<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-21629
THE KROLL-O'GARA COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 31-1470817
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION) IDENTIFICATION NO.)
9113 LESAINT DRIVE
FAIRFIELD, OHIO 45014
(513) 874-2112
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE OF REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past
90 days. Yes X No
The number of shares of common stock outstanding on March 31, 1999 was
20,870,079
<PAGE> 2
INDEX
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) as of March 31, 1999
and December 31, 1998..............................................................1
Consolidated Statements of Operations (unaudited) for the Three Months
Ended March 31, 1999 and 1998......................................................3
Consolidated Statements of Cash Flows (unaudited) for the Three Months
Ended March 31, 1999 and 1998......................................................4
Notes to Consolidated Unaudited Financial Statements...................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................12
PART II
OTHER INFORMATION
Item 1. Legal Proceeding......................................................................20
Item 6. Exhibits and Reports on Form 8-K......................................................20
Signatures......................................................................................21
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 10,233 $ 12,717
Marketable securities 9,586 13,285
Trade accounts receivable, net of allowance for
doubtful accounts of $2,611 and $2,375 at March 31,
1999 and December 31, 1998, respectively 45,042 47,547
Unbilled revenues 11,213 7,766
Other receivables 7,480 2,721
Costs and estimated earnings in excess of
billings on uncompleted contracts 22,701 26,408
Inventories 18,468 18,607
Prepaid expenses and other 6,929 7,684
Net current assets of discontinued operations (Note 9) 8,484 6,837
--------- ---------
Total current assets 140,136 143,572
--------- ---------
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land 1,856 1,856
Buildings and improvements 8,272 8,272
Leasehold improvements 6,364 6,276
Furniture and fixtures 6,146 5,944
Machinery and equipment 19,660 18,304
Construction-in-progress 5,022 2,860
--------- ---------
47,320 43,512
Less: accumulated depreciation (20,729) (19,687)
--------- ---------
26,591 23,825
--------- ---------
DATABASES, net of accumulated amortization of $23,339
and $22,789 at March 31, 1999 and December 31,
1998, respectively 9,222 9,239
COSTS IN EXCESS OF ASSETS ACQUIRED, net of
accumulated amortization of $4,469 and $3,750 at
March 31, 1999 and December 31, 1998, respectively 57,493 57,943
OTHER ASSETS:
Other assets 3,286 4,868
Net non-current assets of discontinued operations (Note 9) 3,100 4,275
--------- ---------
73,101 76,325
--------- ---------
$ 239,828 $ 243,722
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
1
<PAGE> 4
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Revolving lines of credit $ -- $ --
Current portion of long-term debt 3,016 1,966
Trade Accounts payable 19,193 32,122
Related party payables 921 341
Billings in excess of costs and estimated
earnings on uncompleted contracts 182 183
Accrued liabilities 26,355 19,963
Income taxes currently payable 1,960 760
Deferred income taxes 895 895
Customer deposits 2,551 3,971
--------- ---------
Total current liabilities 55,073 60,201
OTHER LONG-TERM LIABILITIES 2,172 1,543
DEFERRED INCOME TAXES 1,625 1,625
LONG-TERM DEBT, net of current portion 38,117 39,257
--------- ---------
Total liabilities 96,987 102,626
SHAREHOLDERS' EQUITY (Note 1):
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,870,079, and 20,685,629 shares
issued and outstanding in 1999 and 1998, respectively 209 207
Additional paid-in-capital 151,396 149,993
Retained deficit (3,962) (7,120)
Deferred compensation (2,418) (1,114)
Accumulated other comprehensive loss (2,384) (871)
--------- ---------
Total shareholders' equity 142,841 141,095
--------- ---------
$ 239,828 $ 243,721
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE> 5
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
NET SALES $65,573 $52,369
COST OF SALES 40,867 34,057
------- -------
Gross Profit 24,706 18,312
OPERATING EXPENSES:
Selling and marketing 5,463 3,683
General and administrative 12,376 8,318
Merger expenses 208 --
Restructuring expense (Note 2) 511 --
------- -------
Operating income 6,148 6,311
OTHER INCOME (EXPENSE):
Interest expense (983) (1,212)
Other, net 286 (38)
------- -------
Income from continuing operations before provision
for income taxes and cumulative effect of change
in accounting principle 5,451 5,061
Provision for income taxes 2,084 1,983
-------- --------
Icome from continuing operations before cumulative
effect of change in accounting principle 3,367 3,078
Discontinued operations (Note 9):
Income (loss) from operations of discontinued
voice and data communications group, net (170) 107
-------- --------
Income before cumulative effect of change in
accounting principle 3,196 3,185
Cumulative effect of change in accounting principle, net
of applicable tax benefit of $408(Note 5) (778) --
-------- --------
Net income $ 2,418 $ 3,185
-------- --------
Other comprehensive income, net of tax:
Foreign currency translation adjustment, net of
$1,009 and $113 tax benefit (1,153) (169)
Reclassification adjustment for gain on securities
included in net income, net of $7 tax benefit -- (10)
-------- --------
Other comprehensive loss (1,513) (179)
-------- --------
Comprehensive income $ 905 $ 3,006
======== ========
Earnings per share (Note 4):
Basic $ 0.12 $ 0.21
======== ========
Diluted $ 0.11 $ 0.20
======== ========
Weighted average shares outstanding (Note 4)
Basic 20,839 15,063
======== ========
Diluted 21,588 15,654
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
THE KROLL O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 6)
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,418 $ 3,185
Adjustments to reconcile net income to net cash
used in continuing operations- Loss (income)
from discontinued operations 170 (107)
Depreciation and amortization 2,311 1,503
Bad debt expense 430 534
Gain from extinguishment of long term debt -- (38)
Loss on sale of marketable securities -- (7)
Noncash compensation expense 268 --
Loss on sale of property and equipment -- (9)
Change in assets and liabilities, net of effects of acquisitions and
dispositions -
Receivables -trade and unbilled (1,372) (1,636)
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,707 (2,777)
Income tax receivable -- 190
Inventories, prepaid expenses and other assets (2,013) 805
Accounts payable and income taxes currently payable (11,729) (1,902)
Billings in excess of costs and estimated earnings on
uncompleted contracts (1) 31
Amounts due to/from related parties 41 --
Customer deposits (1,420) (643)
Deferred income taxes payable -- (133)
Accrued liabilities 6,076 720
Long term liabilities 629 (9)
----------------------------
Net cash used in continuing operations (485) (293)
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (3,808) (570)
Additions to databases (533) (706)
Acquisitions, net of cash acquired -- 18
Sale of marketable securities 3,699 20
----------------------------
Net cash used in investing activities of
continuing operations (642) (1,238)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of credit -- 4,653
Proceeds from long-term debt --
Payments of long-term debt (88) (2,139)
Proceeds from connon stock issuance -- 168
Proceeds from exercise of stock options 887 116
Foreign currency translation (869) (77)
----------------------------
Net cash provided by (used in) financing activities of
continuing operations (70) 2,721
----------------------------
NET DECREASE IN CASH AND EQUIVALENTS (1,197) 1,190
Effects of foreign currency exchange rates on cash (397) (91)
Net cash used in discontinued operations (890) (863)
----------------------------
CASH AND EQUIVALENTS, beginning of period 12,717 9,445
----------------------------
CASH AND EQUIVALENTS, end of period $ 10,233 $ 9,681
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 7
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) GENERAL
The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively the "Company"), is a leading global provider of a
broad range of specialized products and services that are designed to provide
solutions to a variety of security needs. The Company's Security Products and
Services Group markets ballistic and blast protected vehicles and security
services. The Investigations and Intelligence Group offers business intelligence
and investigation services. The Information Security Group offers information
and computer security services, including network and system security review and
repair.
