in and to the name "Background America" and no other Person has the
right to use the same, or any confusing derivative thereof, as its corporate
name or otherwise in connection with the operation of any business similar or
related to the business conducted by the Company.
4.29 RESTRICTIONS ON BUSINESS ACTIVITIES.
There is no Contract, judgment, injunction, order or decree binding upon
the Company or, to the Company's Knowledge, threatened that has or could
reasonably be expected to have the effect of prohibiting or materially impairing
any business practice of the Company and its Subsidiaries (either individually
or in the aggregate), any acquisition of property by the Company and its
Subsidiaries (either individually or in the aggregate), providing of any service
by the Company and its Subsidiaries or the hiring of employees or the conduct of
business by the Company and its Subsidiaries (either individually or in the
aggregate) as currently conducted or proposed to be conducted.
4.30 PAYABLES
There has been no adverse change since the date of the Financial Statements
in the amount or delinquency of accounts payable of the Company (either
individually or in the aggregate) which would have a Material Adverse Effect
upon the Company and its Subsidiaries taken as a whole.
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4.31 OUTSTANDING INDEBTEDNESS
Section 4.31 of the Disclosure Schedule sets forth as of November 30, 1998
(a) the amount of all indebtedness of the Company then outstanding and the
interest rate applicable thereto, (b) any Encumbrances which relate to such
indebtedness and (c) the name of the lender or the other payee of each such
indebtedness.
4.32 CUSTOMERS AND CONTRACTORS
Section 4.32 of the Company Disclosure Schedule contains a complete and
accurate list of the top 30 clients of the Company, including the amounts they
paid to the Company in the last year. Section 4.32 of the Disclosure Schedule
contains a complete and accurate list of the material contractors and
subcontractors used by the Company.
4.33 PRIVATE INVESTIGATION LICENSE
Section 4.33 of the Disclosure Schedule contains a complete list of all
private investigation licenses or other similar licenses held by the Company or
each Subsidiary of the Company or any employee of the Company or any of its
Subsidiaries and the jurisdictions in which each such license was granted. Each
such private investigation license is in full force and effect. There has been
no violation of such private investigation licenses. Neither the Company nor any
Subsidiary of the Company nor any employee of the Company or any of its
Subsidiaries conducts any business or takes or performs any other action which
would require any of them to be licensed as a private investigator in any
jurisdiction other than those listed in Section 4.33 of the Disclosure Schedule.
4.34 BUSINESS PLAN
The Company has delivered to TKOG and Merger Sub a true, correct and
complete copy of the May 1997 Business Plan (the "Business Plan") of the
Company. The Business Plan was prepared by the Company in good faith by the
Company and except as set forth in Section 4.34 of the Disclosure Schedule, the
assumptions underlying the Business Plan, taken as whole, are reasonable.
4.35 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS
The information supplied by the Company with respect to the Company and its
Subsidiaries and their respective officers, directors, shareholders and other
affiliates (collectively, the "COMPANY INFORMATION") for inclusion in the
Registration Statement (as defined in Section 5.8) shall not at the time the
Registration Statement is declared effective by the Commission contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading. The Company Information supplied by the Company for inclusion in the
notice of meeting/prospectus (such notice of meeting/prospectus as amended or
supplemented is referred to herein as the "PROXY STATEMENT/PROSPECTUS") to be
sent to the Company Shareholders in connection with the meeting of the Company
Shareholders to consider the Merger will not, on the date the Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto) is first
mailed to Company Shareholders or at the time of such meeting, contain any
statement which, at such time and in light of the circumstances under which it
shall be made, is false or misleading with respect to any material fact, or
shall omit to state any material fact necessary in order to make the statements
made therein, in light of the circumstances under which it shall be omitted, not
false or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication to Company Shareholders in connection
with the meeting which has become false or misleading. If at any time prior to
the Effective Time any event relating to the Company or its
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Subsidiaries or any of their respective officers, directors, shareholders or
other affiliates is discovered by the Company which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy
Statement/Prospectus, the Company shall promptly inform TKOG. The Proxy
Statement/ Prospectus will comply in all material respects with the requirements
of the Securities Act. Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to any information supplied by TKOG or
Merger Sub which is contained or incorporated by reference in, or furnished in
connection with the preparation of, the Registration Statement or the Proxy
Statement/ Prospectus.
4.36 DISCLOSURE
No representation or warranty of the Company in this Agreement and no
statement in the Disclosure Schedule is inaccurate in any material respect or
omits to state a material fact necessary to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading.
5. REPRESENTATIONS AND WARRANTIES OF TKOG AND MERGER SUB
TKOG and Merger Sub each represents and warrants to the Company as follows:
5.1 ORGANIZATION AND GOOD STANDING
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Tennessee. TKOG is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Ohio. Each of TKOG and Merger Sub has full corporate power and authority to
conduct its business as it is now being conducted and to own or use the
properties and assets that it purports to own or use. Each of TKOG and Merger
Sub is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each state or other jurisdiction in which either the
ownership or use of the properties owned or used by it, or the nature of the
activities conducted by it, requires such qualification, except where the
failure to be so qualified could not reasonably be expected to have a Material
Adverse Effect on TKOG and its Subsidiaries taken as a whole.
5.2 AUTHORITY; NO CONFLICT
(a) TKOG and Merger Sub each has the right, power, authority and capacity
to execute and deliver this Agreement and the Transaction Documents to which
TKOG or Merger Sub is a party, to consummate the Merger and to perform their
respective obligations under this Agreement and the Transaction Documents to
which TKOG or Merger Sub is a party. This Agreement has been duly authorized and
approved, executed and delivered by TKOG and Merger Sub and constitutes the
legal, valid and binding obligation of TKOG and Merger Sub, enforceable against
them in accordance with its terms. Upon the execution and delivery by TKOG and
Merger Sub of the Transaction Documents to which TKOG or Merger Sub is a party,
such Transaction Documents will constitute the legal, valid and binding
obligations of TKOG and Merger Sub, enforceable against them in accordance with
their respective terms.
(b) Neither the execution and delivery of this Agreement by TKOG or Merger
Sub nor the consummation or performance by TKOG or Merger Sub of the Merger or
any of the other transactions contemplated hereby will, directly or indirectly
(with or without notice or lapse of time or both):
(i) contravene, conflict with, or result in a violation or breach of
(A) any provision of the Organizational Documents of TKOG or Merger Sub,
(B) any resolution adopted by the board of
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directors or the shareholders of TKOG or Merger Sub, (C) any legal
requirement or any order to which TKOG or Merger Sub or any of the assets
owned or used by them may be subject, or (D) any Governmental Permit held
by TKOG or Merger Sub;
(ii) result in a breach of or constitute a default, give rise to a
right of termination, cancellation or acceleration, create any entitlement
to any payment or benefit, or require the consent or approval of or any
notice to or filing with any third party, under any Contract to which TKOG
or Merger Sub is a party or by which their respective assets are bound, or
require the consent or approval of or any notice to or filing with any
Governmental Authority to which either TKOG, Merger Sub or their respective
assets are subject; or
(iii) result in the imposition or creation of any Encumbrance upon or
with respect to any of the assets owned or used by TKOG or Merger Sub,
except, with respect to clause (i) (C) or (D), (ii) or (iii) of this Section
5.2, where any such contravention, conflict, violation, breach, default,
termination right, cancellation or acceleration right or Encumbrance would not
have a Material Adverse Effect on TKOG and its Subsidiaries taken as a whole or
would not adversely affect the ability of TKOG or Merger Sub to consummate the
Merger or the other transactions contemplated by this Agreement.
5.3 CAPITALIZATION; TKOG SHARES
(a) The authorized capital stock of TKOG consists of 1,000,000 shares of
preferred stock, $0.01 par value per share, of which as of the date of this
Agreement no shares are issued or outstanding, and 50,000,000 shares of TKOG
Common Stock, of which as of December 30, 1998, 19,015,368 shares were issued
and outstanding. All of the authorized capital stock of Merger Sub is owned of
record and beneficially by TKOG.
(b) The TKOG Shares issuable as a result of the Merger have been duly
authorized and upon the Effective Time will be validly issued, fully paid and
nonassessable and designated for quotation on the NASDAQ National Market.
5.4 FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
(a) TKOG has delivered to the Company true, correct and complete copies of
its Prospectus dated April 30, 1998 as filed with the Commission (the
"Prospectus"), the Prospectus dated November 10, 1998, which forms a part of its
Registration Statement on Form S-4 (Registration No. 333-66959), (the "S-4
Prospectus"), its Annual Report on Form 10-K for the year ended December 31,
1997 (the "Form 10-K"), its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (the "March Form 10-Q"), its Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (the "June Form 10-Q"), and its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998 (the "September Form
10-Q," and together with the March Form 10-Q and the June Form 10-Q, the "Forms
10-Q"). The Prospectus, the S-4 Prospectus, the Form 10-K and the Forms 10-Q
(collectively, the "TKOG SEC Reports") have been timely filed pursuant to the
Securities Act or the Exchange Act, as applicable.
(b) The TKOG SEC Reports complied as to form in all material respects with
the requirements of the Securities Act and the Exchange Act, as applicable, in
effect on the respective dates thereof. None of the TKOG SEC Reports, when filed
pursuant to the Securities Act or the Exchange Act, as applicable, contained any
untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
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(c) Each of the TKOG financial statements (including the related notes)
included in the TKOG SEC Reports presents fairly, in all material respects, the
consolidated financial position and consolidated results of operations and cash
flows of TKOG as of the respective dates or for the respective periods set forth
therein, all in conformity with GAAP consistently applied during the periods
involved except as otherwise noted therein, and subject, in the case of any
unaudited interim financial statements included therein, to normal year-end
adjustments and to absence of complete footnotes.
5.5 NO MATERIAL ADVERSE CHANGE
Since September 30, 1998, there has not been any material adverse change in
the business, operations, properties, prospects, liabilities, results of
operations, assets or condition (financial or otherwise) of TKOG and its
Subsidiaries taken as a whole.
5.6 LEGAL PROCEEDINGS
Except as set forth in Section 5.6 of the TKOG Disclosure Schedule, there
is no pending Proceeding:
(i) that has been commenced by or against TKOG or any of its
Subsidiaries or that otherwise relates to or may affect the business of, or
any of the assets owned or used by, TKOG or any of its Subsidiaries, that
could reasonably be expected to have a Material Adverse Effect on TKOG and
its Subsidiaries taken as a whole; or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
transactions contemplated hereby.
To the knowledge of TKOG, no such Proceeding has been threatened.
5.7 BROKERS OR FINDERS
Neither TKOG nor Merger Sub nor any of its officers and agents has incurred
any obligation or liability, contingent or otherwise, for brokerage or finders'
fees or agents' commissions or financial advisory services or other similar
payment in connection with this Agreement, except for the fees of J. Jeffrey
Brausch & Company and of SunTrust Equitable Securities, which shall be paid by
TKOG.
5.8 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS
The registration statement (the "REGISTRATION STATEMENT") pursuant to which
the TKOG Common Stock to be issued in the Merger will be registered with the
Commission shall not at the time the Registration Statement is declared
effective by the Commission contain any untrue statement of a material fact or
omit to state any 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. The information supplied by TKOG and
Merger Sub in writing specifically for inclusion in the Proxy
Statement/Prospectus will not, on the date the Proxy Statement/Prospectus (or
any amendment thereof or supplement thereto) is first mailed to Company
Shareholders or at the time of the meeting of the Company Shareholders, contain
any statement which, at such time and in light of the circumstances under which
it shall be made, is false or misleading with respect to any material fact, or
shall omit to state any material fact necessary in order to make the statements
made therein, in light of the circumstances under which it shall be omitted, not
false or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication to Company Shareholders in connection
with the meeting which has become false or misleading. If at any time prior to
the Effective Time any event relating to TKOG, Merger Sub or any of their
respective affiliates, officers or directors should be
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discovered by TKOG or Merger Sub which should be set forth in an amendment to
the Registration Statement or a supplement to the Proxy Statement/Prospectus,
TKOG will promptly inform the Company. The Proxy Statement/Prospectus will
comply in all material respects with the requirements of the Securities Act.
