<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File Number: 000-21629
THE KROLL-O'GARA COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
OHIO 31-1470817
<S> <C>
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>
9113 LESAINT DRIVE
FAIRFIELD, OHIO 45014
(513) 874-2112
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date.
22,150,823
------------------------------
(SHARES OF COMMON STOCK OUTSTANDING AS OF JULY 1, 1999)
- --------------------------------------------------------------------------------
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<PAGE> 2
THE KROLL-O'GARA COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of
June 30, 1999 and December 31, 1998.................................. 1
Consolidated Statements of Operations (unaudited) for
the three and six months ended June 30, 1999 and 1998................ 3
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 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.................................. 15
PART II - OTHER INFORMATION..................................................................... 26
ITEM 1: LEGAL PROCEEDINGS............................................................. 26
ITEM 2: CHANGES IN SECURITIES......................................................... 26
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.............................................. 26
SIGNATURES............................................................................. 27
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and equivalents $ 16,852 $ 13,895
Marketable securities 1,278 13,285
Trade accounts receivable, net of allowance for doubtful accounts of $2,758
and $2,427 at June 30, 1999 and December 31, 1998, respectively 53,494 48,937
Unbilled revenues 19,137 7,766
Other receivables 3,956 2,763
Income tax receivable 1,002 -
Costs and estimated earnings in excess of billings on uncompleted contracts 22,895 26,408
Inventories (Note 8) 22,695 18,607
Prepaid expenses and other 6,883 7,748
Net current assets of discontinued operations (Note 11) 8,672 6,837
---------- ----------
Total current assets 156,864 146,246
---------- ----------
Property, Plant and Equipment, at cost
Land 2,137 1,856
Buildings and improvements 8,419 8,272
Leasehold improvements 6,658 6,330
Furniture and fixtures 7,981 6,007
Machinery and equipment 23,662 19,655
Construction-in-progress 6,657 2,915
---------- ----------
55,514 45,035
Less: accumulated depreciation (22,964) (20,463)
---------- ----------
32,550 24,572
---------- ----------
Databases, net of accumulated amortization of $24,426 and $22,789 at June 30, 1999
and December 31, 1998, respectively 9,445 9,239
Costs in Excess of Assets Acquired and Other Intangible Assets, net of accumulated
amortization of $5,752 and $3,986 at June 30, 1999 and December 31, 1998, 78,929 59,154
respectively
Other Assets:
Other assets 2,747 4,882
Net non-current assets of discontinued operations (Note 11) 3,062 4,275
---------- ----------
94,183 77,550
---------- ----------
$ 283,597 $ 248,368
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
1
<PAGE> 4
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Bank lines of credit (Note 5) $ 23,128 $ -
Current portion of other debt 2,717 2,001
Trade accounts payable 23,710 32,557
Related party payables 101 353
Billings in excess of costs and estimated earnings on uncompleted contracts 89 183
Accrued liabilities 32,813 20,751
Customer deposits 2,947 3,971
Income taxes currently payable - 760
Deferred income taxes 895 895
---------- ----------
Total current liabilities 86,400 61,471
---------- ----------
Other Long-Term Liabilities 3,405 1,543
Deferred Income Taxes 1,625 1,625
Long-Term Debt, net of current portion 37,749 39,346
---------- ----------
Total liabilities 129,179 103,985
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, 22,150,823 and
21,584,872 shares issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 222 216
Additional paid-in capital 168,448 157,230
Retained deficit (8,038) (11,078)
Deferred compensation (2,172) (1,114)
Accumulated other comprehensive loss (4,042) (871)
---------- ----------
Total shareholders' equity 154,418 144,383
---------- ----------
$ 283,597 $ 248,368
========== ==========
</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 AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 76,513 $ 60,605 $ 144,578 $ 114,255
COST OF SALES 44,546 39,109 86,913 74,139
------------ ------------ ------------ ------------
Gross profit 31,967 21,496 57,665 40,116
OPERATING EXPENSES:
Selling and marketing expenses 6,609 4,066 12,413 7,652
General and administrative 16,048 10,361 29,011 19,438
Merger expenses (Note 3) 2,886 -- 3,094 --
Restructuring expense (Note 2) 3,856 -- 4,365 --
------------ ------------ ------------ ------------
Operating income 2,568 7,069 8,782 13,026
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (802) (1,081) (1,785) (2,298)
Other, net (245) 412 71 339
------------ ------------ ------------ ------------
Income from continuing operations before provision for income
taxes and cumulative effect of change in accounting principle 1,521 6,400 7,068 11,067
Provision for income taxes 920 2,655 2,990 4,638
------------ ------------ ------------ ------------
Income from continuing operations before cumulative effect of
change in accounting principle 601 3,745 4,078 6,429
Discontinued operations (Note 11):
Income (loss) from operations of discontinued
voice and data communications group, net (336) 210 (507) 317
------------ ------------ ------------ ------------
Income before cumulative effect of change in accounting
principle 265 3,955 3,571 6,746
Cumulative effect of change in accounting principle,
net of applicable tax benefit of $408 (Note 6) -- -- 778 --
------------ ------------ ------------ ------------
Net income $ 265 $ 3,955 $ 2,793 $ 6,746
------------ ------------ ------------ ------------
Other comprehensive income, net of tax:
Foreign currency translation adjustment, net of
$1,784 and $39 tax benefit, respectively (3,171) (98)
Reclassification adjustment for gain on securities
included in net income, net of $7 tax benefit -- (10)
------------ ------------
Other comprehensive loss (3,171) (108)
------------ ------------
Comprehensive income (loss) $ (378) $ 6,638
============ ============
PER SHARE DATA:
BASIC EARNINGS PER SHARE (Note 4)
Earnings per share $ 0.01 $ 0.21 $ 0.13 $ 0.39
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 21,891,216 18,677,454 21,815,388 17,320,181
============ ============ ============ ============
DILUTED EARNINGS PER SHARE (Note 4)
Earnings per share $ 0.01 $ 0.21 $ 0.12 $ 0.38
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 22,480,451 19,287,135 22,547,934 17,862,716
============ ============ ============ ============
</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 7)
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,793 $ 6,746
Adjustments to reconcile net income to net cash used in continuing operations-
Loss (income) from discontinued operations 507 (317)
Depreciation and amortization 5,904 3,649
Bad debt expense 806 1,066
Gain from extinguishment of long-term debt -- (38)
Loss on sale of marketable securities -- (7)
Noncash compensation expense 514 15
Change in assets and liabilities, net of effects of acquisitions and dispositions-
Receivables - trade and unbilled (10,119) (5,969)
Costs and estimated earnings in excess of billings on uncompleted contracts 3,513 (7,724)
Income tax receivable (327) 190
Inventories, prepaid expenses and other assets (841) 437
Accounts payable and income taxes currently payable (11,168) (6,354)
Billings in excess of costs and estimated earnings on uncompleted contracts (94) 111
Amounts due to/from related parties (1,027) (144)
Customer deposits (1,024) (1,213)
Deferred income taxes payable -- (143)
Accrued liabilities 6,163 606
Long-term liabilities 1,862 328
-------- --------
Net cash used in continuing operations (2,538) (8,761)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (9,246) (2,490)
Additions to databases (1,843) (2,407)
Cash paid for non-compete agreements -- (134)
Acquisitions, net of cash acquired (12,015) (4,466)
Sale of marketable securities 12,007 30
-------- --------
Net cash used in investing activities of continuing operations (11,097) (9,467)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under bank lines of credit 20,808 (1,106)
Payments of long-term debt (881) (10,639)
Proceeds from common stock issuance -- 68,390
Proceeds from exercise of stock options 964 2,115
Foreign currency translation (2,551) (4)
-------- --------
Net cash provided by financing activities of continuing operations 18,340 58,756
-------- --------
NET INCREASE IN CASH AND EQUIVALENTS 4,705 40,528
Effects of foreign currency exchange rates on cash (450) (74)
Net cash used in discontinued operations (1,298) (733)
-------- --------
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 13,895 12,371
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 16,852 $ 52,092
======== ========
</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
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(1) GENERAL
The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively "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'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, Kroll-O'Gara 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 Kroll-O'Gara of $60.8 million. A portion of the net proceeds was
used to repay $14.8 million of indebtedness of Kroll-O'Gara, 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 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 and six month periods ended June
30, 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 Kroll-O'Gara's annual report on Form 10-K/A for the year
ended December 31, 1998.
(2) RESTRUCTURING OF OPERATIONS
In the second quarter of 1999, Kroll-O'Gara completed its restructuring
plan (the "Plan") to reduce costs and improve operating efficiencies with an
additional non-recurring pre-tax restructuring charge of approximately $3.9
million. Including the first quarter charge of $0.5 million, the total
non-recurring pre-tax restructuring charge associated with the Plan was $4.4
million. Kroll-O'Gara does not expect to incur any other significant
restructuring charges in future periods related to this Plan. The principal
elements of the restructuring plan are the closure of two Investigations and
Intelligence Group offices and the elimination of approximately 82 employees. Of
the 82 eliminated employees, 35 were direct labor and 47 were management and
professional staff. The primary components of the restructuring charge including
accrued balances as of June 30, 1999 are as follows:
5
<PAGE> 8
<TABLE>
<CAPTION>
DESCRIPTION EXPENSE ACCRUAL
---------------------------------------------------------------------------------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Severance and related costs $3,129 $1,474
Writedown of property, plant and equipment 142 -
Lease termination costs 966 847
Other 128 -
-------- --------
$4,365 $2,321
======== ========
</TABLE>
(3) ACQUISITIONS AND MERGERS
Kroll-O'Gara 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 June 16, 1999, Kroll-O'Gara acquired all of the outstanding capital
stock of Background America, Inc. for approximately 989,000 shares of
Kroll-O'Gara common stock, including approximately 90,000 shares reserved for
issuance for outstanding common stock equivalents. Background America provides
employment screening and compliance services to a variety of industries and is
included in the Kroll-O'Gara's Investigations and Intelligence Group.