On May 5, 1998, the Company completed a public offering of 3,200,000
shares of its Common Stock at $20.50 per share (the "Offering"), resulting in
net proceeds to the Company of $60.8 million. A portion of the net proceeds was
used to repay $14.8 million of indebtedness of the Company, with the balance
available for potential acquisitions, working capital and other general
corporate purposes. In addition to the shares sold by the Company, certain
shareholders sold 1,860,000 shares of Common Stock in conjunction with the
Offering.
The consolidated financial statements include all majority-owned
subsidiaries. All material intercompany accounts and transactions are
eliminated. Investments in 20% to 50% owned entities are accounted for
using the equity method. Affiliated entities are not included in the
accompanying consolidated financial statements.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for fair presentation have been included. Operating results for
the three month period ended March 31, 1999, are not necessarily indicative
of the results that may be expected for the year ended December 31, 1999.
The accompanying financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K/A for the year ended December 31,
1998.
(2) RESTRUCTURING OF OPERATIONS
In the first quarter of 1999, the Company began implementation of a
plan to reduce costs and improve operating efficiencies and recorded a
non-recurring pre-tax restructuring charge of approximately $0.5 million. The
Company expects to complete the restructuring in the second quarter of 1999 with
an additional non-recurring 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 all of which
remain accrued at March 31, 1999.
(3) ACQUISITIONS AND MERGERS
The Company has completed numerous business combinations in the periods
presented. These transactions were accounted for as both purchase business
combinations and pooling of interests business combinations as follows:
On March 1, 1999, the Company acquired all of the capital stock of
Financial Research, Inc. (FRI) for approximately $3.3 million, consisting of
101,553 shares of common stock. FRI provides business valuation and economic
damage analysis services and will be included in the Company's Investigations
and Intelligence Group. The acquisition has been accounted for as a pooling of
interests. The pro forma restated results for 1998 would not be materially
different from the reported results.
In December 1998, a wholly owned subsidiary of the Company was merged
with and into Laboratory Specialists of America, Inc. (LSAI). Effective upon the
consummation of the merger, each then issued and outstanding share of LSAI
common stock was converted into .2102 shares of common stock of the Company or
1,209,053 shares of the
5
<PAGE> 8
Company's common stock in total. Outstanding stock options and stock warrants of
LSAI were converted at the same exchange factor into options to purchase 39,094
and 24,386 shares, respectively, of the Company's common stock. The financial
position and results of operations of LSAI are reported as part of the Company's
Investigations and Intelligence Group.
In December 1998, a wholly owned subsidiary of the Company was merged with
and into Schiff & Associates, Inc. (Schiff). Effective upon the consummation of
the merger, each then issued and outstanding share of Schiff common stock was
converted into approximately 131.41 shares of common stock of the Company or
169,521 shares of the Company's common stock in total. The financial position
and results of operations of Schiff are reported as part of the Company's
Investigations and Intelligence Group.
In December 1998, a wholly owned subsidiary of the Company was merged with
and into Securify Inc. (Securify). Effective upon the consummation of the
merger, all of the outstanding stock of Securify was converted to shares of the
Company's common stock at a rate of .110793 for Series A Preferred, .118273 for
Series B Preferred and .0955252 for Securify common stock. In total, the Company
issued 1,430,936 shares of common stock. In addition, outstanding employee stock
options of Securify were converted at the same exchange factor as Securify
common stock into options to purchase 179,877 shares of the Company's common
stock. Effective with the consummation of the merger, the Company created the
Information Security Group and Securify's results of operations and financial
position are reported in this group.
The mergers with LSAI, Schiff and Securify constituted tax-free
reorganizations and have been accounted for as pooling of interests
transactions. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of operations,
financial position and cash flows of LSAI, Schiff and Securify as though they
had always been a part of the Company.