Notwithstanding the foregoing, TKOG makes no representation or warranty with
respect to any Company Information which is contained or incorporated by
reference in, or furnished in connection with the preparation of, the
Registration Statement or the Proxy Statement/Prospectus.
5.9 DISCLOSURE
Except as set forth in Section 5.9 of the TKOG Disclosure Schedule, no
representation or warranty of TKOG or Merger Sub in this Agreement is inaccurate
in any material respect or omits to state a material fact necessary to make the
statements herein, in light of the circumstances under which they were made, not
misleading.
6 COVENANTS OF THE COMPANY
The Company hereby covenants and agrees as follows:
6.1 NORMAL COURSE
From the date hereof until the Closing, the Company and its Subsidiaries
will: (a) maintain their respective corporate existence in good standing; (b)
maintain the general character of their respective business; (c) use all
commercially reasonable best efforts to maintain in effect all of their
respective presently existing insurance coverage (or substantially equivalent
insurance coverage), preserve their respective business organization
substantially intact, keep the services of their respective present principal
employees and preserve their respective present business relationships with
their respective material suppliers and customers; (d) permit TKOG, Merger Sub,
their accountants, their legal counsel and their other representatives full
access to their respective management, minute books and stock transfer records,
other books and records, Contracts, properties and operations at all reasonable
times and upon reasonable notice; and (e) in all respects conduct their
respective business in the usual and ordinary manner consistent with past
practice and perform in all material respects all agreements or other
obligations with banks, customers, suppliers, employees and others.
6.2 CONDUCT OF BUSINESS
Without limiting the provisions of Section 6.1, from the date hereof until
the Closing, except as set forth in Section 6.2 of the Disclosure Schedule,
neither the Company nor any of its Subsidiaries will, without the prior written
consent of TKOG:
(a) amend or otherwise modify its Organizational Documents;
(b) issue or sell or authorize for issuance or sale, or grant any
options or make other agreements of the type referred to in Section 4.3
with respect to, any shares of its capital stock or any other of its
securities, or, except as contemplated by Section 2.11, alter any term of
any of its outstanding securities or make any change in its outstanding
shares of capital stock or other ownership interests or its capitalization,
whether by reason of a reclassification, recapitalization, stock split or
combination, exchange or readjustment of shares, stock dividend or
otherwise;
(c) mortgage, pledge or grant any security interest in any of its
assets, except security interests solely in tangible personal property
granted pursuant to any purchase money agreement, conditional sales
contract or capital lease under which there exists an aggregate future
liability not in excess of
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$25,000 (which amount is not more than the purchase price for such personal
property and which security interest does not extend to any other item or
items of personal property);
(d) declare, set aside, make or pay any dividend or other distribution
to any shareholder with respect to its capital stock;
(e) redeem, purchase or otherwise acquire, directly or indirectly, any
capital stock of the Company or any of its Subsidiaries;
(f) increase the compensation of any of its employees, except for
amounts accrued as of October 31, 1998 and reflected in the Interim
Financial Statements and except for increases in the ordinary course of
business, consistent with past practice, for those employees listed on
Exhibit 6.12(a);
(g) adopt or (except as otherwise required by law) amend any employee
benefit plan or enter into any collective bargaining agreement;
(h) terminate or modify any material Contract, except for terminations
of Contracts upon their expiration during such period in accordance with
their terms;
(i) incur or assume any indebtedness for borrowed money or guarantee
any obligation or the net worth of any Person in an aggregate amount in
excess of $25,000, except for endorsements of negotiable instruments for
collection in the ordinary course of business;
(j) discharge or satisfy any Encumbrance other than those which are
required to be discharged or satisfied during such period in accordance
with their original terms;
(k) pay any material obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, except for any
current liabilities, and the current portion of any long term liabilities,
shown on the Financial Statements (or not required as of the date thereof
to be shown thereon in accordance with GAAP) or incurred since the date of
the most recent balance sheet in the ordinary course of business consistent
with past practice;
(l) sell, transfer, lease to others or otherwise dispose of any of its
properties or assets having a fair market value in the aggregate in excess
of $25,000, except in the ordinary course of business consistent with past
practice;
(m) cancel, compromise or waive any material debt, claim or right;
(n) make any loan or advance to any Person other than travel and other
similar routine advances in the ordinary course of business consistent with
past practice, or acquire any capital stock or other securities of or any
ownership interest in any other business enterprise;
(o) make any capital expenditure or capital addition or betterment in
amounts which exceed $25,000 in the aggregate, except as contemplated in
capital budgets in effect on the date of this Agreement;
(p) change its method of accounting or the accounting principles or
practices utilized in the preparation of the Financial Statements, other
than as required by GAAP;
(q) institute or settle any Proceeding before any court or
governmental body relating to it or its property;
(r) except in the ordinary course of business consistent with past
practice, commit to provide services for an indefinite period or a period
of more than twelve months;
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(s) enter into other Contracts, except Contracts made in the ordinary
course of business consistent with past practice; or
(t) enter into any commitment to do any of the foregoing.
6.3 COMPANY SHAREHOLDERS MEETING
The Company shall call a meeting of the Company Shareholders as promptly as
practicable for the purpose of voting upon the approval of this Agreement and
the Merger, and the Company shall use its reasonable best efforts to hold such
meeting as soon as practicable after the date on which the Registration
Statement becomes effective. The Company shall solicit from the Company
Shareholders proxies in favor of approval of the Merger and this Agreement,
shall take all such reasonable action that is necessary or advisable to secure
the vote or consent of the Company Shareholders in favor of such approval and
shall not take any action that could reasonably be expected to prevent the vote
or consent of shareholders in favor of such approval.
6.4 AGREEMENTS WITH RESPECT TO AFFILIATES
The Company shall deliver to TKOG, at least five days prior to the date the
Registration Statement becomes effective under the Securities Act, a letter (the
"AFFILIATE LETTER") identifying all Persons who are, at the time of the meeting
of the Company Shareholders, anticipated to be "Affiliates" of the Company for
purposes of Rule 145 under the Securities Act ("RULE 145"), or the rules and
regulations of the Commission relating to pooling of interests accounting
treatment for merger transactions (the "POOLING RULES"). The Company shall use
its reasonable best efforts to cause each Person who is identified as an
"affiliate" in the Affiliate Letter to deliver to TKOG, no less than ten days
prior to the date of the meeting of the Company Shareholders a written agreement
(an "AFFILIATE AGREEMENT") in connection with restrictions on Affiliates under
Rule 145 and pooling of interests accounting treatment, in form mutually
agreeable to the Company and TKOG.
6.5 CERTAIN FILINGS
(a) The Company agrees to cooperate with TKOG with respect to all filings
with regulatory authorities that are required to be made by the Company to carry
out the transactions contemplated by this Agreement. The Company shall assist
TKOG and Merger Sub in making all such filings, applications and notices as may
be necessary or desirable in order to obtain the authorization, approval or
consent of any Governmental Authority which may be reasonably required or which
TKOG and Merger Sub may reasonably request in connection with the consummation
of the transactions contemplated hereby. The Company and TKOG shall furnish all
information reasonably required to be included in the Proxy Statement/Prospectus
and the Registration Statement or for any application or other filing to be made
pursuant to the rules and regulations of any United States or foreign
governmental body in connection with the transactions contemplated by this
Agreement.
(b) The Company agrees to make all reasonable representations and covenants
in connection with the opinions of counsel to be attached to the Registration
Statement with respect to the correctness of the discussion in the Registration
Statement as to the material federal income tax consequences of the Merger.
6.6 CONSENTS AND APPROVALS
The Company shall use its best efforts to obtain as promptly as practicable
all consents, authorizations, approvals and waivers required in connection with
the consummation of the transactions contemplated by this Agreement.
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6.7 BEST EFFORTS TO SATISFY CONDITIONS
The Company shall use its best efforts to cooperate with TKOG for purposes
of satisfying the conditions set forth in Sections 8 and 9 that are within their
control.
6.8 INTERCOMPANY PAYMENTS
All loans, payables and other amounts due to or from the Company and its
Affiliates (as defined in Rule 501 promulgated under the Securities Act) are
listed in Section 6.8 of the Disclosure Schedule and shall be paid in full,
written off or adjusted to zero balances or otherwise resolved to the
satisfaction of TKOG at or prior to the Closing. Such amounts due may be paid
from cash on hand or as may otherwise be available to the Company from existing
lines of credit with third party lenders.
6.9 NOTIFICATION OF CERTAIN MATTERS
The Company shall promptly notify TKOG of (i) the occurrence or
non-occurrence of any fact or event of which the Company has knowledge which
would be reasonably likely (A) to cause any representation or warranty of the
Company contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date hereof to the Closing Date or (B) to cause any
covenant, condition or agreement of the Company in this Agreement not to be
complied with or satisfied in any material respect and (ii) any failure of the
Company to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder in any material respect; provided,
however, that no such notification shall affect the representations or
warranties of the Company, or the right of TKOG to rely thereon, or the
conditions to the obligations of TKOG. The Company shall give prompt notice to
TKOG of any notice or other communication from any third party alleging that the
consent of such third party is or may be required in connection with the
transactions contemplated by this Agreement.
6.10 POOLING ACCOUNTING TREATMENT
(a) The Company agrees not to take any action from and after the date of
this Agreement that would reasonably be expected to adversely affect the ability
of TKOG to account for the business combination to be effected by the Merger as
a pooling of interests, and the Company agrees to use its commercially
reasonable efforts to take such action as may be reasonably required to negate
the impact of any past actions by the Company which would reasonably be expected
to adversely impact the ability of TKOG to treat the Merger as a pooling of
interests. The taking by the Company of any action prohibited by the previous
sentence, or the failure of the Company to use its commercially reasonable
efforts to take any action required by the previous sentence, if the Merger is
not able to be accounted for as a pooling of interests because of such action or
failure to take action, shall constitute a breach of this Agreement by such
party for the purposes of Section 10.
(b) The Company agrees to make all reasonable representations and covenants
in connection with the opinions of accountants required by Section 8.10.
6.11 OTHER AGREEMENTS
(a) The Company shall use its reasonable best efforts to enter into new
leases for the two office buildings in Tennessee with Michael D. Shmerling &
Co., LLC, as landlord. Such leases shall be in form and substance reasonably
satisfactory to TKOG.
(b) The Company shall use its reasonable best efforts to enter into an
agreement for services with System X. Such agreement shall be in form and
substance reasonably satisfactory to TKOG.
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6.12 EMPLOYMENT AGREEMENTS
The Company shall use its reasonable best efforts to cause the key
employees listed on Exhibit 6.12(a) to enter into new employment agreements with
the Company to be effective on the Closing Date. Each employment agreement will
be in substantially the form attached hereto as Exhibit 6.12(b).
6.13 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT
The Proxy Statement/Prospectus shall include the unanimous recommendation
of the Board of Directors of the Company in favor of the Merger and such
recommendation shall not be withdrawn, modified or changed in a manner adverse
to TKOG or Merger Sub unless this Agreement is terminated pursuant to Section
10.