On June 3, 1999, Kroll-O'Gara acquired substantially all of the assets and
assumed certain liabilities of Buchler Phillips, a partnership headquartered in
London, England. The purchase price of $20.0 million was satisfied with cash of
$12.0 million and 366,469 shares of stock valued at $8.0 million, or $21.86 per
share. The acquisition has been accounted for as a purchase and is effective on
April 1, 1999. Goodwill related to this transaction was approximately $20.7
million which will be amortized over 25 years. Buchler Phillips specializes in
corporate advisory practices which includes work related to corporate rescue,
insolvency, financial consulting and corporate finance. Buchler Phillips'
revenues are included in the Investigations and Intelligence Group. In
connection with the Buchler Phillips purchase acquisition, assets were acquired
and liabilities were assumed as follows (dollars in thousands):
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash $ 1
Accounts receivable 457
Inventories 2,119
Other current assets 332
Property, plant and equipment 480
Other non-current assets 124
Costs in excess of assets acquired 20,700
--------
24,213
Less: Cash paid for net assets (12,018)
Fair Value of stock issued (8,011)
--------
$ 4,184
========
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition costs $ 3,280
Debt 904
--------
$ 4,184
========
On March 1, 1999, Kroll-O'Gara acquired all of the capital stock of
Financial Research, Inc. for approximately $3.3 million, consisting of 101,555
shares of common stock. Financial Research provides business valuation and
economic damage analysis services and is included in Kroll-O'Gara'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 Kroll-O'Gara was merged
with and into Laboratory Specialists of America, Inc. Effective upon the
consummation of the merger, each then issued and outstanding share of Laboratory
Specialists common stock was converted into .2102 shares of common stock of
Kroll-O'Gara or 1,209,053 shares of Kroll-O'Gara's common stock in total.
Outstanding stock options and stock warrants of Laboratory Specialists were
converted at the same exchange factor into options to purchase 39,094 and 24,386
shares, respectively, of Kroll-O'Gara's common stock. The financial position and
results of operations of Laboratory Specialists are reported as part of
Kroll-O'Gara's Investigations and Intelligence Group.
In December 1998, a wholly owned subsidiary of Kroll-O'Gara was merged
with and into Schiff & Associates, Inc. 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 Kroll-O'Gara or
169,521 shares of Kroll-O'Gara's common stock in total. The financial position
and results of operations of Schiff are reported as part of Kroll-O'Gara's
Investigations and Intelligence Group.
6
<PAGE> 9
In December 1998, a wholly owned subsidiary of Kroll-O'Gara was merged
with and into Securify Inc. Effective upon the consummation of the merger, all
of the outstanding stock of Securify was converted to shares of Kroll-O'Gara'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, Kroll-O'Gara 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 Kroll-O'Gara's common
stock. Effective with the consummation of the merger, Kroll-O'Gara created the
Information Security Group and Securify's results of operations and financial
position are reported in this group.
The mergers with Laboratory Specialists, Schiff, Securify and Background
America 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 Laboratory
Specialists, Schiff, Securify and Background America as though they had always
been a part of Kroll-O'Gara.
There were no transactions between Kroll-O'Gara and Laboratory
Specialists, Schiff, Securify and Background America prior to the combination
and immaterial adjustments were recorded to conform Laboratory Specialists',
Schiff's, Securify's and Background America's accounting policies. Certain
reclassifications were made to Kroll-O'Gara's, Laboratory Specialists',
Schiff's, Securify's and Background America'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:
7
<PAGE> 10
<TABLE>
<CAPTION>
KROLL-O'GARA LABORATORY BACKGROUND
HISTORICAL SPECIALISTS SCHIFF SECURIFY AMERICA COMBINED
------------ ---------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Three months ended June 30,
1998
(unaudited)
Revenue $53,644 $ 4,088 $ 1,113 $ - $ 1,760 $ 60,605
Income from
discontinued 210 - - - - 210
operation
Net income (loss) $ 3,780 $ 552 $ 120 $ (310) $ (187) $ 3,955
</TABLE>
<TABLE>
<CAPTION>
KROLL-O'GARA LABORATORY BACKGROUND
HISTORICAL SPECIALISTS SCHIFF SECURIFY AMERICA COMBINED
------------ ---------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Six months ended June 30, 1998
(unaudited)
Revenue $101,275 $ 7,660 $ 2,278 $ - $ 3,042 $114,255
Income from
discontinued 317 - - - - 317
operation
Net income (loss) $ 6,307 $ 954 $ 418 $ (352) $ (581) $ 6,746
</TABLE>
Through June 30, 1999, Kroll-O'Gara recorded a charge to operating
expenses of approximately $3.1 million for direct and other merger and
integration related costs. Merger transaction costs are non-recurring and
include $0.2 million for stay bonuses, $0.4 million for compensation related to
variable plan accounting for options which vest upon a change in control and
$2.1 million which consisted primarily of fees for investment bankers,
attorneys, accountants, financial printing, travel and other related charges.
Integration costs relate primarily to the mergers completed in December 1998 and
were approximately $0.4 million.
Kroll-O'Gara 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 Kroll-O'Gara'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, Kroll-O'Gara 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.
Kroll-O'Gara made one significant acquisition in 1998 which is included
above. In September 1998, Kizorek, Inc., now renamed InPhoto Surveillance, Inc.,
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 Kroll-O'Gara's common stock valued at approximately $8.2
million or $23.35 per share. For accounting purposes, the acquisition was
effective on July 1, 1998 and the results of operations of InPhoto are included
in the consolidated results of operations of Kroll-O'Gara from that date
forward. The following unaudited pro forma combined results of operations for
8
<PAGE> 11
the three and six months ended June 30, 1998 assumes the InPhoto acquisition
occurred as of January 1, 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS
JUNE 30, 1998 ENDED JUNE 30, 1998
----------------- -------------------
<S> <C> <C>
Sales $ 63,765 $ 120,640
Income from continuing operations $ 3,815 $ 6,345
Net income $ 4,025 $ 6,662
Earnings per share:
Basic $ 0.21 $ 0.38
Diluted $ 0.20 $ 0.37
</TABLE>
(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 and six months ended June 30, 1999 and 1998 (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -----------
<S> <C> <C> <C>
Basic EPS $ 265 21,891 $0.01
==========
Effect of dilutive securities:
Options - 570
Warrants - 1
Restricted Stock - 18
----------- -----------
Diluted EPS $ 265 22,480 $0.01
=========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -----------
<S> <C> <C> <C>
Basic EPS $ 3,955 18,677 $0.21
=====
Effect of dilutive securities:
Options - 589
Warrants - 21
--------- ------
Diluted EPS $ 3,955 19,287 $0.21
========= ====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -----------
<S> <C> <C> <C>
Basic EPS $ 2,793 21,815 $0.13
==========
</TABLE>
9
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
Effect of dilutive securities:
Options - 708
Warrants - 3
Restricted Stock - 22
Diluted EPS $ 2,793 22,548 $0.12
========= ====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- -----------
<S> <C> <C> <C>
Basic EPS $ 6,746 17,320 $0.39
=======
Effect of dilutive securities:
Options - 522
Warrants - 21
--------- ------
Diluted EPS $ 6,746 17,863 $0.38
========= ====== =======
</TABLE>
Basic and diluted earnings per share based on income from continuing
operations were $0.03 for the three months ended June 30, 1999. The basic and
diluted per share impact of the discontinued operation was $0.02.
Basic and diluted earnings per share based on income from continuing
operations before cumulative effect of change in accounting principle were $0.19
and $0.18, respectively, for the six months ended June 30, 1999. The basic and
diluted per share impact of the discontinued operation was $0.02 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 and $0.19, respectively, for the three months ended June
30, 1998. The basic and diluted per share impact of the discontinued operation
was $0.01 and $0.02, respectively.
Basic and diluted earnings per share based on income from continuing
operations were $0.37 and $0.36, respectively, for the six months ended June 30,
1998. The basic and diluted per share impact of the discontinued operation was
$0.02.
(5) BANK LINES OF CREDIT
On June 25, 1999, Kroll-O'Gara amended its credit agreement to increase
its revolving line of credit to $25 million. Advances under the revolving credit
facility bear interest at rates ranging from prime less 1.75% to prime, or, at
Kroll-O'Gara's option, LIBOR plus .75% to LIBOR plus 1.75%, dependent upon a
defined financial ratio. Borrowings under this line of credit were approximately
$19.1 million at June 30, 1999. There were no outstanding borrowings pursuant to
line of credit agreements at December 31, 1998.
This credit agreement includes financial covenants, which among other
restrictions, requires the maintenance of certain financial ratios, including
interest coverage and net worth, and impose limitations on goodwill, additional
indebtedness and capital expenditures. Kroll-O'Gara was not in compliance with
its capital expenditure covenant as of June 30, 1999. However, Kroll-O'Gara did
receive a waiver of this noncompliance.
10
<PAGE> 13
Effective June 3, 1999, with the acquisition of Buchler Phillips,
Kroll-O'Gara acquired a demand note with maximum borrowings of pound 2.5
million. The demand note bears interest at the Bank of England's base rate plus
1.5%. Maximum borrowings permitted and borrowings outstanding pursuant to this
demand note were approximately $4.0 million as translated at June 30, 1999.
(6) NEW PRONOUNCEMENTS
In 1998, Kroll-O'Gara 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. Kroll-O'Gara 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 $4.0 million
at June 30, 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. Kroll-O'Gara's practice was to capitalize these expenses and amortize
them over periods ranging from one to five years. Kroll-O'Gara 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. Kroll-O'Gara has
several forward contracts in place in association with demand notes from certain
subsidiaries. These instruments qualify for hedge accounting. Kroll-O'Gara 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.
11
<PAGE> 14
(7) 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 that
matured in 1999. These securities are valued at current market value, which
approximates cost.
<TABLE>
<CAPTION>
1999 1998
------ -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash paid for taxes $3,680 $1,532
Cash paid for interest $1,949 $2,439
Non-cash activity:
Fair value of stock issued in connection with acquisition of Buchler $8,011 $ -
Phillips
Fair value of stock issued in connection with acquisition of $ - $5,989
Lindquist Avey
Fair value of stock issued in connection with acquisition of Corplex $ - $ 525
</TABLE>
(8) 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>
JUNE 30, DECEMBER 31,
INVENTORY CATEGORY 1999 1998
----------------------------------------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Raw materials $11,053 $ 7,102
Vehicle costs and work-in-process 11,642 11,505
------- -------
Total inventory $22,695 $18,607
======= =======
</TABLE>
(9) DERIVATIVE FINANCIAL INSTRUMENTS
Financial instruments in the form of foreign currency exchange contracts
are utilized by Kroll-O'Gara to hedge its exposure to movements in foreign
currency exchange rates. Kroll-O'Gara 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.