There were no transactions between the Company and LSAI, Schiff and
Securify prior to the combination and immaterial adjustments were recorded to
conform LSAI's, Schiff's and Securify's accounting policies. Certain
reclassifications were made to the Company's, LSAI's, Schiff's and Securify's
financial statements to conform presentation. The results of operations for the
separate companies and the combined amounts presented in the consolidated
financial statements follow:
<TABLE>
<CAPTION>
KROLL-
O'GARA
HISTORICAL LSAI SCHIFF SECURIFY COMBINED
---------- ---- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Three months ended March 31,
1998 (unaudited)
Revenue................... $ 47,632 $ 3,572 $ 1,165 $ -- $ 52,369
Income from discontinued
operation............... 107 -- -- -- 107
Net income (loss)......... $ 2,527 $ 402 $ 298 $ (42) $ 3,185
</TABLE>
The Company completed eight other acquisitions in 1998, all of which
were accounted for as purchase business combinations. Seven of the 1998 purchase
acquisitions have been included in the Company's Investigations and Intelligence
Group and the eighth has been included in the Security Products and Services
Group. The aggregate purchase price of these eight acquisitions amounted to
approximately $36.5 million and consisted of $19.4 million in cash and 745,003
shares of common stock (valued at approximately $17.1 million or an average of
$22.95 per share). The $36.5 million aggregate purchase price for the 1998
acquisitions excludes a potential earnout of $3.25 million applicable to one of
the acquired companies, which is payable over three years and is contingent upon
the achievement of specified operating income targets. In addition, in
connection with these acquisitions, the Company entered into various employment
and non-compete agreements with officers and key employees of the acquired
companies with varying terms and conditions. The results of operations of the
acquired businesses are included in the consolidated financial statements from
the respective effective dates of acquisition. The resulting goodwill from these
transactions is being amortized over periods ranging from fifteen to twenty-five
years.
The Company made one significant acquisition in 1998 which is included
above. In September 1998, Kizorek, Inc., now renamed In Photo Surveillance, Inc.
(In Photo), a company located in Illinois specializing in video surveillance
services, was acquired for approximately $9.0 million, consisting of $0.8
million in cash and 352,381 shares of the Company's common stock valued at
approximately $8.2 million or $23.35 per share. For accounting purposes, the
6
<PAGE> 9
acquisition was effective on July 1, 1998 and the results of operations of In
Photo are included in the consolidated results of operations of the Company from
that date forward. The following unaudited pro forma combined results of
operations for the period ended March 31, 1998 assumes the In Photo acquisition
occurred as of January 1, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
--------------
<S> <C>
Sales....................................................... $ 55,594
Income from continuing operations .......................... $ 2,924
Net income.................................................. $ 3,031
Earnings per share:
Basic..................................................... $ 0.20
Diluted................................................... $ 0.19
</TABLE>
On January 21, 1999, the Company entered into a definitive agreement to
acquire all of the outstanding capital stock of Background America, Inc. (BAI)
for approximately 989,000 shares of Company common stock, including
approximately 90,000 shares reserved for issuance for outstanding common stock
equivalents. BAI provides employment screening and compliance services to a
variety of industries and will be included in the Company's Investigations and
Intelligence Group. The acquisition is subject to the approval of the BAI
shareholders and upon completion is expected to qualify as a pooling of
interests. Included in the March 31, 1999 consolidated balance sheet is
approximately $586 of merger costs incurred by the Company which, along with
other merger costs subsequently incurred, will be expensed immediately upon
consummation of the transaction on a pooling of interests basis. The Company
expects the BAI merger to be completed by the end of the second quarter of 1999.
(4) EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", basic earnings per share are computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share are computed by dividing net income
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Dilutive common stock equivalents
represent shares issuable upon assumed exercise of stock options and warrants
and upon assumed issuance of restricted stock. The following is a reconciliation
of the numerator and denominator for basic and diluted earnings per share for
the three months ended March 31, 1999 and 1998 (in thousands except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
Shares Per Share
Income (Numerator) (Denominator) Amount
------------------ ------------- ------
<S> <C> <C> <C>
Basic EPS $2,418 20,839 $0.12
=====
Effect of dilutive securities:
Options - 733
Warrants - 3
Restricted stock - 13
------ ------
Diluted EPS $2,418 21,588 $0.11
====== ====== =====
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
Shares Per Share
Income (Numerator) (Denominator) Amount
------------------ ------------- ------
<S> <C> <C> <C>
Basic EPS $3,185 15,063 $0.21
=====
Effect of dilutive securities:
Options - 580
Warrants - 11
------ ------
Diluted EPS $3,185 15,654 $0.20
====== ====== =====
</TABLE>
Basic and diluted earnings per share based on income from continuing
operations before cumulative effect of change in accounting principle were $0.16
for the period ended March 31, 1999. The basic and diluted per share impact of
the discontinued operation was $0.01 and the basic and diluted per share impact
of the change in accounting principle was $0.04.
Basic and diluted earnings per share based on income from continuing
operations were $0.20 for the period ended March 31, 1998. The basic and diluted
per share impact of the discontinued operation was $0.01.
(5) NEW PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
established standards for reporting and displaying comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. The Company has chosen to disclose comprehensive
income, which encompasses net income and foreign currency translation
adjustments and unrealized holding gains of marketable securities in the
Consolidated Statements of Operations. The Accumulated other comprehensive loss
balance of $2.4 million at March 31, 1999 consists entirely of foreign currency
translation adjustments.
In April 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-5 "Reporting on the Cost of Start-Up
Activities." The SOP requires costs of start-up activities, including
pre-operating costs, organization costs and start-up costs to be expensed as
incurred. The Company's practice was to capitalize these expenses and amortize
them over periods ranging from one to five years. The Company adopted SOP 98-5
in the first quarter of 1999 and recorded a cumulative effect of an accounting
change of $0.8 million net of a tax benefit of $0.4 million.
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 requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company has
several forward contracts in place in association with demand notes from certain
subsidiaries. These instruments qualify for hedge accounting. The Company has
not yet quantified the impact of adopting SFAS 133 on its financial statements
and has not determined the timing of or method of adoption of SFAS 133. However,
SFAS 133 could increase volatility in earnings and other comprehensive income.
(6) SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash and equivalents consist of all operating cash accounts and
investments with an original maturity of three months or less. Marketable
securities consist of available-for-sale commercial paper obligations which
matured in 1999. These securities are valued at current market value, which
approximates cost.