6.14 TAX FREE REORGANIZATION
The Company agrees not to take any action that would reasonably be expected
to adversely affect the qualification of the Merger as a tax-free reorganization
pursuant to Section 368 of the Code.
6.15 OPTIONS
The Company shall cause the amendments and other actions listed on Section
2.11 of the Disclosure Schedule, on terms and conditions reasonably satisfactory
to TKOG, to be approved by the Board of Directors of the Company and shall use
its reasonable best efforts to cause each of the Option holders to consent
thereto.
6.16 FINANCIAL STATEMENTS
The Financial Statements for the years ended December 31, 1996 and 1997,
which are being audited by Deloitte & Touche LLC, shall be substantially the
same as the Financial Statements set forth in Section 4.5 of the Disclosure
Schedule. Copies of the audited Financial Statements shall be delivered to TKOG
as soon as practicable after the date first above written.
7 COVENANTS OF TKOG AND MERGER SUB
Each of TKOG and Merger Sub, jointly and severally, hereby covenants and
agrees as follows:
7.1 CERTAIN FILINGS
(a) TKOG and Merger Sub agree to make or cause to be made all filings with
regulatory authorities that are required to be made by TKOG or Merger Sub or
their respective affiliates to carry out the transactions contemplated by this
Agreement.
(b) TKOG and Merger Sub agree to make all reasonable representations and
covenants in connection with the opinions of counsel to be attached to the
Registration Statement with respect to the correctness of the discussion in the
Registration Statement as to the material federal income tax consequences of the
Merger.
7.2 BEST EFFORTS TO SATISFY CONDITIONS
Each of TKOG and Merger Sub agrees to use its best efforts to satisfy the
conditions set forth in Sections 8 and 9 that are within its control.
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7.3 NOTIFICATION OF CERTAIN MATTERS
TKOG and Merger Sub shall promptly notify the Company of (i) the occurrence
or non-occurrence of any fact or event of which TKOG or Merger Sub has knowledge
which would be reasonably likely (A) to cause any representation or warranty of
Merger Sub or TKOG contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Closing Date or (B) to
cause any covenant, condition or agreement of Merger Sub or TKOG in this
Agreement not to be complied with or satisfied in any material respect and (ii)
any failure of Merger Sub or TKOG to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder in any
material respect; provided, however, that no such notification shall affect the
representations or warranties of Merger Sub and TKOG, or the Company's right to
rely thereon, or the conditions to the obligations of the Company. TKOG and
Merger Sub shall give prompt notice to the Company of any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement.
7.4 TAX FREE REORGANIZATION
TKOG and Merger Sub agree not to take any action that would reasonably be
expected to adversely affect the qualification of the Merger as a tax-free
reorganization pursuant to Section 368 of the Code.
7.5 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT
As promptly as practicable after the execution of this Agreement, and after
the furnishing by the Company and TKOG of all information required to be
contained therein (which each agrees to do as promptly as practicable after the
date hereof), TKOG shall file with the Commission a Registration Statement on
Form S-4 (or on such other form as shall be appropriate), which shall include
the Proxy Statement/Prospectus relating to the approval of this Agreement and
the transactions contemplated hereby by the shareholders of the Company, and
shall use all reasonable efforts to cause the Registration Statement to become
effective as soon thereafter as practicable. The Proxy Statement/Prospectus
shall include the unanimous recommendation of the Board of Directors of the
Company in favor of the Merger.
7.6 [INTENTIONALLY OMITTED]
7.7 LISTING
TKOG shall use its reasonable best efforts to designate, prior to the
Closing Date, the TKOG Shares for quotation on the NASDAQ National Market.
8. CONDITIONS TO OBLIGATIONS OF TKOG AND MERGER SUB
The obligations of TKOG and Merger Sub under this Agreement to consummate
the Merger shall be subject to the satisfaction, on or before the Closing Date,
of each of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Company contained in this
Agreement or in the Disclosure Schedule or any certificate delivered pursuant
hereto shall be complete and correct as of the date when made, shall be deemed
repeated at and as of the Closing Date as if made on the Closing Date and,
without giving effect to any qualification as to materiality (or any variation
of such term) contained in any representation or warranty, shall then be
complete and correct in all material respects.
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8.2 PERFORMANCE OF COVENANTS
The Company shall have performed and complied in all material respects with
each covenant, agreement and condition required by this Agreement to be
performed or complied with by it prior to or on the Closing Date.
8.3 LACK OF ADVERSE CHANGE
Except as set forth in Section 8.3 of the Disclosure Schedule, since
October 31, 1998, there shall not have occurred any incident or event which,
individually or in the aggregate, has had or is reasonably likely to result in a
Material Adverse Effect on the Company and its Subsidiaries taken as a whole,
including the loss of any significant customer of the Company or any of its
Subsidiaries.
8.4 UPDATE CERTIFICATE
TKOG and Merger Sub shall have received favorable certificates, dated the
Closing Date, signed by the Company as to the matters set forth in Sections 8.1,
8.2 and 8.3.
8.5 NO GOVERNMENTAL OR OTHER PROCEEDING
No order of any Governmental Authority shall be in effect that restrains or
prohibits any transaction contemplated hereby or that would limit or affect
TKOG's or Merger Sub's ownership or operation of the business of the Company; no
suit, action, investigation, inquiry or proceeding by any Governmental Authority
shall be pending or threatened against TKOG, Merger Sub, the Company or any
officer or director of any thereof, as such, that challenges the validity or
legality, or that seeks to restrain the consummation, of the transactions
contemplated hereby or that seeks to limit or otherwise affect TKOG's or Merger
Sub's right to own or operate the business of the Company; and no written advice
shall have been received by TKOG, Merger Sub or the Company or by any of their
respective counsel from any Governmental Authority, and remain in effect,
stating that an action or proceeding will, if the Merger is consummated or
sought to be consummated, be filed seeking to invalidate or restrain the Merger
or limit or otherwise affect TKOG's or Merger Sub's ownership or operation of
the business of the Company.
8.6 APPROVALS AND CONSENTS
All material consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by the Company for
the authorization, execution and delivery of this Agreement, the consummation by
it of the transactions contemplated hereby and the continuation in full force
and effect of any and all material rights, documents, agreements or instruments
of the Company shall have been obtained and made, except where the failure to
receive such consents, waivers, approvals, authorizations or orders would not
reasonably be expected to have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
8.7 OPINION OF COUNSEL
The Company shall have delivered to TKOG and Merger Sub an opinion of
Sherrard & Roe, PLC, dated the Closing Date and addressed to TKOG and Merger
Sub, as to the matters set forth on Exhibit B hereto.
8.8 SHAREHOLDER APPROVAL
This Agreement shall have been duly approved at or prior to the Effective
Time of the Merger by the requisite vote of the Company Shareholders in
accordance with the TBCA.
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8.9 ESCROW AGREEMENT
The Escrow Agreement shall have been duly executed and delivered by the
Company.
8.10 OPINION OF ACCOUNTANT
(a) TKOG and Merger Sub shall have received an opinion of Arthur Andersen
LLP, independent certified public accountants, regarding the qualification of
the Merger as a pooling of interests for accounting purposes. Such opinion shall
be in form and substance reasonably satisfactory to TKOG.
(b) The Company shall have received an opinion of Deloitte & Touche LLC,
independent certified public accountants, regarding the poolability of the
Company. Such opinion shall be in form and substance reasonably satisfactory to
TKOG.
8.11 AFFILIATE AGREEMENTS
TKOG shall have received from each Person who is identified in the
Affiliate Letter as an "affiliate" of the Company, an Affiliate Agreement, and
such Affiliate Agreement shall be in full force and effect.
8.12 EFFECTIVENESS OF THE REGISTRATION STATEMENT
The Registration Statement shall have been declared effective by the
Commission under the Securities Act. No stop order suspending the effectiveness
of the Registration Statement shall have been issued by the Commission and no
proceedings for that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus shall have been initiated or threatened by the Commission.
8.13 EMPLOYMENT AGREEMENTS
The employment agreements referred to in Section 6.12 shall have been
executed by those employees listed on Exhibit 6.12(a).
8.14 DISSENTING SHAREHOLDERS
Holders of not more than 7.5% of the shares of outstanding capital stock of
the Company that are entitled to vote on the Merger shall be Dissenting
Shareholders.
8.15 OPTIONS
The Options shall have been amended or otherwise dealt with in accordance
with Section 2.11 of the Disclosure Schedule, on terms and conditions reasonably
satisfactory to TKOG, and all Option holders shall have consented to such
amendments or other actions.
8.16 OTHER AGREEMENTS
The agreements referred to in Section 6.11 shall have been executed by all
parties thereto.
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9. CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement to consummate the
Merger shall be subject to the satisfaction, on or before the Closing Date, of
each of the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties of TKOG and Merger Sub contained in this
Agreement or in the Disclosure Schedule or any certificate delivered pursuant
hereto shall be complete and correct as of the date when made, shall be deemed
repeated at and as of the Closing Date as if made on the Closing Date and,
without giving effect to any qualification as to materiality (or any variation
of such term) contained in any representation or warranty, shall then be
complete and correct in all material respects.
9.2 PERFORMANCE OF COVENANTS
TKOG and Merger Sub shall have performed and complied in all material
respects with each covenant, agreement and condition required by this Agreement
to be performed or complied with by them prior to or on the Closing Date.
9.3 UPDATE CERTIFICATE
The Company shall have received favorable certificates, dated the Closing
Date, signed by TKOG and Merger Sub as to the matters set forth in Sections 9.1
and 9.2.
9.4 NO GOVERNMENTAL OR OTHER PROCEEDING
No order of any Governmental Authority shall be in effect that restrains or
prohibits the Merger; and no written advice shall have been received by TKOG,
Merger Sub or the Company or by any of their respective counsel from any
Governmental Authority, and remain in effect, stating that an action or
proceeding will, if the Merger is consummated or sought to be consummated, be
filed seeking to invalidate or restrain the Merger.
9.5 OPINIONS OF COUNSEL
TKOG and Merger Sub shall have delivered to the Company an opinion of
Kramer Levin Naftalis & Frankel LLP, dated the Closing Date and addressed to the
Company, as to the matters set forth on Exhibit C-1 hereto and an opinion of
Taft, Stettinius & Hollister LLP, dated the Closing Date and addressed to the
Company, as to the matters set forth on Exhibit C-2 hereto.
9.6 SHAREHOLDER APPROVAL
This Agreement shall have been duly approved at or prior to the Effective
Time of the Merger by the requisite vote of the Company Shareholders in
accordance with the TBCA.
9.7 EFFECTIVENESS OF THE REGISTRATION STATEMENT
The Registration Statement shall have been declared effective by the
Commission under the Securities Act. No stop order suspending the effectiveness
of the Registration Statement shall have been issued by the Commission and no
proceedings for that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus shall have been initiated or threatened by the Commission.
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9.8 LACK OF ADVERSE CHANGE
Since September 30, 1998, there shall not have occurred any incident or
event which, individually or in the aggregate, has had or is reasonably likely
to result in a Material Adverse Effect on TKOG and its Subsidiaries, taken as a
whole.
9.9 EMPLOYMENT AGREEMENTS
The employment agreements referred to in Section 6.12 shall have been
executed by the Company.
10 TERMINATION OF AGREEMENT
This Agreement may be terminated:
10.1 MUTUAL CONSENT
At any time prior to the Effective Time, by mutual consent of TKOG, Merger
Sub and the Company.