Kroll-O'Gara has entered into eight foreign currency exchange contracts to
hedge effectively its exposure to certain foreign currency rate fluctuations on
demand loans to two subsidiaries that are denominated in the foreign currencies.
By virtue of these contracts, Kroll-O'Gara
12
<PAGE> 15
has fixed the total dollar amount that they will receive under the
aforementioned subsidiary loans through the maturity dates of the contracts
regardless of the fluctuations in the exchange rate. At June 30, 1999, the total
notional amount of the contracts, which mature between July 1999 and June 2001,
is $18.0 million. Kroll-O'Gara's foreign currency translation adjustment
component of shareholder's equity was reduced by $0.1 million in the six months
ended June 30, 1999 as a result of these agreements.
(10) SEGMENT DATA
During 1999 and 1998, Kroll-O'Gara 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:
<TABLE>
<CAPTION>
SECURITY INVESTIGATIONS
PRODUCTS AND AND INFORMATION
SERVICES INTELLIGENCE SECURITY
GROUP GROUP GROUP OTHER CONSOLIDATED
----------- ------------ ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Net sales to unaffiliated $ 28,755 $ 46,487 $ 1,271 $ -- $ 76,513
customers ======== ======== ======== ======== ========
Gross profit $ 10,001 $ 21,319 $ 647 $ -- $ 31,967
======== ======== ======== ======== ========
Operating income (loss) $ 5,799 $ 1,572 $ (41) $ (4,762) $ 2,568
======== ======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 1998
Net sales to unaffiliated $ 33,910 $ 26,695 $ -- $ -- $ 60,605
customers ======== ======== ======== ======== ========
Gross profit $ 9,913 $ 11,583 $ -- $ -- $ 21,496
======== ======== ======== ======== ========
Operating income (loss) $ 5,226 $ 3,947 $ (319) $ (1,785) $ 7,069
======== ======== ======== ======== ========
SIX MONTHS ENDED JUNE 30, 1999
Net sales to unaffiliated $ 57,475 $ 84,623 $ 2,480 $ -- $144,578
customers ======== ======== ======== ======== ========
Gross profit $ 18,576 $ 37,822 $ 1,267 $ -- $ 57,665
======== ======== ======== ======== ========
Operating income (loss) $ 9,544 $ 5,818 $ 123 $ (6,703) $ 8,782
======== ======== ======== ======== ========
Identifiable assets at June 30, 1999 $103,219 $147,575 $ 2,445 $ -- $253,239
======== ======== ========
Corporate assets -- 18,624
Net assets of discontinued -- 11,734
operation -------- --------
Total assets at June 30, 1999 $ -- $283,597
======== ========
SIX MONTHS ENDED JUNE 30, 1998
Net sales to unaffiliated $ 64,128 $ 50,127 $ -- $ -- $114,255
customers ======== ======== ======== ======== ========
Gross profit $ 18,274 $ 21,842 $ -- $ -- $ 40,116
======== ======== ======== ======== ========
Operating income (loss) $ 9,207 $ 7,527 $ (362) $ (3,346) $ 13,026
======== ======== ======== ======== ========
</TABLE>
13
<PAGE> 16
(11) 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 offers
secure satellite communication equipment and satellite navigation systems.
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 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):
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
------- -------
Net Sales $ 4,029 $ 5,714
Interest expense allocation $ 45 $ 89
Income (loss) from discontinued operations $ (336) $ 210
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
------- -------
Net Sales $ 7,463 $10,540
Interest expense allocation $ 90 $ 204
Income (loss) from discontinued operations $ (507) $ 317
JUNE 30, 1999
-------------
Current assets $ 14,475
Property, plant and equipment, net 132
Other assets 2,930
Current liabilities (5,803)
--------
Net assets of discontinued operations $ 11,734
========
Kroll-O'Gara 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, Kroll-O'Gara believes no impairment exists at June 30, 1999.
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of results of operations and financial condition
is based upon and should be read in conjunction with Kroll-O'Gara's Consolidated
Financial Statements and Notes. As a result of the acquisitions made by
Kroll-O'Gara in 1999 and 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 acquisitions in 1999 and 1998, some of which
have been accounted for as poolings of interest and others of which have been
accounted for as purchases.
On June 16, 1999, Kroll-O'Gara acquired all of the capital stock of
Background America, Inc. of Nashville, Tennessee, in exchange for 899,243 shares
of Kroll-O'Gara common stock. Background America provides background
investigation services to a variety of industries. The transaction was accounted
for as a pooling of interests. Background America's revenues are included in the
Investigations and Intelligence Group.
On June 3, 1999, Kroll-O'Gara acquired substantially all of the assets and
assumed certain liabilities of Buchler Phillips, a partnership headquartered in
London, England. The purchase price of $20.0 million was satisfied with cash of
$12.0 million and 366,469 shares of stock valued at $8.0 million, or $21.86 per
share. The acquisition has been accounted for as a purchase and is effective on
April 1, 1999. Goodwill related to this transaction was approximately $20.7
million which will be amortized over 25 years. Buchler Phillips specializes in
corporate advisory practices which includes work related to corporate rescue,
insolvency, financial consulting and corporate finance. Buchler Phillips'
revenues are included in the Investigations and Intelligence Group.
On March 1, 1999, Kroll-O'Gara acquired all of the capital stock of
Financial Research, Inc. of Fort Washington, Pennsylvania, in exchange for
101,555 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. Its revenues are
included in the Investigations and Intelligence Group.
The acquisitions completed in 1998 are listed in the following chart.
<TABLE>
<CAPTION>
POOLINGS(1)
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>
<TABLE>
<CAPTION>
PURCHASES(3)
COMPANY BUSINESS GROUP DATE ACQUIRED PRICE
- --------------------- --------------------- --------------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Corplex, Inc. Investigative and Investigations and March 1, 1998 29,207 shares
</TABLE>
15
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C>
executive protection Intelligence
services
Lindquist Avey Forensic and Investigations and June 1, 1998 $4.7 million in cash
MacDonald Baskerville, investigative Intelligence and 278,340 shares
Inc. accounting 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 and September 30, 1998 $3.2 million in cash
Services and 38,788 shares
Holder Associates, S.A. Security services in Investigations and October 1, 1998 $4.5 million in cash
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-out
infringement cases in based on profits
Hong Kong and the
Peoples Republic of
China
</TABLE>
- --------------
(1) Pooling of interests 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.
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
recognizes estimated contract revenues based generally on
16
<PAGE> 19
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 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 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. In the
second quarter of 1999, Kroll-O'Gara completed the restructuring plan with an
additional non-recurring pre-tax restructuring charge of $3.9 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
were severance costs and lease termination costs. See Note 2 to the Notes to
Financial Statements for more information.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
17
<PAGE> 20
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE
JUNE 30, 30,
----------------------------- ---------------------------
1999 1998 1999 1998
----------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Security Products and Services
Military 9.2% 25.0% 12.4% 23.2%
Commercial 28.4% 31.0% 27.4% 33.0%
Investigations and Intelligence 60.8% 44.0% 58.5% 43.9%
Information Security 1.7% - 1.7% -
---------- ------------- ------------ ----------
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 58.2 64.5 60.1 64.9
---------- ------------- ------------ ----------
Gross profit 41.8 35.5 39.9 35.1
Operating expenses:
Selling and marketing 8.6 6.7 8.6 6.7
General and administrative 21.0 17.1 20.1 17.0
Merger expenses 3.8 - 2.1 -
Restructuring charge 5.0 - 3.0 -
---------- ------------- ------------ ----------
Operating income 3.4 11.7 6.1 11.4
Other income (expense):
Interest expense (1.0) (1.8) (1.2) (2.0)
Other, net (0.3) 0.7 - 0.3
---------- ------------- ------------ ----------
Income from continuing operations before
provision for income taxes and cumulative
effect of accounting change 2.0 10.6 4.9 9.7
Provision for income taxes 1.2 4.4 2.1 4.1
---------- ------------- ------------ ----------
Income from continuing operations before
cumulative effect of accounting change 0.8 6.2 2.8 5.6
Income (loss) from operations of
discontinued Voice and Data (0.4) 0.3 (0.4) 0.3
---------- ------------- ------------ ----------
Communications Group, net
Income before cumulative effect of
accounting change 0.3 6.5 2.5 5.9
Cumulative effect of accounting change,
net of tax benefit - - 0.5 -
---------- ------------- ------------ ----------
Net income 0.3% 6.5% 1.9% 5.9%
========== ============= ============ ==========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales for the three months ended June 30, 1999 increased
$15.9 million, or 26%, from $60.6 million in 1998 to $76.5 million in 1999.
SECURITY PRODUCTS AND SERVICES GROUP. Net sales for the Security Products
and Services Group for the three months ended June 30, 1999 decreased $5.2
million, or 15%, from $33.9 million in 1998 to $28.8 million in 1999. The
decrease results from a decrease in net sales of military products and services
of $8.1 million, or 53%, from $15.1 million in 1998 to $7.1 million in 1999. In
April 1998, Kroll-O'Gara began work on a new contract with the U.S. Military to
supply 738 armored High Mobility Multi-Purpose Wheeled Vehicles ("HMMWVs") to
the U.S. Army and the U.S. Air Force (the "738 Contract"). In addition,
Kroll-O'Gara continued work on a previous contract with the U.S. Military for
360 Up-Armored HMMWVs through July of 1998. The combination of production on the
two contracts as well as an aggressive delivery schedule required by the U.S.
Air Force relating to the 738 Contract resulted in unusually high levels of
production and net sales in 1998. In 1999, levels of production and net sales
more nearly approximated those of 1997 as production was based solely on the 738
Contract.
Also included in net sales for the Security Products and Services Group are
sales of commercial armoring products and services, which increased $2.9
million, or 15%, from $18.8 million in 1998 to
18
<PAGE> 21
$21.7 million in 1999. The increase in sales was due to increased production
resulting from a large contract from the U.S. government to produce over 300
light armored vehicles which Kroll-O'Gara received at the end of the first
quarter of 1999.