8
<PAGE> 11
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash paid for taxes $547 $117
Cash paid for interest $192 $418
Non-cash activity
Fair value of stock issued in connection with
acquisition of Corplex - $525
</TABLE>
(7) INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and include the following (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Raw materials $ 7,472 $ 7,102
Vehicle costs and
work-in-process 10,996 11,505
------- -------
$18,468 $18,607
======= =======
</TABLE>
(8) DERIVATIVE FINANCIAL INSTRUMENTS
Financial instruments in the form of foreign currency exchange
contracts are utilized by the Company to hedge its exposure to movements in
foreign currency exchange rates. The Company does not hold or issue derivative
financial instruments for trading purposes. Gains and losses on foreign exchange
contracts are deferred and amortized as an adjustment to the cumulative foreign
currency translation adjustment component of equity over the terms of the
agreements in accordance with hedge accounting standards. The fair value of
foreign currency exchange contracts is not recognized in the consolidated
financial statements since they are accounted for as hedges.
The Company has entered into eight foreign currency exchange
contracts to effectively hedge its exposure to certain foreign currency
rate fluctuations on a demand loan to a subsidiary which is denominated in
the foreign currency. By virtue of these contracts, the Company has fixed
the total dollar amount which they will receive under the aforementioned
subsidiary loan through the maturity dates of the contracts regardless of
the fluctuations in the exchange rate. At March 31, 1999, the total
notional amount of the contracts, which mature between April 1999 and
December 2000, is $18.0 million. The Company's foreign currency translation
adjustment component of shareholder's equity was increased by $1.1 million
in the first quarter of 1999 as a result of these agreements.
(9) SEGMENT DATA
During 1998 and 1999, the Company operated in three business segments,
the Security Products and Services Group, the Investigations and Intelligence
Group and the Information Security Group.
The following summarizes information about the Company's business
segments:
9
<PAGE> 12
<TABLE>
<CAPTION>
SECURITY
PRODUCTS INVESTIGATIONS
AND AND INFORMATION
SERVICES INTELLIGENCE SECURITY
GROUP GROUP GROUP OTHER CONSOLIDATED
----- ----- ----- ----- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Net sales to unaffiliated
customers............. $ 28,721 $ 35,643 $ 1,209 $ -- $ 65,573
========= ======== ======= ======== ========
Gross profit............ $ 8,576 $ 15,511 $ 619 $ -- $ 24,706
========= ======== ======= ======== ========
Operating income (loss). $ 3,225 $ 4,700 $ 164 $(1,941) $ 6,148
========= ======== ======= ======== ========
Identifiable assets at
March 31, 1999........ $ 94,651 $112,037 $ 1,224 $ -- $207,912
======== ======== =======
Corporate
assets......... -- 20,332
Net assets of discontinued
operation............... -- 11,584
------- --------
Total assets at
March 31, 1999.. $ -- $239,828
======= ========
1998
Net sales to unaffiliated
customers............... $ 30,217 $ 22,152 $ -- $ -- $ 52,369
========= ======== ======= ======== ========
Gross profit.............. $ 8,360 $ 9,952 $ -- $ -- $ 18,312
========= ======== ======= ======== ========
Operating income (loss)... $ 4,011 $ 3,903 $ (42) $(1,561) $ 6,311
========= ======== ======= ======== ========
</TABLE>
(9) DISCONTINUED OPERATIONS
On April 28, 1999, the Board of Directors approved a formal plan to
discontinue operations of the Voice and Data Communications Group, which offered
secure satellite communication equipment and satellite navigation systems. The
Company 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 results of operations of this Group have been classified as
discontinued operations and all prior periods have been restated accordingly.
The results of the discontinued Voice and Data Communications Group include an
allocation of interest expense based on the Group's average net assets. The
Group does not warrant any material income tax expense or benefit for the
periods presented.
Net sales, results of operations and net assets from this discontinued
operation are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
<S> <C> <C>
Net sales............................................ $ 3,434 $ 4,826
Interest expense allocation.......................... $ 45 $ 115
Income (loss) from discontinued operations........... $ (170) $ 107
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
March 31,
1999
----
<S> <C>
Current assets.............................................. $14,745
Property, plant and equipment, net.......................... 112
Other assets................................................ 2,988
Current liabilities......................................... (6,261)
-------
Net assets of discontinued operations............. $11,584
=======
</TABLE>
The Company will continue to monitor the potential for impairment of the
net assets of the discontinued Voice and Data Communications Group, if any, and
will record impairment as facts and circumstances warrant. Based on its most
recent analysis, the Company believes no impairment exists at March 31, 1999.
11
<PAGE> 14
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of results of operations and financial
condition is based upon and should be read in conjunction with Kroll-O'Gara's
Consolidated Financial Statements and Notes. As a result of the acquisitions
made by Kroll-O'Gara in 1998, financial results from period-to-period may lack
comparability. Additionally, effective December 31, 1998, Kroll-O'Gara
established the Information Security Group and, on April 28, 1999, the Board of
Directors approved a plan to discontinue operations of the Voice and Data
Communications Group. Historical revenue amounts have been reclassified to
conform to the current categories.
GENERAL
Kroll-O'Gara is a leading global provider of a broad range of specialized
products and services that are designed to provide solutions to a variety of
security needs. Kroll-O'Gara reports its revenue from continuing operations
through three groups. The Security Products and Services Group markets ballistic
and blast protected vehicles and security services. The Investigations and
Intelligence Group offers business intelligence and investigation services. The
Information Security Group offers information and computer security services,
including network and system security review and repair. 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. Accordingly, these
operations have been reclassified and reported as discontinued operations.
On May 5, 1998, Kroll-O'Gara completed a public offering (the "Offering")
of 3,200,000 shares of its common stock at $20.50 per share, resulting in net
proceeds to Kroll-O'Gara of $60.4 million. A portion of the net proceeds was
used to repay $14.8 million of indebtedness, with the balance available for
potential acquisitions, working capital and other general corporate purposes. In
addition to the shares sold by Kroll-O'Gara, certain shareholders sold 1,860,000
shares of Kroll-O'Gara common stock in conjunction with the Offering.