10.2 TRANSACTION DATE
By TKOG, Merger Sub or the Company if the Effective Time shall not have
occurred by June 30, 1999, unless such failure shall be due to a material breach
of any representation or warranty, or the nonfulfillment in a material respect,
and failure to cure such nonfulfillment, of any covenant or agreement contained
herein on the part of the party or parties seeking to terminate.
10.3 BREACH
(a) By TKOG or Merger Sub if there has been a material misrepresentation by
the Company, or a material breach on the part of the Company of any of its
warranties or covenants set forth herein, or a material failure on the part of
the Company to comply with any of its other obligations hereunder; or
(b) by the Company if there has been a material misrepresentation by TKOG
or Merger Sub, or a material breach on the part of TKOG or Merger Sub of any of
their warranties or covenants set forth herein, or a material failure on the
part of TKOG or Merger Sub to comply with any of their other obligations
hereunder.
No such termination shall relieve any party of the consequences of any such
misrepresentation, breach or failure.
11. INDEMNIFICATION; REMEDIES
11.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE
(a) All representations, warranties, covenants, and obligations in this
Agreement, the Disclosure Schedule and any other certificate or document
delivered pursuant to this Agreement shall survive the Closing until the first
anniversary of the Closing Date and shall thereafter terminate; provided,
however, that a representation, warranty, covenant or obligation with respect to
which a claim has been made but not resolved by such date shall survive, only
with respect to such claim, until such claim is resolved and paid in full. The
right to indemnification, payment of Damages (as defined below) or other remedy
based on such representations, warranties, covenants and obligations will not be
affected by any investigation conducted with respect to, or any knowledge
acquired (or capable of being acquired) at any time, whether before or after the
execution and delivery of this Agreement or the Closing Date, with
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respect to the accuracy or inaccuracy of or compliance with, any such
representation, warranty, covenant or obligation.
(b) Neither party will have the right to indemnification, payment of
Damages (as defined below) or other remedy based on any breach of
representation, warranty, covenant or obligation from the other party to the
extent that the party seeking indemnification, Damages or any other remedy had
actual knowledge prior to the Closing Date of such breach; provided that if any
information relating to any alleged breach was disclosed in the Disclosure
Schedule, such disclosure is complete in all material respects; provided further
that for purposes of this Section 11.1(b), the actual knowledge of TKOG is
limited to the actual knowledge of Jules Kroll, Abram Gordon, Nicholas
Carpinello, Nazzareno Paciotti and Steven Sharpe.
11.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SHAREHOLDERS
(a) From and to the extent of the Escrow Fund only, and pursuant to the
terms of the Escrow Agreement, Merger Sub, TKOG, the Company and their
respective representatives (including all officers and directors), stockholders,
controlling persons and Affiliates (collectively, the "Indemnified Persons")
shall be indemnified and held harmless from and against any and all loss,
liability, claim, damage, expense (including costs of investigation and defense
and reasonable attorneys' and experts' fees) or diminution of value, whether or
not involving a third-party claim (collectively, "Damages"), arising, directly
or indirectly, from or in connection with:
(i) any breach of any representation or warranty made by the Company
in this Agreement, the Disclosure Schedule or any certificate delivered by
the Company pursuant to this Agreement; and
(ii) any breach by the Company of any covenant or obligation of the
Company in this Agreement; and
(iii) any claim by any Person for brokerage or finder's fees or
commission or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with the Company in connection
with the transactions contemplated hereby.
(b) Notwithstanding any provision of this Agreement to the contrary, the
Indemnified Persons shall not be entitled to recover Damages for any individual
breach or series of related breaches of any representation, warranty, covenant
or obligation of the Company unless such Damages (net of attorneys' fees) in
respect of such breach or series of related breaches equal or exceed $25,000.
(c) Notwithstanding any provision of this Agreement to the contrary, all
claims for indemnification pursuant to this Section 11.2 shall be reduced by the
amount of any insurance proceeds received by the Indemnified Persons in
connection with the event(s) giving rise to such claims. If the Indemnified
Persons receive payment from the Escrow Fund, pursuant to the Escrow Agreement,
and the Indemnified Persons shall subsequently receive any insurance proceeds in
connection with the event giving rise to the claim for indemnification
hereunder, then the Indemnified Persons shall promptly pay back into the Escrow
Fund a number of TKOG Shares having an aggregate Market Value as of the date of
such repayment equal to the lesser of the sum of such insurance proceeds
received and the amount so paid from the Escrow Fund, in each case, net of
Taxes, if any, payable with respect to such amounts.
(d) Notwithstanding any provision of this Agreement to the contrary, any
Damages suffered by the Indemnified Persons in connection with a breach of any
representation or warranty relating to Profiles Plus, Inc. for which the
Indemnified Persons are entitled to indemnification pursuant to this Section
11.2 shall, to the extent available, first be satisfied by the escrow fund
established in connection with the Agreement and Plan of Merger, dated as of
March 23, 1998, among the Company, Background America of Florida, Inc., Gerry
Belko, Gerard R. Schwalje, Paula Schwalje, David Cuffe and Profiles Plus, Inc.
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11.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY TKOG AND MERGER SUB
TKOG and Merger Sub will indemnify and hold harmless the Company and its
representatives (including all officers and directors), shareholders,
controlling persons and affiliates ("Company Parties"), and will pay to the
Company Parties the amount of any Damages arising, directly or indirectly, from
or in connection with (a) any breach of any representation or warranty made by
TKOG or Merger Sub in this Agreement or in any certificate delivered by TKOG or
Merger Sub pursuant to this Agreement, (b) any breach by TKOG or Merger Sub of
any covenant or obligation of TKOG or Merger Sub in this Agreement or (c) any
claim by any Person for brokerage or finder's fees or commissions or similar
payments based upon any agreement or understanding alleged to have been made by
such Person with TKOG or Merger Sub in connection with the transactions
contemplated hereby.
11.4 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS
(a) An indemnified party shall promptly give notice to each indemnifying
party after obtaining knowledge of any matter as to which recovery may be sought
against such indemnifying party because of the indemnity set forth above, and,
if such indemnity shall arise from the claim of a third party, shall permit such
indemnifying party to assume the defense of any such claim or any Proceeding
resulting from such claim; provided, however, that failure promptly to give any
such notice shall not affect the indemnification provided under this Section 11,
except to the extent such indemnifying party shall have been actually and
materially prejudiced as a result of such failure. Notwithstanding the
foregoing, an indemnifying party may not assume the defense of any such
third-party claim or Proceeding if the claim or Proceeding (i) is reasonably
likely to result in imprisonment of the indemnified party, (ii) is reasonably
likely to result in a criminal penalty or fine against the indemnified party the
consequences of which would be reasonably likely to have a Material Adverse
Effect on the indemnified party unrelated to the size of such penalty or fine or
(iii) is reasonably likely to result in an equitable remedy which would
materially impair the indemnified party's ability to exercise its rights under
this Agreement, or impair TKOG's right or ability to operate the Company or any
of its Subsidiaries. If an indemnifying party assumes the defense of such third
party claim or Proceeding, such indemnifying party shall agree prior thereto, in
writing, that it is liable under this Section 11 to indemnify the indemnified
party in accordance with the terms contained herein in respect of such claim or
Proceeding (provided that no such agreement as to liability shall contain any
admission of liability to any third party), shall conduct such defense
diligently, shall have full and complete control over the conduct of such claim
or Proceeding on behalf of the indemnified party and shall, in its sole
discretion, have the right to decide all matters of procedure, strategy,
substance and settlement relating to such claim or Proceeding; provided,
however, that any counsel chosen by such indemnifying party to conduct such
defense shall be reasonably satisfactory to the indemnified party. The
indemnified party may participate in such claim or Proceeding and retain
separate co-counsel at its sole cost and expense (except that the indemnifying
party shall be responsible for the fees and expenses of one separate co-counsel
for the indemnified party to the extent the indemnified party is advised by its
counsel that either (x) the counsel the indemnifying party has selected has a
conflict of interest or (y) there are legal defenses available to the
indemnified party that are different from or additional to those available to
the indemnifying party), and the indemnifying party will not without the written
consent of the indemnified party consent to the entry of any judgment or enter
into any settlement with respect to the matter which does not include a
provision whereby the plaintiff or the claimant in the matter releases the
indemnified party from all liability with respect thereto. Failure by an
indemnifying party to notify the indemnified party of its election to defend any
such claim or Proceeding by a third party within thirty (30) days after notice
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thereof shall have been given to such indemnifying party by the indemnified
party shall be deemed a waiver by such indemnifying party of its right to defend
such claim or Proceeding.
(b) If no indemnifying party is permitted or elects to assume the defense
of any such claim or Proceeding by a third party, the indemnified party shall
diligently defend against such claim or Proceeding in such manner as it may
reasonably deem appropriate and, in such event, the indemnifying party or
parties shall promptly reimburse the indemnified party for all reasonable
out-of-pocket costs and expenses, legal or otherwise, incurred by the
indemnified party and its affiliates in connection with the defense against such
claim or Proceeding, as such costs and expenses are incurred. Any counsel chosen
by such indemnified party to conduct such defense must be reasonably
satisfactory to the indemnifying party or parties, and only one counsel shall be
retained to represent all indemnified parties in a Proceeding (except that if
litigation is pending in more than one jurisdiction with respect to a
Proceeding, one such counsel may be retained in each jurisdiction in which such
litigation is pending).
(c) The indemnified party will cooperate in all reasonable respects with
any indemnifying party in the conduct of any claim or Proceeding as to which
such indemnifying party assumes the defense. For the cooperation of the
indemnified party pursuant to this Section 11.4, the indemnifying party or
parties shall promptly reimburse the indemnified party for all reasonable
out-of-pocket costs and expenses, legal or otherwise, incurred by the
indemnified party or its affiliates in connection therewith, as such costs and
expenses are incurred.
(d) In the event the indemnified party is any of the Indemnified Persons
(and not any of the Company Parties), then the Shareholder Representative shall
have the right to take over the defense of any such claim or Proceeding in
accordance with this Section 11.4 and all decisions made by the Shareholder
Representative in connection with such defense shall bind all indemnifying
parties. Notwithstanding anything in this Section 11.4 to the contrary, the
Shareholder Representative shall not assume the defense of any third party claim
or Proceeding if the claim or Proceeding is for an unspecified amount or is for
an amount in excess of the value of the Escrow Fund available at the time such
claim or Proceeding is brought. If the Shareholder Representative cannot assume
the defense of any claim or Proceeding pursuant to the preceding sentence, the
Shareholder Representative may nevertheless participate in (but not control) the
defense of such claim or Proceeding at its sole cost and expense. If the
Shareholder Representative has assumed the defense of a third party claim or
Proceeding as the indemnifying party in accordance with Section 11.4, the
Shareholder Representative may not settle such claim or Proceeding for an amount
in excess of the value of the Escrow Fund without the prior written consent of
TKOG.
12 GENERAL PROVISIONS
12.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, including all fees and
expenses of agents, representatives, counsel and accountants. The Company's
out-of-pocket expenses with respect to the foregoing, including attorney's fees,
shall not exceed the amount set forth in Section 12.1 of the Disclosure
Schedule. Any out-of-pocket expenses incurred by the Company in excess of such
amount shall be borne by the Shareholders. By voting for or failing to dissent
from the approval of this Agreement, each Company Shareholder automatically and
without any further act or deed irrevocably agrees that such Company Shareholder
accepts and shall be bound by this Section 12.1. By exercising Options pursuant
to Section 2.11(b), each holder of such Options automatically and without
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any further act or deed irrevocably agrees that such holder accepts and shall be
bound by this Section 12.1.