INVESTIGATIONS AND INTELLIGENCE GROUP. Net sales for the Investigations and
Intelligence Group increased $19.8 million, or 74%, from $26.7 million in the
second quarter of 1998 to $46.5 million in 1999. A substantial portion of this
increase is a result of the acquisitions completed for the Group in the second
half of 1998 and the first half of 1999. Excluding purchase acquisitions, sales
increased $3.5 million. This increase primarily stems from internal growth in
the Group's business intelligence and investigations as well as corporate
services practices.
INFORMATION SECURITY GROUP. Net sales in the second quarter of 1999 for the
Information Security Group were $1.3 million. The Information Security Group
initiated operations in February 1998 but had no sales in the second quarter of
1998.
COST OF SALES. Cost of sales for the three months ended June 30, 1999
increased $5.4 million, or 14%, from $39.1 million in 1998 to $44.5 million in
1999. The increase in cost of sales was due to the acquisitions completed in the
second half of 1998 and the first half of 1999. Excluding acquisitions, cost of
sales decreased $5.9 million. Gross profit as a percentage of net sales was
41.8%, as compared with 35.5% 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 Group net sales
increased as a percentage of total net sales. In addition, gross margin
increased as a result of a planned shift in sales mix in the Security Products
and Services Group where commercial armoring sales as well as military spare
parts sales, both with higher margins, increased as a percentage of total
Security Products and Services Group sales.
As a percentage of net sales, gross margin for the Security Products and
Services Group increased approximately 5.6% from 29.2% in 1998 to 34.8% in 1999.
Gross profit as a percentage of net sales increased approximately 2.5% from
43.4% in 1998 to 45.9% in 1999 for the Investigations and Intelligence Group,
primarily due to the contribution of higher margins from the completed
acquisition of Buchler Phillips in the second quarter of 1999. Gross margin at
the Information Security Group was 50.9%.
Historically, Kroll-O'Gara 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 second 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 June 30,
1999 increased $15.0 million, or 104%, from $14.4 million in 1998 to $29.4
million in 1999. The increase is partially due to the acquisitions completed
after the second quarter of 1998. Excluding acquisitions, operating expenses
increased $9.9 million. Included in this increase were merger related costs of
$2.9 million primarily for the Background America merger completed on June 16,
1999 and a restructuring charge of $3.8 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.
19
<PAGE> 22
As a percent of net sales, operating expenses, before merger related costs
and the restructuring charge, increased from 23.8% in 1998 to 29.6% in 1999. 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 second quarter as much of the cost savings
actions did not occur until late in the quarter.
INTEREST EXPENSE. Interest expense for the three months ended June 30, 1999
decreased $0.3 million, or 26%, from $1.1 million in 1998 to $0.8 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 May 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 June 30, 1999 was $0.9 million compared to $2.7 million in 1998.
The effective tax rate for the second quarter of 1999 was 60% compared to 41% in
1998. The effective tax rate in the second quarter of 1999 was higher due to the
non-deductibility of some merger-related expenses incurred in the period related
to the Background America, Inc. merger.
DISCONTINUED OPERATIONS. In the second quarter of 1999, the loss from
operations related to the discontinued Voice and Data Communications Group was
$0.3 million compared to income from operations of this business in 1998 of $0.2
million. The decrease in income was attributable to a $1.7 million decrease in
sales and a related decrease in gross profit of $0.7 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 does expect sales performance and
profitability to improve in the third quarter as a large contract was received
at the end of the second quarter for approximately $3.0 million of equipment.
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.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NET SALES. Net sales for the six months ended June 30, 1999 increased $30.3
million, or 27%, from $114.3 million in 1998 to $144.6 million in 1999.
SECURITY PRODUCTS AND SERVICES GROUP. Net sales for the Security Products
and Services Group for the six months ended June 30, 1999 decreased $6.7
million, or 10%, from $64.1 million in 1998 to $57.5 million in 1999. The
decrease results from a decrease in net sales of military products and services
of $8.6 million, or 33%, from $26.5 million in 1998 to $17.9 million in 1999. In
April 1998, Kroll-O'Gara began work on the 738 Contract. In addition,
Kroll-O'Gara continued work on a previous contract with the U.S. Military for
360 Up-Armored HMMWVs through July of 1998. The combination of production on the
two contracts as well as an aggressive delivery schedule required by the U.S.
Air Force relating to the 738 Contract resulted in unusually high levels of
production and net sales in 1998. In 1999, levels of production and net sales
more nearly approximated those of 1997 as production was based solely on the 738
Contract.
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Also included in net sales for the Security Products and Services Group are
sales of commercial armoring products and services, which increased $1.9
million, or 5%, from $37.7 million in 1998 to $39.6 million in 1999. The
increase in sales was due to increased production resulting from a large
contract from the U.S. government to produce over 300 light armored vehicles
which Kroll-O'Gara received at the end of the first quarter of 1999.
INVESTIGATIONS AND INTELLIGENCE GROUP. Net sales for the Investigations and
Intelligence Group increased $34.5 million, or 69%, from $50.1 million in 1998
to $84.6 million in 1999. A substantial portion of this increase is a result of
the acquisitions completed for the Group in the second half of 1998 and the
first half of 1999. Excluding purchase acquisitions, sales increased $5.6
million. This increase primarily stems from internal growth in the Group's
business intelligence and investigations as well as corporate services
practices.
INFORMATION SECURITY GROUP. Net sales for the six months ended June 30,
1999 for the Information Security Group were $2.5 million. The Information
Security Group initiated operations in February 1998 but had no sales in the
first half of 1998.
COST OF SALES. Cost of sales for the six months ended June 30, 1999
increased $12.8 million, or 17%, from $74.1 million in 1998 to $86.9 million in
1999. The increase in cost of sales was due to the acquisitions completed in the
second half of 1998 and the first half of 1999. Excluding acquisitions, cost of
sales decreased $5.7 million. Gross profit as a percentage of net sales was
39.9%, as compared with 35.1% 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 Group net sales
increased as a percentage of total net sales. In addition, gross margin
increased as a result of a planned shift in sales mix in the Security Products
and Services Group where commercial armoring sales as well as military spare
parts sales, both with higher margins, increased as a percentage of total
Security Products and Services Group sales.
As a percentage of net sales, gross margin for the Security Products and
Services Group increased approximately 3.8% from 28.5% in 1998 to 32.3% in 1999.
Gross profit as a percentage of net sales increased approximately 1.1% from
43.6% in 1998 to 44.7% in 1999 for the Investigations and Intelligence Group,
primarily due to the contribution of higher margins from the completed
acquisition of Buchler Phillips in the second quarter of 1999. Gross margin at
the Information Security Group was 51.0%.
Historically, Kroll-O'Gara 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 six months of 1999, consolidated gross profit as
a percentage of net sales may increase as well.
OPERATING EXPENSES. Operating expenses for the six months ended June 30,
1999 increased $21.8 million, or 80%, from $27.1 million in 1998 to $48.9
million in 1999. The increase is partially due to the acquisitions completed
after the second quarter of 1998. Excluding acquisitions, operating expenses
increased $12.6 million. Included in this increase were merger-related costs of
$3.1 million primarily for the Background America merger completed on June 16,
1999 and a restructuring charge of $4.4 million. The remaining increase relates
to an increase in the level of personnel and
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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 23.7% in 1998 to 28.7% in
1999. 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 six months of 1999 as
much of the cost savings actions did not occur until late in the quarter.
INTEREST EXPENSE. Interest expense for the six months ended June 30,
1999 decreased $0.5 million, or 22%, from $2.3 million in 1998 to $1.8 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 May 1998, Kroll-O'Gara received a 1%
step down in interest rate on 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 six
months ended June 30, 1999 was $3.0 million compared to $4.6 million in 1998.
The effective tax rate for the first six months of 1999 was 42% compared to 42%
in 1998. In 1998, the effective tax rate was negatively impacted by recording
valuation allowances on certain foreign net operating losses. In 1999, the
effective tax rate was negatively impacted by the non-deductibility of some
merger-related expenses incurred in the period related to the Background
America merger.
DISCONTINUED OPERATIONS. In 1999, the loss from operations related to
the discontinued Voice and Data Communications Group was $0.5 million compared
to income from operations of this business in 1998 of $0.3 million. The decrease
in income was attributable to a $3.1 million decrease in sales and a related
decrease in gross profit of $1.1 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 does expect sales performance and profitability to improve in the
third quarter as a large contract was received at the end of the second quarter
for approximately $3.0 million of equipment. 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 and other financing activities, excluding non-cash charges such as
depreciation and amortization.
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CREDIT FACILITY. On June 25, 1999, Kroll-O'Gara amended and restated its
credit agreement with KeyBank National Association to provide for a revolving
line of credit of $25 million and a letter of credit facility of approximately
$7.6 million which matures on May 31, 2000. Advances under the revolving credit
facility bear interest at rates ranging from prime less 1.75% to prime, or, at
Kroll-O'Gara's option, LIBOR plus .75% to LIBOR plus 1.75%, dependent upon a
defined financial ratio. The credit agreement includes financial covenants,
which among other restrictions, requires the maintenance of certain financial
ratios, including interest coverage and net worth, and impose limitations on
goodwill, additional indebtedness and capital expenditures. Kroll-O'Gara was not
in compliance with its capital expenditure covenant as of June 30, 1999.
However, Kroll-O'Gara did receive a waiver of this noncompliance. Borrowings
under this line of credit were approximately $19.1 million at June 30, 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 upon the sale of its Voice and Data
Communications Group.
Kroll-O'Gara will continue to review additional sources of capital,
which may include additional bank borrowings or equity offerings, as they become
necessary to meet needs other than working capital.
CASH FLOWS FROM OPERATING ACTIVITIES. Cash used in operating activities
decreased from $8.8 million in the first six months of 1998 to $2.5 million in
1999. In both periods, cash was used primarily to fund working capital
investments offset by income from continuing operations.
CASH FLOWS FROM INVESTING ACTIVITIES. Historically, Kroll-O'Gara has
limited its capital expenditure requirements by leasing certain assets. Through
June 30, 1999, Kroll-O'Gara incurred $9.2 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 as
well as upgrades of general information systems unrelated to Kroll-O'Gara's Year
2000 compliance efforts. Additional capital expenditures were made for machinery
and equipment. Capital expenditures totaled $2.5 million for the six months
ended June 30, 1998. In 1999, Kroll-O'Gara sold $12.0 million of its marketable
securities in order to fund its increased capital expenditure requirements.