Other Acquisitions. Kroll-O'Gara has pursued a strategy of aggressive
growth and has completed numerous other acquisitions in 1998, some of which have
been accounted for as poolings of interest and others of which have been
accounted for as purchases. These acquisitions are listed in the following
chart.
POOLINGS(1)
<TABLE>
<CAPTION>
COMPANY BUSINESS GROUP DATE ACQUIRED PRICE
------- -------- ----- ------------- -----
<S> <C> <C> <C> <C>
Laboratory Drug testing Investigations and December 7, 1998 1,209,053 shares
Specialists of Intelligence
America, Inc.(2)
Securify Inc. Information security Information Security December 31, 1998 1,430,936 shares
services
Schiff & Associates, Security architectural Investigations and December 31, 1998 169,521 shares
Inc. services Intelligence
</TABLE>
12
<PAGE> 15
PURCHASES(3)
<TABLE>
<CAPTION>
COMPANY BUSINESS GROUP DATE ACQUIRED PRICE
------- -------- ----- ------------- -----
<S> <C> <C> <C> <C>
Corplex, Inc. Investigative and Investigations and March 1, 1998 29,207 shares
executive protection Intelligence
services
Lindquist Avey Forensic and Investigations and June 1, 1998 $4.7 million in cash
MacDonald investigative accounting Intelligence and 278,340 shares
Baskerville, Inc. services; headquartered
in Canada
Kizorek, Inc. Video surveillance Investigations and July 1, 1998 $0.8 million in cash
services Intelligence and 352,381 shares
Protec S.A. Armors cars in Colombia Security Products September 30, $3.2 million in cash
and Services 1998 and 38,788 shares
Holder Associates, Security services in Investigations and October 1, 1998 $4.5 million in cash
S.A. Argentina Intelligence and 46,287 shares
Fact Finders Limited Investigates Investigations and November 1, 1998 $3.2 million in cash,
intellectual property Intelligence plus a 3-year earn-
infringement cases in out based on profits
Hong Kong and the
Peoples Republic of
China
</TABLE>
(1) Pooling of interest accounting requires the restating of all prior period
consolidated financial information as though the acquired entity had always
been a part of Kroll-O'Gara.
(2) In 1997 and 1998 Laboratory Specialists paid a total of approximately $5.9
million to acquire customer lists and related assets from Pathology
Laboratories, Ltd., Harrison Laboratories, Inc., Accu-Path Medical
Laboratory, Inc., and TOXWORX Laboratories, Inc.
(3) Kroll-O'Gara's consolidated financial statements include the reported
results of each entity from its effective date of acquisition forward.
On January 21, 1999, Kroll-O'Gara entered into a definitive agreement to
acquire all of the capital stock of Background America, Inc. of Nashville,
Tennessee, in exchange for approximately 900,000 shares of Kroll-O'Gara common
stock. Background America provides background investigation services to
government, corporate, not-for-profit, professional and other clients. The
transaction is expected to be accounted for as a pooling of interests.
Background America will report revenue through the Investigations and
Intelligence Group. Kroll-O'Gara expects this transaction to close late in the
second quarter of 1999.
On March 1, 1999, Kroll-O'Gara acquired all of the capital stock of
Financial Research, Inc. of Fort Washington, Pennsylvania, in exchange for
101,553 shares of Kroll-O'Gara common stock valued at approximately $3.3
million, or $32.49 per share. The acquisition has been accounted for as a
pooling of interests. Financial Research provides business valuation and
economic damage analysis services throughout the United States. It reports
revenue through the Investigation and Intelligence Group.
Revenue recognition. Kroll-O'Gara recognizes net sales from government and
most commercial armoring contracts using the percentage-of-completion method
calculated utilizing the cost-to-cost approach. Under this method, Kroll-O'Gara
accrues estimated contract revenues based generally on the percentage that costs
to date bear to total estimated costs and recognizes estimated contract losses
in full when it becomes likely that a loss will occur. Accordingly, Kroll-O'Gara
periodically reviews and revises contract revenues and total cost estimates as
the work progresses and as change
13
<PAGE> 16
orders are approved. It reflects adjustments in contract revenues, based upon
the percentage of completion, in the period when the estimates are revised. To
the extent that these adjustments result in an increase, a reduction or an
elimination of previously reported contract revenues, Kroll-O'Gara recognizes a
credit or a charge against current earnings, which could be material. Contract
costs include all direct material and labor costs, along with certain direct
overhead costs related to contract production. Kroll-O'Gara records provisions
for any estimated total contract losses on uncompleted contracts in the period
in which it concludes that the losses will occur. Changes in estimated total
contract costs result in revisions to contract revenue. The revisions are
recognized when determined.
Kroll-O'Gara recognizes revenue from investigative and intelligence
services as the services are performed. It records either billed or unbilled
accounts receivable based on case-by-case invoicing determinations.
Kroll-O'Gara recognizes information security service revenues, which
consist of consulting fees on information security projects, ratably over the
period of the agreement or according to the completed contract method of
accounting for contract revenues, depending on the nature of the agreement.
RESTRUCTURING OF OPERATIONS
Due to the large number of acquisitions Kroll-O'Gara completed in 1997 and
1998, integration of the operations of the acquired companies with existing
operations has become a strategic initiative for Kroll-O'Gara's management. As
part of this initiative, management continuously evaluates its business segments
to ensure that its core businesses within the segments are operating
efficiently. In 1998, most of the businesses acquired were acquired as part of
the Investigations and Intelligence Group. As a result of management's
evaluation of this Group, the decision was made to close several less profitable
operating facilities so that the Group could focus on integration of existing
facilities with the newly acquired businesses. In 1997, the Security Products
and Services Group completed several acquisitions as well. In evaluating the
operations of this Group, management concluded that a cost savings initiative
was required and would be achieved largely through operating process
improvements and a corresponding decrease in personnel.
In the first quarter of 1999, Kroll-O'Gara began implementation of such a
plan to reduce costs and improve operating efficiencies and recorded a
non-recurring 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 non-recurring 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.