12.2 PUBLIC ANNOUNCEMENTS
Unless required by law or by the NASDAQ National Market, any public
announcement or similar publicity with respect to this Agreement, the Closing or
the transactions contemplated hereby will be issued, if at all, at such time and
in such manner as TKOG determines with the concurrence of the Company, which
concurrence shall not be unreasonably withheld or delayed by the Company. Unless
disclosure is consented to by TKOG in advance or required by law, the Company
shall keep this Agreement strictly confidential and may not make any disclosure
of this Agreement to any Person and shall use its best efforts to ensure that
the Company Shareholders do the same. The Company and TKOG will consult with
each other concerning the means by which the Company"s employees, customers and
suppliers and others having dealings with the Company will be informed of this
Agreement, the Closing and the transactions contemplated hereby, and
representatives of TKOG may at its option be present for any such communication.
12.3 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by fax (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
each case to the appropriate addresses or fax numbers set forth below (or to
such other address, person's attention or fax number as a party may designate by
notice to the other parties given in accordance with this Section 12.3):
(a) If to TKOG or Merger Sub:
The Kroll-O'Gara Company
9113 LeSaint Drive
Fairfield, OH 45014
Telecopier No.: (513) 874-1262
Telephone No.: (513) 881-5481
Attention: Abram S. Gordon, Esq.
With a copy to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022
Telecopier No.: (212) 715-8000
Telephone No.: (212) 715-9100
Attention: Peter S. Kolevzon, Esq.
(b) If to the Company:
Background America, Inc.
1900 Church Street, Suite 400
Nashville, TN 37203
Telecopier No.: (615) 321-9585
Telephone No.: (615) 320-9800
Attention: Michael Shmerling
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With a copy to:
Sherrard & Roe
424 Church Street, 20th Floor
SunTrust Center Building
Nashville, TN 37219
Telecopier No.: (615) 742-4539
Telephone No.: (615) 742-4200
Attention: Thomas Sherrard, Esq.
(c) If to the Shareholder Representative:
Russell R. French
c/o Noro-Mosely Partners III, L.P.
9 North Parkway Square
4200 Northside Parkway, N.W.
Atlanta, GA 30327
Telecopier No.: (404) 239-9280
Telephone No.: (404)
With a copy to:
King & Spalding
191 Peachtree Street, N.E.
Atlanta, GA 30303-1763
Telecopier No.: (404) 572-5100
Telephone No.: (404) 572-4600
Attention: Lynn Scott, Esq.
And a copy to:
Sherrard & Roe
424 Church Street, 20th Floor
SunTrust Center Building
Nashville, TN 37219
Telecopier No.: (615) 742-4539
Telephone No.: (615) 742-4200
Attention: Thomas Sherrard, Esq.
12.4 JURISDICTION; SERVICE OF PROCESS
Any Proceeding seeking to enforce any provision of, or based on any right
arising out of, this Agreement may be brought against any of the parties in the
courts of the State of Ohio, County of Butler or the United States District
Court for the Southern District of Ohio, Western Division, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such Proceeding and waives any objection to venue laid
therein. Service of process or any other papers in any such Proceeding may be
made by registered or certified mail, return receipt requested, pursuant to the
provisions of Section 12.3.
12.5 FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other
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party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to in this Agreement.
12.6 WAIVER
Neither the failure nor any delay by any party in exercising any right,
power or privilege under this Agreement or the documents referred to in this
Agreement will operate as a waiver of such right, power or privilege.
12.7 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter (including any correspondence among TKOG, Merger
Sub, the Company or any Company Shareholder) and constitutes (along with the
documents referred to in this Agreement) the entire agreement among the parties
with respect to its subject matter. This Agreement may not be amended except by
a written agreement executed by the party to be charged with the amendment.
12.8 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
No party may assign any of its rights under this Agreement without the
prior written consent of the other parties except that TKOG may assign any of
its rights, but not its obligations, under this Agreement to any direct wholly
owned Subsidiary of TKOG. Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon, and inure to the benefit of the
successors and permitted assigns of the parties and their respective heirs and
personal representatives. Nothing expressed or referred to in this Agreement
will be construed to give any Person other than the parties to this Agreement
and the Persons contemplated by Section 11 any legal or equitable right, remedy
or claim under or with respect to this Agreement or any provision of this
Agreement.
12.9 SEVERABILITY
If any provision of this Agreement or the application of any such provision
to any party or circumstances shall be determined by any court of competent
jurisdiction to be invalid or unenforceable to any extent, the remainder of this
Agreement, or the application of such provision to such person or circumstances
other than those to which it is so determined to be invalid or unenforceable,
shall not be affected thereby, and each provision hereof shall be enforced to
the fullest extent permitted by law. If the final judgment of a court of
competent jurisdiction declares that any item or provision hereof is invalid or
unenforceable, the parties hereto agree that the court making the determination
of invalidity or unenforceability shall have the power, and is hereby directed,
to reduce the scope, duration or area of the term or provision, to delete
specific words or phrases and to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified.
12.10 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. In this Agreement
(i) words denoting the singular include the plural and vice versa, (ii) "it" or
"its" or words denoting any gender include all genders, (iii) the word
"including" shall mean "including without limitation," whether or not expressed,
(iv) any reference to a statute shall mean the statute and any regulations
thereunder in force as of the date of this Agreement or the Closing Date, as
applicable, unless otherwise expressly provided, (v) any reference herein to a
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Section, Schedule or Exhibit refers to a Section of or a Schedule or Exhibit to
this Agreement, unless otherwise stated, and (vi) when calculating the period of
time within or following which any act is to be done or steps taken, the date
which is the reference day in calculating such period shall be excluded and if
the last day of such period is not a Business Day, then the period shall end on
the next day which is a Business Day. Each party acknowledges that he, she or it
has been advised and represented by counsel in the negotiation, execution and
delivery of this Agreement and accordingly agrees that if an ambiguity exists
with respect to any provision of this Agreement, such provision shall not be
construed against any party because such party or its representatives drafted
such provision.
12.11 GOVERNING LAW
This Agreement will be governed by the internal laws of the State of New
York without regard to principles of conflict of laws.
12.12 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
THE KROLL-O'GARA COMPANY
By------------------------------------
Name:
Title:
KROLL-O'GARA TENNESSEE, INC.
By------------------------------------
Name:
Title:
BACKGROUND AMERICA, INC.
By------------------------------------
Name:
Title:
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EXHIBIT A
ESCROW AGREEMENT
This ESCROW AGREEMENT dated as of , 1999 is by and among The
Kroll-O'Gara Company ("TKOG"), an Ohio corporation, Russell R. French, as the
representative (the "Shareholder Representative") of the shareholders (the
"Shareholders") of Background America, Inc. ("BAI"), a Tennessee corporation,
and Star Bank, N.A., as escrow agent (the "Escrow Agent").
PRELIMINARY STATEMENT
Pursuant to an Agreement and Plan of Merger dated as of January 21, 1999
(the "Merger Agreement") by and among TKOG, Kroll-O'Gara Tennessee, Inc. and
BAI, Merger Sub will be merged with and into BAI and BAI will become a wholly
owned subsidiary of TKOG. Capitalized terms used herein and not otherwise
defined have the meanings assigned to them in the Merger Agreement.
BAI and the Shareholders have agreed to indemnify TKOG as provided in the
Merger Agreement through the deposit of shares of TKOG Common Stock (the "Escrow
Shares") pursuant to Section 2.8 of the Merger Agreement. A list of all
Shareholders and their respective percentage interests in the Escrow Shares is
attached hereto as Schedule 1.
The Escrow Agent is not a party to any agreement between TKOG and BAI and
shall not be required to interpret the terms of any such agreement, it being
agreed that all of Escrow Agent's duties and obligations are stated in this
Agreement.
The parties hereto agree as follows:
1. Establishment of Escrow. Pursuant to Section 2.8 of the Merger
Agreement, TKOG has delivered to the Escrow Agent, and the Escrow Agent hereby
acknowledges receipt of, the Escrow Shares in the form of a single stock
certificate. The Escrow Shares shall be held in escrow in the name of the Escrow
Agent or its nominee, subject to the terms and conditions set forth herein. The
Escrow Shares and any and all shares of TKOG Common Stock or other securities
declared and paid as a dividend or other distribution on or with respect to the
Escrow Shares shall be and become part of the "Escrow Fund" to be held and
disposed of by the Escrow Agent pursuant to the terms and conditions of this
Agreement. Unless and until the Escrow Shares are returned to TKOG or delivered
to the Shareholders pursuant to the terms of this Agreement, the Shareholder
Representative shall vote the Escrow Shares.
2. Amounts Earned on Escrow Shares; Tax Matters. All amounts distributed
on the Escrow Shares as cash dividends shall be distributed pro rata to the
Shareholders. The parties agree that to the extent permitted by applicable law,
including Section 468B(g) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Shareholders will include all amounts earned on the Escrow Fund in
their gross income for federal, state and local income tax (collectively,
"income tax") purposes and pay any income tax resulting therefrom. The Escrow
Agent has been previously furnished with all information necessary to enable it
to comply with the reporting and backup withholding requirements of the Code and
all reporting and withholding information.
3. Claims Against Escrow Shares.
(a) At any time or times prior to the first anniversary of the Effective
Time (as such term is defined in the Merger Agreement), TKOG may make claims
against the Escrow Fund for amounts due for indemnification under Section 11 of
the Merger Agreement. TKOG shall notify the Shareholder
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Representative and the Escrow Agent in writing of each such claim, stating that
TKOG has paid or incurred or anticipates that it may be required to pay or may
incur Damages (as such term is defined in the Merger Agreement) in the amount
stated in such notice or has negotiated a proposed settlement in connection with
potential Damages, and specifying in reasonable detail (to the extent then
ascertainable) individual items of Damages included in the amount so stated, the
date each such item was paid or incurred, or the material terms of a settlement
or the basis for such anticipated liability, and the nature of the claim to
which such item is related. If applicable, each such notice shall state that the
Damages paid or incurred or anticipated to be incurred or paid by the Company
exceed, on a cumulative basis with all prior Damages paid or incurred or
anticipated to be paid or incurred, the applicable threshold amount, if any, set
forth in Section 11.2 of the Merger Agreement. Each such notice delivered to the
Escrow Agent by TKOG shall contain a representation from TKOG to the effect that
TKOG has delivered a copy of such notice to the Shareholder Representative prior
to or simultaneously with its delivery to the Escrow Agent. The Escrow Agent
shall have no duty to ascertain whether the Shareholder Representative received
the notice. The Escrow Agent shall advise TKOG and the Shareholder
Representative of the date on which it received notice from TKOG of such claim,
which date shall be conclusively deemed correct. In the event that the amount
subject to the claim is unliquidated, TKOG shall make a good faith estimate as
to the amount of the claim; such claim and such amount of the claim are subject
to Section 4 hereof. If the amount of such unliquidated claim is paid pursuant
to Section 3(e) hereof and if Damages actually incurred in connection with any
such unliquidated claim are less than the amount paid to TKOG from the Escrow
Fund, TKOG will pay back into the Escrow Fund a number of shares of TKOG Common
Stock (the "Refund Shares") having an aggregate Escrow Share Value as of the
date such amount was first paid to TKOG equal to the amount by which (i) the
Escrow Share Value of the Escrow Shares paid to TKOG from the Escrow Fund on the
date such amount was first paid to TKOG exceeds (ii) the Damages actually
incurred; provided that if the Escrow Agreement has terminated, TKOG shall
distribute the Refund Shares to the Shareholders in proportion to the
percentages set forth on Schedule I. If the amount of such unliquidated claim is
paid pursuant to Section 3(e) hereof and if Damages actually incurred in
connection with any such unliquidated claim are greater than the amount paid to
TKOG from the Escrow Fund, TKOG shall so notify the Shareholder Representative
and the Escrow Agent in writing and pursuant to Section 3(e) hereof, the Escrow
Agent shall pay to TKOG a number of shares of TKOG Common Stock having an
aggregate Escrow Share Value as of the date such amount was first paid to TKOG
equal to the amount by which (i) the Damages actually incurred exceeds (ii) the
Escrow Share Value of the Escrow Shares paid to TKOG from the Escrow Fund on the
date such amount was first paid to TKOG.