Additions to databases totaled $1.8 million and $2.4 million for the six months
ended June 30, 1999 and 1998, respectively.
CASH FLOWS FROM FINANCING ACTIVITIES. Cash provided by financing
activities for the first six months of 1998 was $58.8 million. Cash provided by
financing activities was a result of the Offering in May 1998. In 1999, cash
provided by financing activities was $18.3 million and was provided by
borrowings under the bank lines of credit.
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 Kroll-O'Gara'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 June 30, 1999, eight such contracts, maturing between July 1999
and December 2000, were outstanding in connection with intercompany
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<PAGE> 26
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 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. One of the new systems became operational
early in the third quarter and the other is scheduled to be operational by the
middle of the fourth 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 acting to resolve any
potential problems which were previously identified. 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 end of the third quarter of
1999.
Total Year 2000 compliance cost is estimated to be approximately $5.5
million, of which approximately $4.9 million relates to the acquisition of new
enterprise systems and will be capitalized. The remaining approximately $0.6
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 June 30, 1999 were $4.4 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.
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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 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.
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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, Kroll-O'Gara 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 2. CHANGES IN SECURITIES
On March 1, 1999, Kroll-O'Gara issued 101,555 shares of common stock in
the acquisition of Financial Research, Inc. On June 3, 1999, the Kroll-O'Gara
Company issued 366,469 shares of common stock in the acquisition of Buchler
Phillips. On June 16, Kroll-O'Gara issued 899,243 shares of common stock in the
acquisition of Background America. In each case, the shares were issued to a
limited number of investors and the issuance was exempt from registration on the
basis of Section 4(2) of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment Agreement between Kroll Associates, Inc.,
The Kroll-O'Gara Company and Michael G. Cherkasky, dated
May 17, 1999
10.2 Amended Loan Agreement, dated June 25, 1999, among The
Kroll-O'Gara Company, O'Gara-Hess & Eisenhardt Armoring
Company, Kroll Holdings, Inc., Kroll Associates, Inc. and
Keybank National Association
27 Financial Data Schedule (Edgar version only)
(b) Reports on Form 8-K.
During the quarter ended June 30, 1999, Kroll-O'Gara filed the
following current reports on Form 8-K.
a.) Announcing the acquisition of assets of Buchler Phillips
(Date of Report: June 3, 1999) filed June 18, 1999.
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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 16th day of August, 1999.
THE KROLL-O'GARA COMPANY
By /s/ Nicholas P. Carpinello
Nicholas P. Carpinello
Controller and Treasurer
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EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement is made and entered into as of this 17th day
of May 1999, by and among KROLL ASSOCIATES, INC., a Delaware corporation, THE
KROLL O'GARA COMPANY, an Ohio corporation, (hereinafter sometimes collectively
referred to as the "Company"), and Michael G. Cherkasky (the "Executive").
WHEREAS, the Executive and the Company desire to embody in this
Agreement the terms and conditions of the Executive's employment by the Company;
NOW, THEREFORE, in consideration of the premises and mutual promises
contained in this Agreement, including the compensation paid to the Executive,
the parties hereby agree:
ARTICLE 1
EMPLOYMENT, DUTIES AND RESPONSIBILITIES
---------------------------------------
1.1 Employment. The Company shall employ the Executive as President of
Kroll Associates, Inc. and the Investigative Intelligence Group. The Executive
hereby accepts such employment. The Executive agrees to devote his best efforts
to promote the interests of the Company, and, if requested by the Board of
Directors of the Company, for any affiliate of the Company.
1.2 Duties and Responsibilities. The Executive shall have such duties
and responsibilities as are consistent with his position and shall perform such
services not inconsistent with his position as shall, from time to time, be
reasonably assigned to him by the Board of Directors of the Company or any other
officer of the Company in a position superior to the Executive. The Company
shall not, without the Executive's consent, relocate the Executive outside of
the New York City Metropolitan area.
ARTICLE 2
TERM
----
2.1 "Evergreen" Term. The term of the Executive's employment under this
Agreement (the "Term") shall commence on the date hereof and shall continue for
a two-year "Evergreen" period which shall automatically be renewed and extended
on a daily basis so as to always have two years remaining, unless sooner
terminated pursuant to Article V hereof. It is expressly acknowledged and agreed
by the parties that it is their intention that the term of this Agreement shall
be "Evergreen" meaning that there shall always be two (2) years remaining before
expiration thereof.
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ARTICLE 3
COMPENSATION
------------
3.1 Salary, Bonuses and Benefits. As compensation and consideration for
the performance by the Executive of his obligations to the Company under this
Agreement, the Executive shall be entitled to the compensation and benefits
described in the attached Exhibit A (subject, in each case, to the provisions of
ARTICLE 5 hereof).
3.2 Expenses. The Company will reimburse the Executive for reasonable
business-related expenses incurred by him in connection with the performance of
his duties hereunder during the Term, subject, however, to the Company's written
policies relating to business-related expenses as in effect, from time to time,
during the Term, a copy of which has previously been provided to the Executive.
ARTICLE 4
EXCLUSIVITY, CONFIDENTIALITY, AND NONCOMPETITION
------------------------------------------------
4.1 Exclusivity, Etc. The Executive agrees to perform his duties,
responsibilities and obligations hereunder efficiently and to the best of his
ability. The Executive agrees that he will devote his entire working time, care
and attention and best efforts to such duties, responsibilities and obligations
throughout the Term, subject to any obligations to third parties in existence as
of the date hereof, which obligations may not be in conflict with Section 4.2(d)
hereof. The Executive also agrees that he will not engage in any other business
activities pursued for gain, profit or other pecuniary advantage that are
competitive with the activities of the Company, except as permitted in Section
4.2 below. The Executive agrees that all of his activities as an employee of the
Company shall be in conformity with all policies, rules and regulations and
directions of the Company not inconsistent with this Agreement.
4.2 Confidentiality and Noncompetition.
(a) The term "Confidential Information," as employed in this Agreement,
means, except to the extent such information is otherwise publicly available and
such public availability was not wrongfully caused in any manner by the
Executive, (i) any object, material, device, substance, data, report, record,
forecast, interpretation or information, whether written or oral, not in the
public domain and relating to or reflecting any product, design, process,
procedure, formula, research, idea, invention, discovery, improvement,
equipment, scientific or technical information, method of production, business
plan, financial information, listing of names, addresses or telephone numbers,
trade secret and/or know how, and all matters pertaining thereto, of the Company
and its affiliates, whether or not contained in any written document, which are
or have been
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directly or indirectly communicated to, acquired by, or learned by the Executive
as a result of his relationship (whether as an employee or otherwise) with the
Company or any of its affiliates and (ii) any analysis, compilation, note,
study, sample, drawing, sketch, computer program, computer file or other
document, not in the public domain, whether prepared by or under the direction
of the Company or any of its affiliates, the Executive or others, and all
copies, facsimiles, replicas, photographs, and reproductions thereof, which
contain, relate to, or reflect any of the aforementioned items.
(b) The Executive shall not, directly or indirectly, either disclose
any Confidential Information, except to the extent required in the performance
of his duties as an employee of the Company or use any Confidential Information
for the benefit of himself or any person, firm, corporation, or association
other than the Company or any of its affiliates, during the Term or thereafter.
(c) All samples, drawings, sketches, documents and written information
of any kind reflecting any of the Confidential Information or relating to the
Company's or any of its affiliates' business or products which come into
possession of the Executive shall remain the sole property of the Company or
such affiliate and shall not be copied, photocopied, reprinted or otherwise
reproduced or disseminated by the Executive, except in the performance of his
duties as an employee of the Company. Upon the earlier of the Company's request
therefor or the termination of the Executive's employment by the Company, the
Executive shall return all such samples, drawings, sketches, documents and
written information, and all copies, facsimiles, replicas, photocopies, and
reproductions of them, to the Company.
(d) The Executive hereby covenants and agrees to refrain, during his
employment and for a period of two (2) years after the date of termination of
the Executive's employment during the Term (i) if such termination during the
Term was for Cause (as hereinafter defined) or (ii) if the Executive terminates
his employment during the Term other than for "Good Reason" (as hereinafter
defined), from, directly or indirectly, (a) engaging in his own behalf in the
Investigative and Intelligence Business (as hereinafter defined), or (b) owning
any interest in or engaging in or performing any service for any person, firm,
corporation or other entity, either as a partner, owner, employee, consultant,
agent officer, director or shareholder that (A) derives a meaningful portion of
its revenues from the Investigative and Intelligence Business or (B) is a
meaningful competitor in the Investigative and Intelligence Business.
Notwithstanding the foregoing, for purposes of this Section 4.2(d), the term
"Term" shall not include any extensions or renewals of this Agreement or
renewals beyond the two year anniversary date of this Agreement. The Executive
will not at any time during the period of the Executive's employment by the
Company and for a period of one (1) year thereafter induce or assist others to
induce or attempt to induce, in any manner, directly or indirectly, any
employee, agent, representative, customer or any other person or concern dealing
with or in any way associated with the Company or any of its affiliates to
terminate or to modify in any other fashion to the detriment of the Company or
any of its affiliates such association with the Company or any of its
affiliates. The Executive
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represents that his experience and capabilities are such that the provision of
this paragraph will not prevent him from earning a livelihood. Notwithstanding
any provision of this Section 4.2(d), (i) it shall not be a violation of this
Section 4.2(d) for the Executive to own two percent (2%) or less of a public
company, provided that the Executive does not exert or have the power to exert
any management or other control over such public company, and (ii) the Executive
shall not be required to sell or transfer the Executive's ownership interest in
any company involved in the Investigative and Intelligence Business which the
Executive owns as of the date of this Agreement. The Investigative and
Intelligence Business shall mean the business of private investigations,
executive protection, corporate investigation, risk and crisis management,
forensic auditing and/or business intelligence.