14
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Security Products and Services
Military 16.5% 21.6%
Commercial 27.3 36.1
Investigations and Intelligence 54.4 42.3
Information Security 1.8 0.0
------ ------
Total net sales 100.0% 100.0%
Cost of sales 62.3 65.0
------ ------
Gross profit 37.7 35.0
Operating expenses:
Selling and marketing 8.3 7.0
General and administrative 18.9 15.9
Merger expenses 0.3 0.0
Restructuring charge 0.8 0.0
------ ------
Operating income 9.4 12.1
Other income (expense):
Interest expense (1.5) (2.3)
Other, net 0.4 (0.1)
------ ------
Income from continuing operations before
provision for income taxes and cumulative
effect of accounting change 8.3 9.7
Provision for income taxes 3.2 3.8
------ ------
Income from continuing operations before
cumulative effect of accounting change 5.1 5.9
Income (loss) from operations of
discontinued Voice and Data Communications
Group, net (0.3) 0.2
------ ------
Income before cumulative effect of
accounting change 4.9 6.1
Cumulative effect of accounting change,
net of tax benefit 1.2 0.0
------ ------
Net income 3.7% 6.1%
====== ======
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
NET SALES. Net sales for the three months ended March 31, 1999
increased $13.2 million, or 25%, from $52.4 million in 1998 to $65.6 million in
1999.
Security Products and Services Group. Net sales for the Security
Products and Services Group for the three months ended March 31, 1999 decreased
$1.5 million, or 5%, from $30.2 million in 1998 to $28.7 million in 1999. The
decrease includes a decrease in net sales of commercial armoring products and
services of $1.0 million, or 5%, from $18.9 million in 1998 to $17.9 million in
1999. The decrease in commercial revenue was primarily due to decreased sales in
the Company's international divisions. In particular, the devaluation associated
with Brazil's currency early in the first quarter of 1999 and Russia's
continuing financial crisis negatively impacted sales in these markets in the
early part of the quarter. Subsequent to the end of the first quarter of 1999,
Kroll-O'Gara received a large contract from the U.S. government to produce over
200 light armored vehicles. As a result, sales in future periods should increase
over first quarter 1999 levels.
Also included in net sales for the Security Products and Services Group
are sales of military products and services, which decreased $0.5 million, or
5%, from $11.3 million in 1998 to $10.8 million in 1999. The decrease in sales
was due to a decrease in revenues from the Systems Technical Support contract
for engineering services signed with the U.S. Military in 1997. Due to a
temporary decline in service requests from the U.S. Military, services performed
in the first quarter of 1999 associated with this contract were at decreased
levels from the same period in 1998. However, Kroll-O'Gara anticipates that
revenues from this contract will return to 1998 levels in future periods.
15
<PAGE> 18
Investigations and Intelligence Group. Net sales for the Investigations
and Intelligence Group increased $13.5 million, or 61%, from $22.2 million in
the first quarter of 1998 to $35.6 million in 1999. A substantial portion of
this increase is a result of the acquisitions completed for the Group in 1998.
Excluding acquisitions, sales increased $1.2 million. This increase is a result
of internal growth achieved by new offices in the United States as well as
increased services performed in an international office related to a new client.
Information Security Group. Net sales in the first quarter of 1999 for
the Information Security Group were $1.2 million. The Information Security Group
initiated operations in February 1998 but had no sales in the first quarter of
1998.
COST OF SALES. Cost of sales for the three months ended March 31,
1999 increased $6.8 million, or 20%, from $34.1 million in 1998 to $40.9
million in 1999. As a percentage of net sales, cost of sales decreased from
65% in 1998 to 62.3% in 1999. The increase in cost of sales was due to the
acquisitions completed in 1998. Excluding acquisitions, cost of sales
decreased $0.2 million. Gross profit as a percentage of net sales was
37.7%, as compared with 35.0% for the same period in 1998. The overall
increase in gross profit as a percent of net sales is primarily the result
of a shift in sales mix in which higher margin Investigations and
Intelligence net sales increased as a percentage of total net sales. In
addition, gross margin increased due to high margin engagements booked by
the Information Security Group as well as shipments of higher margin spare
parts by the Security Products and Services Group.
As a percentage of net sales, gross margin for the Security Products
and Services Group increased approximately 2% from 27.7% in 1998 to 29.9% in
1999. Gross profit as a percentage of net sales decreased approximately 1% from
44.9% in 1998 to 43.5% in 1999 for the Investigations and Intelligence Group,
primarily due to decreases in the average case sizes and the corresponding
increase in indirect labor to administer the higher volume of cases. Gross
margin at the Information Security Group was 51.2%.
Historically, the Company has experienced a higher gross profit percent
associated with revenue from its Investigations and Intelligence Group in
comparison with the Security Products and Services Group. Management expects the
level of gross profit as a percent of net sales to remain relatively consistent
within each Group. However, if revenue from the Investigations and Intelligence
Group or the Information Security Group increases as a percentage of total net
sales as occurred in the first quarter of 1999, consolidated gross profit as a
percentage of net sales may increase as well.
OPERATING EXPENSES. Operating expenses for the three months ended March
31, 1999 increased $6.6 million, or 55%, from $12.0 million in 1998 to $18.6
million in 1999. The increase is primarily due to the acquisitions completed
after the first quarter of 1998. Excluding acquisitions, operating expenses
increased $1.9 million. Included in this increase were merger related costs of
$0.2 million for the mergers completed in December 1998 and a restructuring
charge of $0.5 million. The remaining increase relates to an increase in the
level of personnel and professional services required to administer the growth
experienced by Kroll-O'Gara after the end of the first quarter in 1998.
As a percent of net sales, operating expenses, before merger related
costs and the restructuring charge, increased from 23% in 1998 to 27% in 1999.
This increase was a direct result of the acquisitions made in 1998. As mentioned
previously in Restructuring of Operations, Kroll-O'Gara continues to evaluate
the different segments of its business and recently concluded that a plan to
reduce costs and improve operating efficiencies was needed. As a result, a
restructuring plan was implemented which management believes will reduce
operating expenses as a percentage of net sales in future periods. However,
there was no such reduction in the first quarter as the plan began
implementation late in the quarter.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1999 decreased $0.2 million, or 19%, from $1.2 million in 1998 to $1.0 million
in 1999. This decrease was the result of the Offering, in which a portion of the
Company's debt was repaid. In addition, in the second quarter of 1998,
Kroll-O'Gara received a 1% step down in interest rate on its $35.0 million
senior notes (the "Senior Notes") as a result of achieving the specified
criteria outlined in the Senior Notes purchase agreement.