(b) The Shareholder Representative may dispute such claim, in which case
the Shareholder Representative shall give written notice thereof to TKOG and to
the Escrow Agent within thirty (30) days after the date on which the Escrow
Agent received TKOG's notice (the "Response Period") (if the Escrow Agent
receives the Shareholder Representative's notice within the aforesaid time
period, the Escrow Agent may conclusively presume that the notice was received
by TKOG within the aforesaid time period).
(c) If the Shareholder Representative gives a timely written notice of
dispute pursuant to Section 3(b) hereof, the Escrow Agent shall continue to hold
the Escrow Shares in accordance with the terms of this Agreement. If the
Shareholder Representative does not give timely written notice disputing such
claim, such claim shall be deemed to have been acknowledged to be payable out of
the Escrow Fund in the full amount thereof as set forth in the claim and the
Escrow Agent shall promptly pay such claim from the Escrow Fund to TKOG after
expiration of the Response Period. Such claim shall be paid in Escrow Shares
having a value equal to the amount of such claim (based upon the Escrow Share
Value (as defined below)).
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(e) The Escrow Agent shall effect any payment or delivery of Escrow Shares
to TKOG by surrendering the certificate for such Escrow Shares to TKOG's
transfer agent for cancellation and transfer upon receipt by the Escrow Agent of
a copy of a letter from TKOG to TKOG's transfer agent, instructing such transfer
agent to promptly issue a new certificate to the Escrow Agent for the remaining
Escrow Shares after giving effect to such payment or delivery. If the amount of
the claim exceeds the aggregate value of the Escrow Fund, the Escrow Agent shall
have no liability or responsibility for any deficiency. The value per share of
the Escrow Shares for purposes of this Agreement shall be the Market Value
(collectively, the "Escrow Share Value"); provided however, that the Escrow
Share Value will be appropriately increased or decreased, as the case may be, in
the event of any combination or split-up (by way of stock dividend or otherwise)
of TKOG Common Stock. For purposes of this Agreement, "Market Value" shall mean
the average of the last sales price on the Nasdaq National Market of TKOG Common
Stock for the five consecutive trading days ending on the trading day that is
four days immediately prior to the Closing Date. In determining the number of
Escrow Shares required to pay a claim, the Escrow Agent may make such
determination in good faith or it may rely on the written instructions of TKOG;
provided, that in each case such determination shall be based upon the Escrow
Share Value. All payments made by the Escrow Agent pursuant to such claim shall
be applied to the Shareholders in accordance with their respective percentages
set forth on Schedule I hereto. The Escrow Agent shall have no liability or
responsibility for the performance of any calculations pursuant to this Section
3, including any determination with respect to the number of Escrow Shares
required to pay a claim pursuant to this Section 3. All claims paid out of the
Escrow Shares with respect to each Shareholder shall be rounded down to the
nearest whole share. Under no circumstances shall the Shareholders or the
Shareholder Representative have any right to substitute other property for the
Escrow Shares or to change the per share value stated herein.
4. Disputed Claims.
(a) If the Shareholder Representative shall dispute an indemnification
claim of TKOG as above provided and subject to Section 3 hereof, the Escrow
Agent shall set aside a number of Escrow Shares having an aggregate Escrow Share
Value equal to the amount of the claim as set forth in the notice of the claim
(the "Set Aside Amount"). The Escrow Agent shall adjust each Set Aside Amount in
the event that (i) TKOG makes another claim against the Escrow Fund pursuant to
Section 3 and an additional Set Aside Amount is established, (ii) the Escrow
Agent pays out any claim for which any Set Aside Amount was set aside or (iii)
the Expiration Date occurs, so that any Set Aside Amount, as adjusted, shall at
any such time have an aggregate Escrow Share Value equal to the amount of the
claim as set forth in the notice of the claim; provided that for purposes of the
payment of claims, the value of each share comprising any Set Aside Amount shall
equal the Market Value on the date of such payment. In the event TKOG notifies
the Escrow Agent in writing that it has made or anticipates that it will incur
out-of-pocket expenditures or legal expenses in connection with any such
disputed claim with respect to which it is entitled to be indemnified under the
Merger Agreement, a number of the Escrow Shares having an aggregate Escrow Share
Value equal to such incurred or anticipated expenditures shall also be set aside
and added to and become a part of the Set Aside Amount, which aggregate Set
Aside Amount shall be set forth in a written notice to the Escrow Agent executed
by TKOG; provided, that in the event that it shall be agreed (as evidenced by a
written notice executed by TKOG and the Shareholder Representative) or
determined through a proceeding described in Section 4(b) hereof that TKOG is
not entitled to indemnification with respect to such claim, the Escrow Agent
shall no longer set aside such number of Escrow Shares but shall nevertheless
continue to hold the same, subject to the terms and conditions otherwise herein
contained.
(b) If the Escrow Agent has not received written notice executed by TKOG
and the Shareholder Representative within thirty (30) days after the Shareholder
Representative sends notice of such dispute
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to the effect that the disputed indemnification claim has been resolved, the
Escrow Agent shall continue to hold the Set Aside Amount until directed to
dispose of it pursuant to (i) a final non-appealable order of a court of
competent jurisdiction or (ii) instructions or directions furnished in writing
signed by both the Shareholder Representative and TKOG. Upon receipt of either
such direction, the Escrow Agent shall promptly comply therewith. In no event
shall the Escrow Agent be responsible for any fees or expenses of any party to
any litigation or proceeding.
5. Termination. This Agreement shall terminate at the first anniversary
of the Effective Time (the date of such anniversary is hereinafter referred to
as the "Expiration Date"), provided that there is no outstanding litigation
between TKOG and the Shareholder Representative with respect to the settlement
of any Set Aside Amount; otherwise this Agreement shall continue in effect with
respect to each Set Aside Amount that is subject to litigation between TKOG and
the Shareholder Representative until the resolution of such litigation. TKOG
shall provide the Escrow Agent with reasonable advance notice of the Expiration
Date and shall confirm the occurrence of such as soon as practicable thereafter.
On the Expiration Date or as soon thereafter as is practicable, the Escrow Agent
shall distribute the Escrow Fund (including any Set Aside Amount which is not
the subject of such litigation), less the number of Escrow Shares subject to
such litigation, to the Shareholders, pro rata in accordance with their
respective percentages set forth on Schedule I hereto, or to TKOG pursuant to
Section 3(e). At such time thereafter as all litigation with respect to the
settlement of any Set Aside Amount has been resolved and the Escrow Agent has
received a written notice executed by TKOG and the Shareholder Representative to
that effect (or a copy of a court order pursuant to Section 4(b) hereof to that
effect) and any Escrow Shares to be distributed to TKOG in connection therewith
have been so distributed, the Escrow Agent shall distribute the remaining Escrow
Fund, if any, to the Shareholders pro rata in accordance with their respective
percentages set forth on Schedule I hereto and this Agreement shall terminate.
The Escrow Agent shall effect such distributions of Escrow Shares as it is
required to make to the Shareholders under this Agreement by surrendering such
Escrow Shares to TKOG's stock transfer agent for cancellation and transfer upon
receipt by the Escrow Agent of a copy of a letter from TKOG to TKOG's transfer
agent (which letter TKOG shall promptly issue to the transfer agent),
instructing such transfer agent to issue certificates for such Escrow Shares pro
rata to the Shareholders.
6. The Escrow Agent.
(a) Notwithstanding anything herein to the contrary, the Escrow Agent shall
retain and promptly dispose of all or any part of the Escrow Fund in accordance
with this Agreement. The reasonable fees and expenses of the Escrow Agent in
connection with its execution and performance of this Agreement as set forth on
Schedule 2 hereto shall be borne by TKOG and shall be due and payable upon the
signing of this Agreement and on the first day of each subsequent year during
which this Agreement remains in effect. The Escrow Agent shall not be liable for
any act or omission to act under this Agreement, including any and all claims
made against the Escrow Agent as a result of its holding the Escrow Fund in its
own name, except for its own gross negligence or willful misconduct. TKOG agrees
to indemnify and hold harmless the Escrow Agent from and against any and all
claims, losses, costs, liabilities, damages, suits, demands, judgments or
expenses (including but not limited to reasonable attorneys' fees) (the "Escrow
Damages") claimed against or incurred by the Escrow Agent arising out of or
related, directly or indirectly, to this Agreement, except for Escrow Damages
arising out of acts of gross negligence or willful misconduct; provided,
however, that the Shareholder Representative agrees to promptly reimburse TKOG
for any Escrow Damages arising solely out of any improper action or omission to
act on the part of (i) any Shareholder, using a portion of the Escrow Fund in an
amount up to such Shareholder's pro rata share of the Escrow Fund, or (ii) the
Shareholder Representative, in an amount up to the Escrow Fund. The Escrow Agent
may decline to act and shall not be liable for failure to act if in doubt as to
its duties under this Agreement. The Escrow Agent may act upon any instrument
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or signature believed by it to be genuine and may assume that any person
purporting to give any notice or instruction hereunder, reasonably believed by
it to be authorized, has been duly authorized to do so. The Escrow Agent's
duties shall be determined only with reference to this Agreement and applicable
laws, and the Escrow Agent is not charged with knowledge of or any duties or
responsibilities in connection with any other document or agreement, including,
but not limited to, the Merger Agreement. In the event that the Escrow Agent
shall be uncertain as to its duties or rights hereunder, the Escrow Agent shall
be entitled to refrain from taking any action other than to keep safely the
Escrow Fund until it shall (i) receive written instructions signed by TKOG and
the Shareholder Representative; or (ii) is directed otherwise by a court of
competent jurisdiction.
(b) The Escrow Agent may act in reliance upon any instructions signed on
signature believed by it to be genuine, and may assume that any person who has
been designated by TKOG or the Shareholder Representative to give any written
instructions, notice or receipt, or make any statements in connection with the
provisions hereof, has been duly authorized to do so. The Escrow Agent shall
have no duty to make inquiry as to the genuineness, accuracy or validity of any
statements or instructions or any signatures on statements or instructions. The
name and true signatures of each individual authorized to act on behalf of TKOG
and the Shareholder Representative are stated in Exhibit A which is attached
hereto and made a part hereof.