(e) The parties hereto agree that the Executive's agreements contained
in paragraph (b) through (d) of this Article relate to matters of unique
character and peculiar value impossible of replacement, that breach of such
agreements by the Executive will cause the Company great and irreparable injury
therefor, that the remedy at law for any breach of the agreements contained in
(b) through (d) will be inadequate and that the Company, in addition to any
other relief available to it, shall be entitled to seek temporary restraining
orders and temporary and permanent injunctive relief or other equitable relief
without the necessity of proving actual damage or of providing any bond so as to
prevent a breach of any of the agreements contained in (b) through (d) of this
Article and to secure the enforcement thereof.
ARTICLE 5
TERMINATION
-----------
5.1 Termination by the Company. The Company shall have the right,
subject to the terms of this Agreement, to terminate the Executive's employment
at any time, with or without "Cause". For purposes of this Agreement, "Cause"
shall mean the non-appealable conviction of Executive of a felony.
5.2 Termination by the Executive.
(a) The Executive shall have the right, subject to the terms of this
Agreement, to terminate his employment at any time with or without "Good
Reason." For purposes of this Agreement, "Good Reason" shall mean (A) a Change
in Control of the Company (as defined below); (B) any assignment to Executive of
any duties other than those contemplated by, or any limitation on the powers of
Executive in any respect not contemplated by, this Agreement; (C) any removal of
Executive from or any failure to re-elect Executive to any of the positions he
holds as of the date of this Agreement; (D) a reduction in Employee's rate of
compensation, including Stock Options and
4
<PAGE> 5
Incentive Stock, not agreed to in writing by him; (E) a failure by Company to
comply with any other material provision of this Employment Agreement; (F) the
occurrence of an event which either directly or indirectly results in a change
of the Executive's reporting responsibility such that the Executive is required
to report to any person or persons other than Wilfred O'Gara and/or Jules Kroll.
(b) "Change in Control of the Company" shall be deemed to have occurred
if any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the
Exchange Act), other than Jules Kroll personally (and specifically not his
estate or personal representatives), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 promulgated under the Exchange Act), directly
5
<PAGE> 6
or indirectly, of securities of the Company representing thirty-five percent
(35%) or more of the combined voting power of the Company's then outstanding
securities.
5.3 Death. In the event the Executive dies during the Term, this
Agreement shall automatically terminate, such termination to be effective on the
date of the Executive's death.
5.4 Disability. In the event that the Executive shall suffer a
disability which shall have prevented him from performing satisfactorily his
obligations hereunder for a period of at least ninety (90) consecutive days or
one hundred eighty (180) non-consecutive days within any three hundred
sixty-five (365) day period, the Company shall have the right to terminate the
Executive's employment, such termination to be effective upon the giving of
notice thereof to the Executive in accordance with Section 6.3 hereof.
5.5 Effect of Termination.
(a) In the event of termination of the Executive's employment for any
reason, the Company shall pay to the Executive (or his beneficiary, heirs or
estate in the event of his death) any base salary or other compensation in
accordance with the normal pay practices of the Company upon a termination of
employees for similar reasons.
(b) In the event of termination of the Executive's employment (i) by
the Company for Cause, (ii) by the Executive for other than for Good Reason,
neither the Executive nor any beneficiary, heir or estate of the Executive shall
be entitled to any further compensation other than the amounts described in
Section 5.5(a) hereof.
(c) In the event of termination of the Executive's employment by the
Company other than for Cause, or by the Executive for Good Reason, or upon the
occurrence of Executive's Death or Disability as defined in Sections 5.3 and 5.4
hereof, the Company shall immediately pay the Executive, in addition to the
amounts described in Section 5.5(a) hereof, an amount equal to the value of the
Executive's Salary, plus Annual Bonus plus Additional Compensation, plus Stock
Options and Incentive Stock, as those terms and amounts are defined and set
forth in this Agreement and Exhibit A hereto, for the full remainder of the
Term. Such amount shall be payable in a lump sum.
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ARTICLE 6
MISCELLANEOUS
-------------
6.1 Benefit of Agreement; Assignment; Beneficiary.
(a) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns (but only to the extent the Agreement
relates to such entity), including, without limitation, any corporation or
person which may acquire all or substantially all of the Company's assets or
business or with or into which the Company may be consolidated or merged. This
Agreement shall also inure to the benefit of, and be enforceable by, the
Executive and his personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amount would still be payable to the Executive hereunder if he had
continued to live, all such amount shall be paid in accordance with the terms of
this Agreement to the Executive's beneficiary, devisee, legatee or other
designee, or if there is no such designee, to the Executive's estate.
(b) The Company shall require any successor (whether direct or
indirect, by operation of law, by purchase, merger, consolidation or otherwise)
to all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place.
(c) Upon a reorganization, merger or consolidation of The Kroll-O'Gara
Company with one or more corporations as a result of which The Kroll-O'Gara
Company is not to be the surviving corporation (whether or not The Kroll-O'Gara
Company shall be dissolved or liquidated) or upon the execution of an agreement
for the sale or transfer of all or substantially all of the assets of The
Kroll-O'Gara Company ("Change-in-Control Event") at the option of the Executive,
the Term shall be modified to eighteen (18) months from the Change-in-Control
Event. Provided, however, that nothing contained in this Section 6. l (c) shall
limit or otherwise modify Executive's rights under ARTICLE 5.
6.2 Notices. Any notice required or permitted hereunder shall be in
writing and shall be sufficiently given if personally delivered or if sent by
registered or certified mail, postage prepaid, with return receipt requested,
addressed: (a) in the case of the Company to the Chief Operating Officer of the
Company, and (b) in the case of the Executive, to the Executive's last known
address as reflected in the Company's records, or to such other address as the
Executive shall designate by written notice to the Company. Any notice given
hereunder shall be deemed to have been given at the time of receipt thereof by
the person to whom such notice is given if personally delivered or at the time
of mailing if sent by registered or certified mail.
6.3 Entire Agreement; Amendment. This Agreement contains the entire
agreement of the parties hereto with respect to the terms and conditions of the
Executive's employment during the Term and supersedes any and all prior
agreements and understandings, whether written or oral, between the parties
hereto with respect to compensation due for services rendered hereunder. This
Agreement may not be changed or modified except by an instrument in writing
signed by both of the parties hereto.
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6.4 Waiver. The waiver of either party of a breach of any provision of
this Agreement shall not operate or be construed as a continuing waiver or as a
consent to or waiver of any subsequent breach hereof.
6.5 Headings. The Article and Section headings herein are for
convenience of reference only, do not constitute a part of this Agreement and
shall not be deemed to limit or affect any of the provisions hereof.
6.6 Governing Law. This Agreement shall be governed by, and construed
and interpreted in accordance with, the internal laws of the State of New York
without reference to the principles of conflict of laws.
6.7 Agreement to Take Actions. Each party hereto shall execute and
deliver such documents, certificates, agreements and other instruments and shall
take such other actions, as may be reasonably necessary or desirable in order to
perform his or its obligations under this Agreement or to effectuate the
purposes hereof.
6.8 Venue and Jurisdiction. Any action or proceeding arising from or
relating to this Agreement and/or Executive's employment or relationship with
the Company shall exclusively be brought in the courts of the State of New York,
County of New York or in the United States District Court for the Southern
District of New York, and each of the parties hereto consents to the
jurisdiction of such courts (and the appropriate appellate courts) in any such
action or proceeding and waives any objections to venue therein.
6.9 Survivorship. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to effectuate the intended preservation of such rights and
obligations.
6.10 Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision or provisions of this Agreement, which shall remain in full
force and effect. If any provision of this Agreement is held to be invalid, void
or unenforceable, any court so holding shall substitute a valid, enforceable
provision that preserves, to the maximum lawful extent, the terms and intent of
this Agreement.
6.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
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<PAGE> 9
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement effective as of the date first written above.
THE KROLL O'GARA COMPANY
By: /s/ JULES B. KROLL
--------------------------------
Name: Jules B. Kroll
Title: Chairman of the Board
KROLL ASSOCIATES, INC.
By: /s/ JULES B. KROLL
--------------------------------
Name: Jules B. Kroll
Title: Chairman of the Board
EXECUTIVE
/s/ MICHAEL G. CHERKASKY
------------------------------------
Michael G. Cherkasky
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<PAGE> 10
EXHIBIT A TO EMPLOYMENT AGREEMENT
The Executive shall receive as compensation for his performance under
the attached Employment Agreement the following:
(a) Salary. The Company shall pay the Executive a base salary during
the Term, payable in accordance with the normal payment procedures of the
Company, subject to such withholdings and other normal employee deductions as
may be required by law, at the annual rate of not less than $400,000, for the
first calendar year of the Term, and thereafter Executive's salary shall be
increased by a rate of not less than 4% of the previous year's salary on January
1 of each year of Executive's employment. The Board of Directors of the Company
shall also review such compensation not less frequently than annually during the
Term, but any adjustment in Executive's salary may only be greater than as
previously set forth.
(b) Annual Bonus. In addition to base salary, the Executive shall earn
incentive compensation ("incentive compensation") and the Company shall pay each
fiscal year, or any fractional period thereof during the term, incentive
compensation in accordance with the plan approved by the Compensation Committee
and/or the Board of Directors of the Company or The Kroll-O'Gara Company each
fiscal year.
(c) Additional Compensation. In addition to the compensation set forth
in sections (a) and (b) above, Executive shall be entitled to the following
Additional Compensation:
(i) Simultaneously with the execution of this Agreement, the
Company shall pay to the Executive the sum of $40,000.
(ii) On January 2, 2000, the Company shall pay the Executive
$100,000. Such payment shall be made irrespective of whether the Executive is
employed by the Company on January 2, 2000.
(iii) On each three-year anniversary date of this Agreement,
the Company shall pay Executive an additional $350,000 over and above all other
compensation to which Executive is entitled. If the Executive's employment with
the Company is terminated other than for Cause, the Executive shall be
immediately entitled to the $350,000 payment which would have been paid at the
three-year anniversary date next following the date of termination.
(d) Benefits. The Executive shall participate during the Term in such
pension, life insurance, health, death, disability and major medical insurance
plans, and in such other employee benefit plans and programs, for the benefit of
the employees of the Company, as may be maintained, from time to time, during
the Term, in the
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<PAGE> 11
Company's discretion, in each case to the extent and in the manner available to
other officers of the Company and subject to the terms and provisions of such
plans or programs. Nothing herein shall limit the Company's ability to change,
modify, cancel or amend any such pension, life insurance, health, death,
disability or medical insurance plans.