PROVISION FOR INCOME TAXES. The provision for income taxes for the
three months ended March 31, 1999 was $2.1 million compared to $2.0 million in
1998. The effective tax rate for the first quarter of 1999 was 38% compared to
41% in 1998. The effective tax rate in the first quarter of 1998 was higher due
to the fact that Kroll-O'Gara did not book a tax benefit on certain foreign
losses. Certain of these foreign subsidiaries generated income in the first
quarter of 1999 and, as such, Kroll-O'Gara was able to utilize net operating
loss carryforwards. This had a favorable impact on the effective tax rate in
the first quarter of 1999.
DISCONTINUED OPERATIONS. In 1999, the loss from operations related to
the discontinued Voice and Data Communications Group was $0.2 million compared
to income from operations of this business in 1998 of $0.1 million.
16
<PAGE> 19
The decrease in income was attributable to a $1.4 million decrease in sales and
a related decrease in gross profit of $0.4 million. The decrease in sales was a
result of the slower than anticipated introduction of a new product into the
market to replace an existing product and softness in the market for the Group's
products. Kroll-O'Gara continues to evaluate the need for a provision for a loss
on disposal of this business. However, management expects proceeds from the sale
of this business to cover Kroll-O'Gara's investment in net assets as well as any
costs incurred to sell the business.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Kroll-O'Gara had
previously capitalized costs associated with the start-up of activities,
including pre-operating costs, organization costs and other start-up costs.
These capitalized costs were amortized over periods ranging from one to five
years. The capitalized amount, $1.2 million before tax, was expensed in 1999 in
accordance with the American Institute of Certified Public Accountants Statement
of Position 98-5, "Reporting on the Cost of Start-Up Activities". The amount
expensed is shown net of applicable tax benefit of $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
General. Kroll-O'Gara historically has met its operating cash needs by
utilizing borrowings under its credit arrangements to supplement cash provided
by operations, excluding non-cash charges such as depreciation and amortization.
Credit Facility. Kroll-O'Gara's credit agreement with KeyBank
National Association as amended effective October 30, 1998 allows Kroll-O'Gara
to maintain a $7.0 million revolving credit facility and a $7.7 million letter
of credit facility. The interest rate on the revolving credit facility will vary
based on financial ratios between prime less 1.75% to prime less 0.25%, or, at
Kroll-O'Gara's option, LIBOR plus 0.75% to LIBOR plus 1.50%. The credit
agreement includes financial covenants, which among other restrictions, require
the maintenance of certain financial ratios, including fixed charge coverage and
net worth, and impose limitations on foreign investment, total intangible
assets, and capital expenditures. Kroll-O'Gara was in compliance with these
covenants as of March 31, 1999. There were no borrowings on the revolving credit
facility at March 31, 1999.
The remaining proceeds from the Offering along with the unused capacity
on the revolving line of credit will be sufficient to fund the working capital
needs of Kroll-O'Gara for the next twelve months. In addition, Kroll-O'Gara
expects to have proceeds available from the sale of its Voice and Data
Communications Group.
Kroll-O'Gara intends to pursue its strategy of acquiring risk
mitigation companies in an effort to consolidate its position in the industry.
To that end, Kroll-O'Gara will continue to review additional sources of capital,
which may include additional bank borrowings or equity offerings, as they become
necessary.
Cash flows from operating activities. Cash used in operating activities
increased from $0.3 million in the first quarter of 1998 to $0.5 million in the
first quarter of 1999. In both periods, cash was used primarily to fund working
capital investments offset by income from continuing operations and depreciation
and amortization.
Cash flows from investing activities. Historically, the Company has
limited its capital expenditure requirements by leasing certain assets. However,
in 1999, the Company incurred $3.8 million of capital expenditures primarily
related to the acquisition of two new enterprise systems at its Security
Products and Services Group and Investigation and Intelligence Group. These new
enterprise systems were acquired as part of the Company's plan to be Year 2000
compliant and to enhance the information systems capabilities of these Groups.
Capital expenditures totaled $0.5 million for the three months ended March 31,
1998. In 1999, the Company sold $3.7 million of its marketable securities in
order to fund its increased capital expenditure requirements. Additions to
databases totaled $0.5 million and $0.7 million for the three months ended March
31, 1999 and 1998, respectively.
Cash flows from financing activities. Cash provided by financing
activities for the first quarter of 1998 was $2.7 million. Cash was provided
primarily by borrowings under the revolving lines of credit net of repayments of
long term debt. In the first quarter of 1999, cash used in financing activities
was $0.1 million as no borrowings under the revolving lines of credit were
necessary.
Foreign operations. Kroll-O'Gara attempts to mitigate the risks of
doing business in foreign countries by separately incorporating its operations
in those countries; maintaining reserves for credit losses; maintaining
insurance on equipment to protect against losses related to political risks and
terrorism, and using financial instruments to hedge the Company's risk from
translation gains and losses.
Kroll-O'Gara utilizes derivative financial instruments, in the form of
forward contracts, to hedge some of its exposure to foreign currency rate
fluctuations. At March 31, 1999 eight such contracts, maturing between April
1999 and December 2000, were outstanding in connection with intercompany demand
notes with Labbe and Lindquist Avey. These contracts are intended to hedge
Kroll-O'Gara's exposure to deterioration in the amount outstanding due to
changes in
17
<PAGE> 20
currency translation rates. The notional amount, together with amortized
premium, and the fair market value associated with these forward contracts was
$18.0 million. Gains or losses on existing forward instruments are offset
against the translation effects reflected in shareholders' equity. The fair
value of forward contracts is not recognized in the consolidated financial
statements since they are accounted for as hedges. Kroll-O'Gara does not hold or
issue derivative financial instruments for trading purposes.