(c) The Escrow Agent shall have the right at any time to resign hereunder
by giving written notice of its resignation to TKOG and the Shareholder
Representative, at the addresses set forth herein or at such other address as
such parties shall provide, at least thirty (30) days prior to the date
specified for such resignation to take effect. In such event TKOG and the
Shareholder Representative shall appoint a successor escrow agent within said
thirty (30) days; if a successor escrow agent is not designated within such
period, the Escrow Agent may appoint a successor escrow agent; provided,
however, that such successor escrow agent shall be acceptable to TKOG and the
Shareholder Representative and shall agree to abide by the terms and conditions
of this Agreement. Upon the effective date of such resignation, the Escrow Fund
shall be delivered by it to such successor escrow agent. In the event the Escrow
Agent does not appoint a successor escrow agent within thirty (30) days, the
Escrow Fund shall be delivered to and deposited with a court of competent
jurisdiction to act as successor escrow agent. Upon the delivery of the Escrow
Fund pursuant to this Section 6(c) to a successor escrow agent, the Escrow Agent
shall be relieved of all liability hereunder except those arising from its
negligence or willful misconduct.
(d) In the event that the Escrow Agent should at any time be confronted
with inconsistent or conflicting claims or demands by the parties hereto, the
Escrow Agent shall have the right to interplead said parties in any court of
competent jurisdiction and request that such court determine the respective
rights of such parties with respect to this Agreement and, upon doing so, the
Escrow Agent shall be released from any obligations or liability to either party
as a consequence of any such claims or demands.
(e) The Escrow Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder, either directly or by or through
its agents or attorneys. The Escrow Agent shall not be responsible for and shall
not be under a duty to examine, inquire into or pass upon the validity, binding
effect, execution or sufficiency of this Agreement or of any amendment or
supplement hereto.
7. Shareholder Representative.
(a) In the event the Shareholder Representative shall die or resign or
otherwise terminate his status as such, his successor shall be any Shareholder
appointed by the Shareholder Representative or, in the case of the death of the
Shareholder Representative or where the Shareholder Representative fails to
appoint a successor after a vacancy has been created, elected by the vote or
written consent of a majority in interest of the Shareholders. If the
Shareholders fail for any reason to elect a new
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Shareholder Representative and during any period in which a vacancy exists,
Michael D. Shmerling shall serve as the Shareholder Representative until a new
Shareholder Representative is elected. All decisions of the Shareholder
Representative shall be binding upon the Shareholders. The Shareholder
Representative shall keep the Shareholders reasonably informed of his or her
decisions of a material nature.
(b) The Shareholder Representative is authorized to take any action deemed
by him or her appropriate or necessary to carry out the provisions of, and to
determine the rights of the Shareholders under, this Agreement and is entitled
to rely on the advice of counsel with respect to the decision to take any action
or omit to take any action hereunder. The Shareholder Representative shall serve
as the agent of the Shareholders for all purposes related to this Agreement,
including without limitation service of process upon the Shareholders. By his or
her execution of this Agreement, the Shareholder Representative accepts and
agrees to diligently discharge the duties and responsibilities of the
Shareholder Representative set forth in this Agreement. The authorization and
designation of the Shareholder Representative under this Section 7(b) shall be
binding upon the successors and assigns of each of the Shareholders. TKOG and
the Escrow Agent shall be entitled to rely upon such authorization and
designation and shall be fully protected in dealing with the Shareholder
Representative, and shall have no duty to inquire into the authority of any
person reasonably believed by any of them to be the Shareholder Representative.
(c) The Shareholder Representative shall not be entitled to any
compensation for services hereunder.
(d) In performing the functions specified in this Agreement, the
Shareholder Representative shall not be subject to liability to the Shareholders
for any act or omission to act under this Agreement in the absence of fraud or
willful misconduct on the part of the Shareholder Representative.
(e) Each of the Shareholders by approval of or absence of dissent from the
Merger Agreement (i) appoints the Shareholder Representative (and any successor
appointed in accordance with this Section 7) as agent and attorney-in-fact, to
serve as the Shareholder Representative under this Agreement and take all
actions pursuant to this Agreement and (ii) agrees to indemnify the Shareholder
Representative for all costs and expenses incurred by the Shareholder
Representative in fulfilling his obligations under this Agreement. All decisions
of the Shareholder Representative under this Agreement shall be binding upon the
Shareholders, and notices to or from the Shareholder Representative shall
constitute notice to or from each of the Shareholders under this Agreement.
8. Governing Law; Successors and Assigns; Venue; Jurisdiction. This
Agreement is governed by the laws of Ohio without regard to its conflict of law
provisions, and shall inure to the benefit of and be binding upon the
successors, assigns, heirs and personal representatives of the parties hereto.
This Agreement shall be enforceable in any court of competent jurisdiction. In
furtherance of and not in limitation of the foregoing, each of the parties
hereto (i) agrees and consents to the personal jurisdiction and venue of the
state and Federal courts sitting in the county of Butler and State of Ohio in
any action or proceeding arising out of or connected in any way with this
Agreement, (ii) irrevocably waives, to the fullest extent permitted by law, any
claim that any such proceeding brought in such a court has been brought in an
inconvenient forum, and (iii) agrees that service of process in any such action
or proceeding will be sufficient if sent by certified mail, return receipt
requested, to the address set forth in Section 10 hereof, and that such service
shall constitute "personal service," and further agrees to the invocation of
said jurisdiction by service of process in any other manner authorized by law.
9. Counterparts. This Agreement may be executed in one or more
counterparts, all of which documents shall be considered one and the same
document.
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10. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when so delivered in
person, by overnight courier, by facsimile transmission (with receipt confirmed
by telephone or by automatic transmission report) or two business days after
being sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:
TO TKOG:
The Kroll-O'Gara Company
9113 LeSaint Drive
Fairfield, Ohio 45014
Attention: General Counsel
Fax: (513) 874-1262
In each case with a copy to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Attention: Peter S. Kolevzon, Esq.
Fax: (212) 715-8000
TO THE SHAREHOLDER REPRESENTATIVE:
Russell R. French
c/o Noro-Mosely Partners III, L.P.
9 North Parkway Square
4200 Northside Parkway, N.W.
Atlanta, Georgia 30327
Fax: (404) 239-9280
In each case with a copy to:
King & Spalding
191 Peachtree Street
Atlanta, GA 30303-1763
Attention: Lynn Scott, Esq.
Fax: (404) 572-5100
and to:
Sherrard & Roe
424 Church Street, 20th Floor
SunTrust Center Building
Nashville, TN 37219
Attention: Thomas Sherrard, Esq.
Fax: (615) 742-4539
TO ESCROW AGENT:
Star Bank, N.A.
452 Walnut Street
Cincinnati, Ohio 45202
Attention: Bob Jones
Fax: (513) 632-5511
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Addresses, facsimile numbers and the person to whose attention notices are to be
sent may be changed by written notice given pursuant to this Section 10. Any
notice given hereunder may be given on behalf of any party by his counsel or
other authorized representative.
11. Business Days. In any case where the date for payment of any portion
of the Escrow Fund or notice or any other date hereunder shall be a Saturday,
Sunday or legal holiday or a day on which banking institutions in the City of
New York are authorized by law to close, then the date for such payment of the
Escrow Fund or notice or any other date may be made on the next succeeding
business day.
12. Amendments, Etc. This Agreement may be amended, modified, superseded
or canceled (collectively, "modification"), and any of the terms or conditions
hereof may be waived, only by a written instrument executed by each party hereto
or, in the case of a waiver, by the party waiving compliance; provided, however,
that any modification or waiver which treats all of the Shareholders equally
with respect to their rights to the Escrow Fund shall only require approval of
the Shareholders on whose behalf a then majority in interest of the Escrow Fund
is held. The failure of any party at any time or times to require performance of
any provision hereof shall in no manner affect its right at a later time to
enforce the same. No waiver of any party of any condition, or of the breach of
any term contained in this Agreement, whether by conduct or otherwise, in any
one or more instances shall be deemed to be or construed as a further or
continuing waiver of any such condition or breach or a waiver of any other
condition or of the breach of any other term of this Agreement. No party may
assign any rights, duties or obligations hereunder unless all other parties have
given their prior written consent.
13. Headings. The headings of Sections in this Agreement are provided for
convenience only and will not affect the construction or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
under seal as of the date first stated above.
THE KROLL-O'GARA COMPANY
By:__________________________________
Name:
Title:
SHAREHOLDER REPRESENTATIVE, in his
capacity as the Shareholder
Representative
By:__________________________________
Name: Russell R. French
STAR BANK, N.A., as Escrow Agent
By:
Name:
Title:
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<PAGE> 154
AMENDMENT TO AGREEMENT AND PLAN OF MERGER
AMENDMENT, dated as of April 20, 1999 (the "Amendment"), to the Agreement
and Plan of Merger (the "MERGER AGREEMENT"), dated as of January 21, 1999, among
The Kroll-O'Gara Company ("TKOG"), an Ohio corporation, Kroll-O'Gara Tennessee,
Inc. ("MERGER SUB"), a Tennessee corporation all of whose capital stock is owned
directly by TKOG and Background America, Inc. (the "COMPANY"), a Tennessee
corporation. Capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Merger Agreement.
WHEREAS, the parties desire to amend the Merger Agreement to eliminate the
Internal Escrow Amount and to eliminate the obligation of the Shareholders to
pay for the Company's out-of-pocket expenses in excess of the amount set forth
in Section 12.1 of the Disclosure Schedule;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Section 2.8(a) of the Merger Agreement is hereby amended by deleting
that Section 2.8(a) in its entirety and replacing it with the following:
"(a) Subject to the provisions of Section 2.9, and the proviso to this
Section 2.8(a), at or as soon as practicable after the Effective Time of
the Merger, TKOG shall issue and deliver, upon surrender by a Company
Shareholder of one or more certificates ("OLD CERTIFICATES") representing
Series A Preferred Stock or Company Common Stock for cancellation, to:
(i) a holder that surrenders Old Certificates representing Series A
Preferred Stock, one or more certificates ("NEW CERTIFICATES"),
registered in the name of such holder, for the number of shares of TKOG
Common Stock equal to the product of (x) the number of shares of TKOG
Common Stock determined pursuant to the provisions of Section 2.7(a)
(subject to appropriate adjustment for any stock splits or combinations
after the date hereof and on or prior to the Effective Time of the
Merger) and (y) the number of shares of Series A Preferred Stock
represented by such Old Certificates; and
(ii) a holder that surrenders Old Certificates representing Company
Common Stock, one or more New Certificates, registered in the name of
such holder, for the number of shares of TKOG Common Stock equal to the
product of (x) the number of shares of TKOG Common Stock determined
pursuant to the provisions of Section 2.7(b) (subject to appropriate
adjustment for any stock splits or combinations after the date hereof
and on or prior to the Effective Time of the Merger) and (y) the number
of shares of Company Common Stock represented by such Old Certificates;
provided, however, that, in lieu of delivering to such holders New
Certificates for the full number of shares of TKOG Common Stock provided
for in Sections 2.8(a)(i) and (ii), TKOG shall deliver to (A) each such
holder one or more New Certificates, registered in the name of such holder,
for a number of shares of TKOG Common Stock equal to the total number of
shares of TKOG Common Stock otherwise to be delivered pursuant to this
Section 2.8 less the Applicable Amount determined pursuant to the following
provisions of this proviso to Section 2.8; and (B) Star Bank, N.A. as
escrow agent (the "ESCROW AGENT") for deposit into the escrow fund (the
"ESCROW FUND") provided for in the escrow agreement in the form attached
hereto as Exhibit A (the "ESCROW AGREEMENT"), to secure the indemnification
obligations under Section 11.2, one or more New Certificates, registered in
the name of the Escrow Agent, for such Applicable Amount, all of which
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will be held as part of the Escrow Fund and disposed of by the Escrow Agent
in accordance with the provisions of the Escrow Agreement:
The Applicable Amount for each holder of Series A Preferred Stock
and each holder of Company Common Stock is that number of whole shares
of TKOG Common Stock equal to 10% of the total number of shares of TKOG
Common Stock issuable to such holder pursuant to Section 2.8(a), with
any fraction of a share being rounded down to the nearest whole share.