(e) Vacation. The Executive shall be entitled to paid vacation in
accordance with Company policy during the Term.
(f) Stock Options and Incentive Stock.
(i) On March 25, 1999, the Executive was granted 50,000 stock
options under, and in accordance with the terms of, The Kroll-O'Gara Company's
1996 Stock Option Plan at an exercise price of $26.938, which options shall vest
over a three year period (one-third in each year) commencing one year after the
date of grant.
(ii) On March 25, 1999, the Executive was granted 6,000
incentive shares under The Kroll-O'Gara Company's 1998 Stock Incentive Plan.
Such incentive shares shall vest as follows: 2,000 shares on January 1, 2000,
2,000 shares on January 1, 2001, and 2,000 shares on January 1, 2002.
(iii) The Executive shall participate in stock options in
future years consistent with other senior executives.
(iv) The Executive shall participate in incentive stock plans
in future years consistent with other senior executives.
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<PAGE> 1
EXHIBIT 10.2
AMENDMENT TO LOAN AGREEMENT
THE KROLL-O'GARA COMPANY, O'GARA - HESS & EISENHARDT ARMORING COMPANY,
KROLL HOLDINGS, INC., and KROLL ASSOCIATES, INC. (individually and collectively
the "Borrower"), and KEYBANK NATIONAL ASSOCIATION ("Lender"), hereby agree as
follows:
1. RECITALS.
1.1 On October 30, 1998, Borrower and Lender entered into an
Amended and Restated Loan Agreement (the "Loan Agreement").
Capitalized terms used herein and not otherwise defined will
have the meanings given such terms in the Loan Agreement.
1.2 Borrower and Lender desire to enter into a new Revolving
Credit Note dated of even date herewith (the "Revolving Credit
Note") to provide Borrower with funds for general corporate
purposes in the amount of $25,000,000.
1.3 Borrower and Lender desire to amend the Loan Agreement
pursuant to this Amendment to Loan Agreement (the
"Amendment").
2. AMENDMENT.
2.1 Section 3.1.1 is amended to provide as follows:
TOTAL FACILITY. Lender will make available to Borrower a
revolving credit facility of up to $25,000,000 ("Total
Facility"), subject to the terms and conditions and made upon
the representations and warranties of Borrower set forth in
this Agreement. Amounts outstanding under the revolving credit
facility from time to time will be referred to as the
"Revolving Credit Loan". The Revolving Credit Loan will be
represented by the promissory note of Borrower of even date
with the Amendment to Loan Agreement and all amendments,
extensions and renewals thereto and restatements and
replacements thereof ("Revolving Credit Note"). The Revolving
Credit Loan will bear interest and will be payable in the
manner set forth in the Revolving Credit Note, the terms of
which are incorporated herein by reference.
<PAGE> 2
2.2 Section 3.1.4 of the Loan Agreement is amended to provide as
follows:
COMMITMENT FEE. Borrower will pay to Lender a commitment fee
from the date on which all of the conditions precedent set
forth in Section 9.1, below are satisfied, computed at the
Applicable Rate per annum set forth below, on the average
daily difference between: (i) the outstanding amount of the
Note and (ii) the Total Facility, such Commitment Fee to be
payable quarterly in arrears on the last day of each
September, December, March and June and upon the maturity date
of the Note and/or the date this Agreement is terminated:
FUNDED DEBT TO EBITDA APPLICABLE RATE
--------------------- ---------------
If less than 2.0 to 1.0 0.125%
If greater than or equal to 2.0 to 1.0 0.25%
The Applicable Rate will be adjusted by Lender as necessary on
the first Business Day of the calendar month following
submission to Lender of the Borrower's quarterly financial
statements.
2.3 Section 5.2 of the Loan Agreement is hereby amended as
follows:
LATEST FINANCIALS. Its Current Financial Statements dated
March 31, 1999 as delivered to Lender are true, complete and
accurate in all material respects and fairly present its
financial condition, assets and liabilities, whether accrued,
absolute, contingent or otherwise and the results of its
operations for the periods specified therein. The annual
financial statements of all business entities included in the
Current Financial Statements have been prepared in accordance
with generally accepted accounting principles applied
consistently with preceding periods subject to any comments
and notes contained therein.
2.4 Section 7.4 is hereby amended as follows:
GUARANTEES. Other than (i) with respect to the Senior Notes
and (ii) guarantees by one or more of the Persons constituting
Borrower of the obligations of one or more other Persons
constituting Borrower or (iii) guarantees by one or more of
the Persons constituting Borrower of the obligations of any
Guarantor or (iv) guarantees by one or more of the Persons
constituting Borrower of the obligations of a subsidiary,
guarantee, endorse or become contingently liable for the
obligations of any person, firm or corporation, except in
connection with the endorsement and deposit of checks in the
ordinary course of business for collection or accounts payable
incurred by Subsidiaries in the ordinary course of business.
2.5 Section 7.5 of the Loan Agreement (Fixed Charge Coverage) is
hereby deleted and replaced with the following:
INTEREST COVERAGE RATIO. Permit the ratio of Borrower's
consolidated earnings before interest and taxes divided by the
interest expenses to be less than 2.5 to 1, measured quarterly
on a rolling four quarter basis.
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<PAGE> 3
2.6 Section 7.6 of the Loan Agreement is amended to provide as
follows:
NET WORTH MAINTENANCE. Fail to maintain at all times a minimum
consolidated Net Worth of not less than $126,985,500.00 as of
December 31, 1998 to be increased by 65% of net income,
calculated at the end of each quarter thereafter. The amount
of Intangible Assets included in Net Worth shall at no time
exceed 60% of consolidated Net Worth from closing through
December 30, 2000 and shall at no time thereafter exceed 55%
of consolidated Net Worth; however, should Borrower purchase
intangible assets after closing for which Borrower tenders new
common stock as consideration for the purchase price, Lender
will reduce Borrower's Intangible Assets figure as shown on
its post-closing balance sheet by the corresponding amount of
such common stock for purposes of calculating compliance with
their covenants.
For purposes of this Agreement, "Intangible Assets"
shall mean the sum total shown on Borrower's balance sheet
under the line item entitled "Costs in Excess of Assets
Acquired and other Intangible Assets" as such intangible
assets are required to be classified by generally accepted
accounting principles, and other such assets that may be
deemed to be "Intangible Assets" by Lender in its sole
discretion.
2.7 Section 7.7 of the Loan Agreement (Debt to Capitalization) is
hereby deleted.
2.8 Subsection 7.8.1 of Section 7.8 of the Loan Agreement (Capital
Expenditures) is hereby amended to provide as follows:
7.8.1 Make capital expenditures or acquisitions, including the
capitalized value of any leases in the aggregate, which, when
calculated in accordance with generally accepted accounting
principles, would exceed the $8,000,000.00 in any fiscal year.
2.9 Subsection 7.8.2 of Section 7.8 of the Loan Agreement (Capital
Expenditures) is hereby deleted.
2.10 Section 7.9 of the Loan Agreement is amended to provide as
follows:
FUNDED DEBT TO EBITDA. Permit the ratio of Consolidated Funded
Debt to Consolidated Earnings Before Interest, Taxes,
Depreciation and Amortization ("EBITDA"), to exceed 3.0 to
1.0, measured quarterly on a rolling four quarter basis.
2.11 Section 7.10 of the Loan Agreement is amended to provide as
follows:
CASH BALANCES HELD BY SUBSIDIARIES. Permit the TKOGC
Subsidiaries, other than OGHEAC and KAI, to hold cash balances
for any reason other than to fund working capital and other
general corporate purposes in the ordinary course; provided
however that the Borrower may, with Lender's prior written
consent
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<PAGE> 4
which will not be unreasonably withheld, permit any foreign
subsidiary, created solely for the purpose of minimizing tax
liability, to hold cash balances.
2.12 Section 7.11 of the Loan Agreement is hereby amended as
follows:
REDEMPTIONS. Purchase, retire, redeem or otherwise acquire for
value, directly or indirectly, any shares of its capital stock
now or hereafter outstanding, except as part of a stock option
plan, a stock buy back plan or stock distribution plan that
may be approved by the Board of Directors of Borrower,
provided, however, that the value of such purchase,
retirement, redemption or acquisition does not exceed 5% of
Borrower's consolidated Net Worth.
2.13 Section 7.12 is hereby deleted in its entirety and replaced
with the following:
7.12 INVESTMENTS. The Borrower will not, and will not
permit any TKOGC Subsidiaries to, at any time make or
permit to exist any Investment except:
7.12.1 Property to be used in the ordinary course
of business of the Borrower and the TKOGC
Subsidiaries;
7.12.2 Current assets arising from the sale or
goods and services in the ordinary course of
business of the Borrower and the TKOGC
Subsidiaries;
7.12.3 Investments in one or more subsidiaries or
in any Person that concurrently with such
Investment becomes a subsidiary; provided
that such Investments are in compliance with
Section 7.10, above and as to an Investment
in foreign subsidiaries (other than a
Borrower or any Guarantor), such Investments
do not exceed $1,000,000 in the aggregate in
any fiscal year;
7.12.4 Investments existing as of May 30, 1997 and
more particularly set forth in Schedule
10.10 of the Note Purchase Agreement dated
May 30, 1997;
7.12.5 Investments in United States Governmental
Securities, provided that such obligations
mature within 365 days from the date of
acquisition thereof;
7.12.6 Investments in securities issued by Federal
Farm Credit Bank, Federal National Mortgage
Association, Federal Home Loan Mortgage
Corp., Federal Home Loan Bank, Student Loan
Marketing Association, and Tennessee Valley
Authority, provided that such obligations
mature within 365 days from the date of
acquisition thereof;
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<PAGE> 5
7.12.7 Investments in certificates of deposit,
banker's acceptances or accounts issued or
held by an Acceptable Bank, provided that
such obligations mature within 365 days from
the date of acquisition thereof;
7.12.8 Investments in accounts held by a
Non-Qualifying Bank, provided that the
amount held in accounts by all
Non-Qualifying Banks for the benefit of
Borrower or any TKOGC Subsidiary will not
exceed the amount of working capital
required by Borrower; or such TKOGC
Subsidiary in the ordinary course of
business;
7.12.9 Investments in variable rate tax exempt
bonds, notes or funds given either of the
two highest ratings by a credit rating
agency of recognized national standing, or
if payment thereunder may be made by drawing
on letters of credit issued by Acceptable
Banks, so long as the Investments in such
bonds, notes or funds mature within one year
of the date of acquisition thereof;
7.12.10 Investments in commercial paper given either
of the two highest ratings by a credit
rating agency of recognized national
standing and maturing not more than 270 days
from the date of creation thereof; and
7.12.11 Investments in money market mutual funds
that invest solely in so-called "money
market" instruments maturing not more than
one year after the acquisition thereof,
which funds have assets in excess of
$500,000,000.