Year 2000 Issues. Kroll-O'Gara has initiated a program to prepare for the
year 2000. During 1997, Kroll-O'Gara began the process of replacing the
enterprise systems at its two largest subsidiaries, both for the purpose of
making the systems Year 2000 compliant and to enhance the information systems
capabilities of these subsidiaries. The new systems are scheduled to be
operational by the end of the third quarter of 1999.
Additionally, Kroll-O'Gara is implementing a plan to prepare its remaining
systems for Year 2000. Kroll-O'Gara has completed an inventory of all its
computer software and embedded technology and has prepared a master database of
all technology potentially impacted by the Year 2000 issue. In conjunction with
outside consultants, Kroll-O'Gara now is in the process of evaluating the
findings from its inventory and formulating plans of action. Kroll-O'Gara
anticipates that it will have taken all the necessary steps to ensure no
interruption of services as a result of the Year 2000 issue by the third quarter
of 1999.
Total Year 2000 compliance cost is estimated to be approximately $4.0
million, of which approximately $3.6 million relates to the acquisition of new
enterprise systems and will be capitalized. The remaining approximately $0.4
million will be charged to expense over several reporting periods in accordance
with established accounting pronouncements, and is not expected to be material
to Kroll-O'Gara's results of operations or cash flows. Total costs paid relating
to this plan as of March 31, 1999 were $1.2 million. There can be no assurance
that the final costs of the Year 2000 program will not exceed current management
estimates.
Many of the operations of Kroll-O'Gara's largest revenue groups are manual.
The manufacture of bullet resistant vehicles and some of the investigation and
intelligence services provided by Kroll-O'Gara are not largely dependent on
embedded technology. If, however, the databases of public records relied upon by
the Investigations and Intelligence Group are not available due to lack of
compliance with Year 2000, manual searches would be required, which would
increase the cost and length of time as well as negatively effect the quality of
investigations. Kroll-O'Gara is actively engaged in evaluating and confirming
compliance in this area. To the extent that third party providers upon which
Kroll-O'Gara is dependent are not Year 2000 compliant or are likely not to be
compliant, contingency plans will be prepared if possible, although there
currently is no timetable in place for this action. However, viable alternatives
may not be available.
Kroll-O'Gara believes that its internal computer software and systems will
not experience significant disruption in connection with Year 2000. However,
there can be no assurance that third-party failures to resolve the Year 2000
issue will not have an adverse effect on Kroll-O'Gara. In particular, if
Kroll-O'Gara's internal computer software and systems or those of one or more
third parties experience any significant disruption in connection with the Year
2000 issue, the disruption could affect Kroll-O'Gara's ability to conduct
business and may have a material adverse effect on operations and results.
Quarterly fluctuations. Kroll-O'Gara's operations may fluctuate on a
quarterly basis as a result of the timing of contract costs and revenues of its
Security Products and Services Group, particularly from its military and
governmental contracts which are generally awarded in a periodic and/or sporadic
basis. Kroll-O'Gara generally does not have long-term contracts with its clients
in its Investigations and Intelligence Group and its ability to generate net
sales is dependant upon obtaining many new projects each year, most of which are
of a relatively short duration. Period-to-period comparisons within a given year
or between years may not be meaningful or indicative of operating results over a
full fiscal year.
Forward-Looking Statements. This quarterly report contains statements which
Kroll-O'Gara believes are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements are made
particularly in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, but also appear elsewhere in this document.
Forward-looking statements can be identified by the use of language such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. Kroll-O'Gara'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
18
<PAGE> 21
results may be affected by a number of external factors such as actions of
competitors, changes in laws and regulations, customer demand, effectiveness of
programs, strategic relations, fluctuations in the cost and availability of
resources, and foreign economic conditions, including currency rate
fluctuations.
19
<PAGE> 22
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Kroll-O'Gara is involved in litigation from time to time in the
ordinary course of its business; however, the Company does not believe that
there is any pending litigation, individually or in aggregate, that is likely to
have a material adverse effect on its business or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (Edgar version only)
(b) Reports on Form 8-K.
During the quarter ended March 31, 1999,
Kroll-O'Gara filed the following current reports
on Form 8-K.
a.) Announcing the signing of a definitive
agreement to acquire Background America, Inc.
(Date of Report: January 21, 1999) filed
January 29, 1999; amended to provide
financial information on March 11, 1999 (Item
7).
b.) Announcing the completion of the acquisition
of Securify, Inc. and Schiff & Associates,
Inc. (Date of Report: December 31,1998) filed
January 15, 1999; amended to provide
financial statements on March 11, 1999 (Items
2, 5 and 7).
c.) To provide Background America, Inc. financial
statements, supplemental and proforma
financial information (Date of Report March
9, 1999) filed March 11, 1999 (Items 5 and
7).
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 17th day of May, 1999.
THE KROLL-O'GARA COMPANY
By /s/ Nicholas P. Carpinello
Nicholas P. Carpinello
Controller and Treasurer
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,233
<SECURITIES> 9,586
<RECEIVABLES> 89,047
<ALLOWANCES> 2,611
<INVENTORY> 18,468
<CURRENT-ASSETS> 140,136
<PP&E> 47,320
<DEPRECIATION> 20,729
<TOTAL-ASSETS> 239,828
<CURRENT-LIABILITIES> 55,073
<BONDS> 38,117
0
0
<COMMON> 209
<OTHER-SE> 142,632
<TOTAL-LIABILITY-AND-EQUITY> 239,828
<SALES> 65,573
<TOTAL-REVENUES> 65,573
<CGS> 40,867
<TOTAL-COSTS> 40,867
<OTHER-EXPENSES> 18,128
<LOSS-PROVISION> 430
<INTEREST-EXPENSE> 983
<INCOME-PRETAX> 5,451
<INCOME-TAX> 2,084
<INCOME-CONTINUING> 3,367
<DISCONTINUED> (170)
<EXTRAORDINARY> 0
<CHANGES> (778)
<NET-INCOME> 2,418
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