The Escrow Agreement is incorporated herein by reference and shall be
considered part of this Agreement. By voting for or failing to dissent from
the approval of this Agreement, each Company Shareholder automatically and
without any further act or deed irrevocably agrees that such Company
Shareholder:
(A) accepts and shall be bound by the terms and provisions of the
Escrow Agreement;
(B) consents to the appointment of Russell R. French as Shareholder
Representative (the "SHAREHOLDER REPRESENTATIVE") for purposes of the
Escrow Agreement with all rights, powers and authority provided for in
the Escrow Agreement and that any action taken by the Shareholder
Representative pursuant to the Escrow Agreement shall be conclusive,
valid, binding and enforceable with respect to such Company Shareholder;
and
(C) agrees to indemnify the Shareholder Representative for any
costs and expenses (including reasonable attorney's fees) incurred by
the Shareholder Representative pursuant to Section 11.
By exercising Options pursuant to Section 2.11(b), each holder of such
Options automatically and without any further act or deed irrevocably
agrees that such holder:
(A) accepts and shall be bound by the terms and provisions of the
Escrow Agreement;
(B) consents to the appointment of Russell R. French as Shareholder
Representative for purposes of the Escrow Agreement with all rights,
powers and authority provided for in the Escrow Agreement and that any
action taken by the Shareholder Representative pursuant to the Escrow
Agreement shall be conclusive, valid, binding and enforceable with
respect to such holder; and
(C) agrees to indemnify the Shareholder Representative for any
costs and expenses (including reasonable attorney's fees) incurred by
the Shareholder Representative pursuant to Section 11."
2. Section 2.8(e) of the Merger Agreement is hereby amended by deleting
that Section 2.8(e) in its entirety.
3. Section 2.11(b) of the Merger Agreement is hereby amended by deleting
that Section 2.11(b) in its entirety and replacing it with the following:
"(b)At the Effective Time, each outstanding Option shall, subject
to the amended terms of such Option and the agreement of the holder
thereof, be deemed to have been exercised and each such Option holder
shall receive from TKOG, against surrender of the Option and the payment
of the exercise price therefor and in settlement and cancellation of
each such Option, an amount of consideration per Option equal to
0.2689628 of one fully paid and non-assessable share of TKOG Common
Stock; provided, however, that if such exercise price is paid in shares
of TKOG Common Stock, such shares shall be valued at the last sales
price on the NASDAQ National Market of TKOG Common Stock on the Closing
Date;
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provided, further, however, that, in lieu of delivering to such holder
New Certificates for the full number of shares of TKOG Common Stock
provided for in Section 2.11(b), TKOG shall deliver to (A) each such
holder one or more New Certificates, registered in the name of such
holder, for a number of shares of TKOG Common Stock equal to the total
number of shares of TKOG Common Stock otherwise to be delivered pursuant
to this Section 2.11(b) less the Applicable Amount determined pursuant
to the following provisions of this proviso to Section 2.11(b); and (B)
the Escrow Agent for deposit into the Escrow Fund provided for in the
Escrow Agreement, to secure the indemnification obligations under
Section 11.2, one or more New Certificates, registered in the name of
the Escrow Agent, for such Applicable Amount, all of which will be held
as part of the Escrow Fund and disposed of by the Escrow Agent in
accordance with the provisions of the Escrow Agreement:
The Applicable Amount for each holder of Options is that number
of whole shares of TKOG Common Stock equal to 10% of the total number
of shares of TKOG Common Stock issuable to such holder, after giving
effect to any "cashless" exercise, pursuant to Section 2.11(b), with
any fraction of a share being rounded down to the nearest whole
share."
4. Section 12.1 of the Merger Agreement is hereby amended by deleting that
Section 12.1 in its entirety and replacing it with the following:
"12.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each
party to this Agreement will bear its respective expenses incurred in
connection with the preparation, execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
hereby, including all fees and expenses of agents, representatives,
counsel and accountants. The Company shall use its reasonable best
efforts to ensure that its out-of-pocket expenses with respect to the
foregoing, including attorney's fees, shall not exceed the amount set
forth in Section 12.1 of the Disclosure Schedule."
5. Other than as expressly set forth herein, the Merger Agreement is hereby
ratified and confirmed and shall remain unchanged in all other respects.
6. This Amendment may be executed in one or more counterparts, each of
which shall be deemed an original copy of this Amendment, and all of which, when
taken together, will be deemed to constitute one and the same agreement.
7. This Agreement will be governed by the internal laws of the State of New
York without regard to principles of conflict of laws.
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IN WITNESS WHEREOF, the parties have executed and delivered this Amendment
as of the date first written above.
THE KROLL-O'GARA COMPANY
By------------------------------------
Name:
Title:
KROLL-O'GARA TENNESSEE, INC.
By------------------------------------
Name:
Title:
BACKGROUND AMERICA, INC.
By------------------------------------
Name:
Title:
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<PAGE> 158
APPENDIX B
CHAPTER 23
BUSINESS CORPORATIONS -- DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
48-23-101 DEFINITIONS. -- (1) "Beneficial shareholder" means the person
who is a beneficial owner of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under "48-23-102 and who exercises that right when and in the
manner required by sec.sec.48-23-201-48-23-209;
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date of
payment, at the average auction rate paid on United States treasury bills with a
maturity of six (6) months (or the closest maturity thereto) as of the auction
date for such treasury bills closest to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
48-23-102 RIGHT TO DISSENT. -- (a) A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a party:
(A) If shareholder approval is required or the merger by sec.48-21-103
or the charter and the shareholder is entitled to vote on the merger; or
(B) If the corporation is a subsidiary that is merged with its parent
under sec.48-21-104;
(2) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
(1) year after the date of sale;
(4) An amendment of the charter that materially and adversely affects
rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
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(C) Alters or abolishes a preemptive right of the holder of the shares
to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any matter,
or to cumulate votes, other than a limitation by dilution through issuance
of shares or other securities with similar voting rights; or
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share, if the fractional share is to be acquired for cash
under sec.48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote to the extent
the charter, bylaws, or a resolution of the board of directors provides that
voting or nonvoting shareholders are entitled to dissent and obtain payment for
their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this chapter may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder may
dissent as to any shares of a security which, as of the date of the effectuation
of the transaction which would otherwise give rise to dissenters' rights, is
listed on an exchange registered under sec.6 of the Securities Exchange Act of
1934, as amended, or is a "national market system security," as defined in rules
promulgated pursuant to the Securities Exchange Act of 1934, as amended.
48-23-103 DISSENT BY NOMINEES AND BENEFICIAL OWNERS. -- (a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one (1) person and notifies the corporation in writing
of the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares of
any one (1) or more classes held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of the same class of which
he is the beneficial shareholder or over which he has power to direct the
vote.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
48-23-201 NOTICE OF DISSENTERS' RIGHTS. -- (a) If proposed corporate
action creating dissenters' rights under sec.48-23-102 is submitted to a vote at
a shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under this chapter and be
accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under sec.48-23-102 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in sec.48-23-203.
(c) A corporation's failure to give notice pursuant to this section will
not invalidate the corporate action.
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48-23-202 NOTICE OF INTENT TO DEMAND PAYMENT. -- (a) If proposed corporate
action creating dissenters' rights under sec.48-23-102 is submitted to a vote at
a shareholders' meeting, a shareholder who wishes to assert dissenters' rights:
(1) Must deliver to the corporation, before the vote is taken, written
notice of his intent to demand payment for his shares if the proposed
action is effectuated; and
(2) Must not vote his shares in favor of the proposed action. No such
written notice of intent to demand payment is required of any shareholder
to whom the corporation failed to provide the notice required by
sec.48-23-201.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his shares under this chapter.
48-23-203 DISSENTERS' NOTICE. -- (a) If proposed corporate action creating
dissenters' rights under sec.48-23-102 is authorized at a shareholders' meeting,
the corporation shall deliver a written dissenters' notice to all shareholders
who satisfied the requirements of sec.48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days after
the corporate action was authorized by the shareholders or effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the principal terms
of the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership
of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than one (1) nor more than two (2)
months after the date the subsection (a) notice is delivered; and (5) Be
accompanied by a copy of this chapter if the corporation has not previously
sent a copy of this chapter to the shareholder pursuant to sec.48-23-201.
48-23-204 DUTY TO DEMAND PAYMENT. -- (a) A shareholder sent a dissenters'
notice described in sec.48-23-203 must demand payment, certify whether he
acquired beneficial ownership of the shares before the date required to be set
forth in the dissenters' notice pursuant to sec.48-23-203(b)(3), and deposit his
certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the effectuation of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn unless
the corporation with which it was filed, or the surviving corporation, consents
thereto.
48-23-205 SHARE RESTRICTIONS. -- (a) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is effectuated or the restrictions
released under sec.48-23-207.
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(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the effectuation of the proposed corporate
action.
48-23-206 PAYMENT. -- (a) Except as provided in sec.48-23-208, as soon as
the proposed corporate action is effectuated, or upon receipt of a payment
demand, whichever is later, the corporation shall pay each dissenter who
complied with sec.48-23-204 the amount the corporation estimates to be the fair
value of his shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under
sec.48-23-209; and
(5) A copy of this chapter if the corporation has not previously sent
a copy of this chapter to the shareholder pursuant to sec.48-23-201 or
sec.48-23-203.
48-23-207 FAILURE TO TAKE ACTION. -- (a) If the corporation does not
effectuate the proposed action that gave rise to the dissenters' rights within
two (2) months after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send a
new dissenters' notice under sec.48-23-203 and repeat the payment demand
procedure.
48-23-208 AFTER-ACQUIRED SHARES. -- (a) A corporation may elect to
withhold payment required by sec.48-23-206 from a dissenter unless he was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the principal terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of his
demand. The corporation shall send with its offer a statement of its estimate of
the fair value of the shares, an explanation of how the interest was calculated,
and a statement of the dissenter's right to demand payment under sec.48-23-209.
48-23-209 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER. -- (a) A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate (less any payment under sec.48-23-206), or reject the
corporation's offer under sec.48-23-208 and demand payment of the fair value of
his shares and interest due, if:
(1) The dissenter believes that the amount paid under sec.48-23-206 or
offered under sec.48-23-208 is less than the fair value of his shares or
that the interest due is incorrectly calculated;
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(2) The corporation fails to make payment under sec.48-23-206 within
two (2) months after the date set for demanding payment; or
(3) The corporation, having failed to effectuate the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within two (2) months after
the date set for demanding payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection (a)
within one (1) month after the corporation made or offered payment for his
shares.
PART 3. JUDICIAL APPRAISAL OF SHARES
48-23-301 COURT ACTION. -- (a) If a demand for payment under sec.48-23-209
remains unsettled, the corporation shall commence a proceeding within two (2)
months after receiving the payment demand and petition the court to determine
the fair value of the shares and accrued interest. If the corporation does not
commence the proceeding within the two-month period, it shall pay each dissenter
whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) For the amount, if any, by which the court finds the fair value of
his shares, plus accrued interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of his after-acquired
shares for which the corporation elected to withhold payment under
sec.48-23-208.
48-23-302 COURT COSTS AND COUNSEL FEES. -- (a) The court in an appraisal
proceeding commenced under sec.48-23-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under sec.48-23-209.
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(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of sec.sec.48-23-201-48-23-209; or
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefitted.
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