7.12.12 Investments not otherwise included in
Section 7.12.1 through 7.12.11, provided
that at the time any such investment is made
and immediately after giving effect thereto,
the aggregate amount of all such investments
would not exceed 12.5% of Consolidated Net
Worth.
As used in this Section:
"ACCEPTABLE BANK" means any bank or trust company (i)
which is organized under the laws of the United States of
America or any state thereof, (ii) which has capital, surplus
and undivided profits aggregating at least $500,000,000 and
(iii) whose long-term unsecured debt obligations (or the
long-term unsecured debt obligations of the bank holding
company owning all of the Capital Stock of such bank or trust
company) shall have been given a rating of "A" or better by
Standard and Poor's Ratings Group, "A2" or better by Moody's
Investors Service, Inc. or an equivalent rating by any other
credit rating agency of recognized national standing.
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<PAGE> 6
"INVESTMENT" means any investment, made in cash or by
delivery of property, by Borrower or any Subsidiary in any
Person, whether by acquisition, of capital stock, debt or
other obligation or security, or by loan, guaranty, advance,
capital contribution or otherwise.
"NON-QUALIFYING BANK" means any bank or trust
company, other than an Acceptable Bank, which has capital,
surplus and undivided profits aggregating at least
$100,000,000 (or the equivalent in a foreign currency).
"UNITED STATES GOVERNMENTAL SECURITY" means any
direct obligation of, or obligation guaranteed by, the United
States of America, or any agency controlled or supervised by
or acting as an instrumentality of the United States of
America pursuant to authority granted by the Congress of the
United States of America, so long as such obligation or
guarantee shall have the benefit of the full faith and credit
of the United States of America which shall have been pledged
pursuant to authority granted by the Congress of the United
States of America.
2.14 Section 14.21 of the Loan Agreement is amended to provide the
following:
"Funded Debt" will mean all Indebtedness on a consolidated
basis, including any amount which may be considered the
current portion of such Indebtedness.
2.15 Section 14.23 of the Loan Agreement is amended to provide as
follows:
"Guarantor(s)" will mean any persons or entities that now or
in the future deliver one or more Guarantees to Lender,
including but not limited to Kroll Associates, Inc., Kroll
Holding, Inc., Kroll Information Services, Inc., Kroll
International, Inc., Background America, Inc., Kroll-O'Gara
Information Security Group, Inc., Schiff & Associates, Inc.,
Lindquist Avey MacDonald Baskerville, Inc., Laboratory
Specialists, Inc. and Inphoto Surveillance, Inc.
2.16 Section 14.25 of the Loan Agreement is hereby amended as
follows:
"Indebtedness" will mean, without duplication: (i) all
obligations (including capitalized lease obligations) which in
accordance with generally accepted accounting principles would
be shown on a balance sheet as a liability; (ii) all
obligations for borrowed money or for the deferred purchase
price of property or services; (iii) all guarantees,
reimbursement, payment or similar obligations, absolute,
contingent or otherwise, under acceptance, letter of credit or
similar facilities, and (iv) all obligations for any Swap. For
the purposes of this Section, "Swap" shall mean, with respect
to any Person, payment obligations with respect to interest
rate swaps, currency swaps and similar obligations obligating
such Person making payments, whether periodically or upon the
happening of a contingency. The amount of the obligation under
any Swap shall be the amount determined by Lender in its
reasonable calculation to be that portion of the Swap
obligation that represents the credit risk of such Person
under the Swap.
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<PAGE> 7
2.17 Section 5.16 is hereby added to the Loan Agreement to provide
as follows:
YEAR 2000 COMPLIANCE. Borrower has (i) undertaken a detailed
review and assessment of all areas within its business that
could be adversely affected by the failure of the Borrower to
be Year 2000 Compliant (as herein defined) on a timely basis,
(ii) developed a plan and time line for becoming Year 2000
Compliant on a timely basis, and (iii) to date, implemented
that plan in accordance with the specified time line in all
material respects.
As of January 1, 2000, all of Borrower's computer
hardware and software provides the following functions:
(1) consistently handle date information before,
during and after January 1, 2000, including,
but not limited to, accepting date input,
providing date output and performing
calculations on dates or portions of dates;
(2) function accurately in accordance with the
specifications of such computer hardware or
software and without interruption before,
during and after January 1, 2000, without
any change in operations associated with the
advent of the new century;
(3) respond to two-digit date input in a way
that resolves any ambiguity as to century in
a disclosed, defined and predetermined
manner; and
(4) store and provide output of date information
in ways that are unambiguous as to century.
As used herein, "Year 2000 Compliant" shall mean that
all software, embedded microchips and other processing
capabilities utilized by the Borrower will correctly process,
sequence, and calculate, without interruption, all date and
date related data for all dates to, through and after January
1, 2000, including leap year calculations, and shall
recognize, store and transmit date data in a format which
clearly indicates the correct century.
3. REPRESENTATIONS AND WARRANTIES. To induce Lender to enter into this
Amendment, Borrower represents and warrants as follows:
3.1 Except as amended above in 2.3 above and provided below, the
representations and warranties of Borrower contained in
Section 5 of the Loan Agreement are deemed to have been made
again on and as of the date of execution of this Amendment and
will apply to this Amendment and the Revolving Credit Note.
3.1.1 As to Section 5.2 as amended, the Borrower and Lender
recognize that the Current Financial Statements do
not account for the June 16, 1999 acquisition of
Background America, Inc.
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<PAGE> 8
3.2 No Event of Default (as such term is defined in Section 8 of
the Loan Agreement) or event or condition which with the lapse
of time or giving of notice or both would constitute an Event
of Default exists on the date hereof.
3.3 The person executing this Amendment and the loan documents to
be executed in connection herewith is a duly elected and
acting officer of Borrower and is duly authorized by the Board
of Directors of Borrower to execute and deliver such documents
on behalf of Borrower.
4. CONDITIONS. Lender's consent to this Amendment is subject to the
following conditions:
4.1 Borrower will have executed and delivered to Lender the
Revolving Credit Note.
4.2 Lender will have been furnished copies, certified by the
Secretary or Assistant Secretary of Borrower, of resolutions
of the Board of Directors of Borrower authorizing the
execution of this Amendment, the Exhibits hereto and all other
documents executed in connection herewith.
4.3 Background America, Inc., Kroll-O'Gara Information Security
Group, Inc., Schiff & Associates, Inc., Lindquist Avey
MacDonald Baskerville, Inc., Laboratory Specialists, Inc. and
Inphoto Surveillance, Inc. (individually and collectively, the
"Guarantor") will have executed and delivered to Lender the
Guarantee dated of even date herewith (the "Guarantee").
4.4 Borrower will provide to Lender within 90 days of the date
hereof appropriate documentation evidencing the change of
Financial Research, Inc. to Lindquist Avey MacDonald
Baskerville, Inc., and the change of Securify, Inc. to
Kroll-O'Gara Information Security Group, Inc.
4.5 For each Guarantor, Lender will have been furnished copies,
certified by the Secretary or assistant Secretary of each
Guarantor, of resolutions of the Board of Directors of each
Guarantor authorizing the execution of the Guarantee.
4.6 Borrower will have delivered to Lender copies of its Year 2000
plan and time line, which shall reasonably specify the
method(s) to be used by the Borrower to become Year 2000
Compliant.
4.7 The representations and warranties of Borrower in Section 3
herein will be true.
4.8 Borrower shall pay all expenses and attorneys' fees incurred
by Lender in connection with the preparation, execution, and
delivery of this Amendment and related documents. Such fees
may be deducted by Lender from the Revolving Credit Note.
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<PAGE> 9
5. GENERAL.
5.1 Except as expressly modified herein, the Loan Agreement, as
amended, is and remains in full force and effect.
5.2 Nothing contained herein will be construed as waiving any
default or Event of Default under the Loan Agreement or will
affect or impair any right, power or remedy of Lender under or
with respect to the Loan, the Loan Agreement, as amended, the
Revolving Credit Note or any agreement or instrument
guaranteeing, securing or otherwise relating to any of the
Loan.
5.3 This Amendment will be binding upon and inure to the benefit
of Borrower and Lender and their respective successors and
assigns.
5.4 All representations, warranties and covenants made by Borrower
herein will survive the execution and delivery of this
Amendment.
5.5 This Amendment will in all respects be governed and construed
in accordance with the laws of the State of Ohio.
[SIGNATURES ON NEXT PAGE]
9
<PAGE> 10
Signed on June 25, 1999.
THE KROLL-O'GARA COMPANY
By: /s/ JULES KROLL
---------------------------
Print Name: Jules Kroll
Title: Chairman and CEO
Date: June 25, 1999
THE KROLL-O'GARA COMPANY
By: /s/ ABRAM S. GORDON
---------------------------
Print Name: Abram S. Gordon
Title: Vice President
Date: June 25, 1999
O'GARA-HESS & EISENHARDT
ARMORING COMPANY
By: /s/ ABRAM S. GORDON
---------------------------
Print Name: Abram S. Gordon
Title: Vice President
Date: June 25, 1999
KROLL HOLDINGS, INC.
By: /s/ ABRAM S. GORDON
---------------------------
Print Name: Abram S. Gordon
Title: Vice President
Date: June 25, 1999
KROLL ASSOCIATES, INC.
By: /s/ ABRAM S. GORDON
---------------------------
Print Name: Abram S. Gordon
Title: Vice President
Date: June 25, 1999
KEYBANK NATIONAL ASSOCIATION
By: /s/ STEVEN J. BLOEMER
---------------------------
Print Name: Steven J. Bloemer
Title: Vice President
Date: June 25, 1999
10
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0
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